Is a taxpayer that fails to file or pay payroll taxes subject to penalty?

The taxpayer may be subject to several different penalties.

Failure to File
If a taxpayer fails to file on the date the return should have been filed (determined with regard to any extension of time for filing) the taxpayer will be subject to a failure to file penalty unless it is shown that the failure to file a return is due to reasonable cause and not due to willful neglect. This penalty is 5% of the net amount of tax due for each month (or fraction thereof) during which there is a failure to file any return, up to a maximum penalty of 25%. If the return is not filed within 60 days of the due date, the minimum penalty will be the lesser of $135 or 100% of the tax liability on the return (even if there are no unpaid taxes when the return is filed).

If both the “failure to file” and the “failure to pay” penalties apply for the same period, the failure to file penalty (5%) is reduced by the failure to pay penalty (0.5%). This generally results in a 4.5% per month failure to file penalty and a 0.5% per month failure to pay penalty.

Failure to Deposit
If a taxpayer fails to make required payroll tax deposits, the taxpayer will be subject to the failure to deposit (FTD) penalty which uses a 4-tier rate (ranging from 2% to 15%) based upon the length of time the amount due is unpaid. The FTD penalty may be waived if the failure is due to reasonable cause and not due to willful neglect. The FTD penalty may apply to the following federal payroll tax forms: (1) Form 940, (2) Form 941, (3) Form 943, (4) Form 944, (5) Form 945.

Failure to Pay
If a taxpayer fails to pay the tax on an income tax return, the penalty is 0.5% of the tax shown on the return, plus 0.5% for every month of delinquency, up to 25%. The monthly rate increase is adjusted to 1% if the IRS gives the taxpayer notice that it intends to use its power to collect the tax.

Failure to Deposit by EFTPS
If a taxpayer is required to deposit federal taxes using EFTPS but deposits using paper, the taxpayer will be assessed the failure-to-deposit penalty even if the taxes are paid on time.

Fraudulent Failure to Pay
When the failure to pay is fraudulent, the 5% monthly penalty is increased to 15%, with a maximum penalty of 75%.

Trust Fund Recovery Penalty
A taxpayer may be subject to the trust fund recovery penalty (TFRP) if the taxpayer is (1) responsible for collecting, accounting for, and paying withheld employment taxes, and (2) willfully fails to collect or pay these taxes.

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About Mike Habib, EA NTPI Fellow®:

Mike Habib, EA is an IRS licensed Enrolled Agent who owns and operates a specialized tax services boutique firm serving clients in various metro areas such as Los Angeles, Whittier, Pasadena, Glendale, Burbank, Orange County, Riverside, Palm Springs, San Bernardino, Palmdale, Bakersfield, New York, New Jersey, Chicago, Houston, Phoenix, Philadelphia, San Antonio, San Diego, Dallas, San Jose, Detroit, Jacksonville, Indianapolis, San Francisco, Columbus, Austin, Memphis, Fort Worth, Baltimore, Charlotte, El Paso, Boston, Seattle, Washington DC, Milwaukee, Denver, Louisville, Jefferson, Las Vegas, Reno, Hempstead, Tucson, Nashville, Davidson, Portland, Tucson, Albuquerque, Santa Fe, Anchorage, Atlanta, Long Beach, Fresno, Sacramento, Mesa, Kansas City, Cleveland, Virginia Beach, Omaha, Miami, Oakland, Tulsa, Honolulu, Minneapolis, Pittsburgh, Colorado Springs, Arlington, Wichita, Birmingham, Montgomery

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