“We may be able to remove or reduce some penalties if you acted in good faith and can show reasonable cause for why you weren’t able to meet your tax obligations,” the IRS says on its website. Hardships that could lead to lesser penalties include fire, casualty, natural disaster “or other disturbances”; inability to obtain records; death, serious illness, incapacitation or “unavoidable absence” of the taxpayer or a member of the taxpayer’s immediate family, the IRS says.
“A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time,” said the IRS, which notes that businesses can dispute penalties.
Employment tax penalties can add up fast and rules for when to timely deposit payroll taxes are complicated.
“Many employers follow a monthly or semi-weekly schedule for deposits. There are special situations that require a deposit outside of your normal schedule,” Forster said. “For example, for taxes of $100,000 or more accumulated on the same day, deposits are required to be made by the next business day.”
Being 15 days or more late in making deposits results in a penalty of 10% of the unpaid deposit and increases to 15% upon notice and demand by the IRS. “It’s crucial to maintain good records and have procedures in place to know when special deposits are required and how to timely make them outside of the normal payroll deposit schedule,” Forster said.
If you have outstanding employment tax obligations or have recently spotted errors in your payroll compliance, come forward before the IRS comes after you, planners say.
“Even employers with the best intentions can make mistakes,” Forster said, adding that under certain circumstances the IRS allows employers to conclusively resolve their employment tax non-compliance through a closing agreement program. “The IRS may also entertain a request for waiver of penalties."