IRS ILLUSTRATES RULES FOR ABATING PENALTY FOR LATE FTDs.

Rev. Rul. 94-46

ISSUE

How does a taxpayer that makes an electronic funds transfer (EFT) establish reasonable cause for abating the failure to deposit penalty under section 6656 of the Internal Revenue Code?

FACTS

A taxpayer may make an EFT either by telephone or personal computer using one of two payment options: (1) a debit transaction, or (2) a credit transaction. A debit transaction is effected by a Financial Agent of the Department of the Treasury within the meaning of Rev. Proc. 94-48, 1994-29 I.R.B. (dated July 18, 1994). The taxpayer requests the Financial Agent to initiate the transfer of funds from the taxpayer's bank account(s) to Treasury's general account and to transmit the related tax payment data, supplied by the taxpayer, to the Internal Revenue Service. A credit transaction is effected by the taxpayer's financial institution. The taxpayer requests the financial institution to initiate the transfer of funds through the Automated Clearing House (ACH) system to the Treasury's general account and to submit the related tax data, supplied by the taxpayer, through the ACH system to a Financial Agent for transmission to the Service.

The following situations illustrate various failure-to-deposit circumstances. In each situation, the bank involved may be either a Financial Agent initiating a debit transaction on behalf of the taxpayer or the taxpayer's financial institution initiating a credit transaction through the ACH system.

Situation (1). A had a federal tax deposit due on January 5 and was required to make its federal tax deposits by EFT. Bank X required that all EFT requests be made before 2:00 p.m. eastern time of the banking day immediately prior to the banking day the EFT is to be completed. On January 4 at 1:00 p.m. eastern time, A contacted Bank X and instructed Bank X to initiate an EFT on January 5 (by a debit transaction or a credit transaction), causing $30,000 to be withdrawn from A's account and transferred to Treasury's general account as a first quarter employment tax deposit. Bank X issued an acknowledgement number or other certification of the request to A at the time A instructed Bank X to make the EFT. On January 5, A's account had sufficient funds to cover the $30,000 EFT.

On January 6, Bank X initiated the EFT, causing $30,000 to be withdrawn from A's account and transferred to Treasury's general account. On May 18, A received a notice showing a failure to deposit penalty of $600 (2 percent of the $30,000 liability) for the late deposit made on January 6. A requests in writing that the Service waive the penalty and includes the acknowledgement number or other certification of the EFT request. Bank X's records indicate that on January 4 A instructed it to make the EFT on January 5.

Situation (2). The facts are the same as Situation (1), except Bank X's records indicate that on January 4 A instructed Bank X to initiate the EFT on January 6. A's books and records do not demonstrate that A instructed Bank X to initiate the EFT on January 5.

LAW AND ANALYSIS

Section 6656 provides that a penalty shall be imposed in case of failure by any person to make a timely deposit of tax imposed under the Code unless such failure is due to reasonable cause and not to willful neglect. The penalty rate is 2 percent of the underpayment if the failure to deposit is for not more than 5 days, 5 percent if the failure is for more than 5 days but not more than 15 days, and 10 percent if the failure is for more than 15 days.

Section 301.6656-1(b) of the Regulations on Procedure and Administration provides that a taxpayer must make an affirmative showing of all facts alleged as a reasonable cause in a written statement containing a declaration that the statement is made under penalties of perjury. If it is determined that the underpayment was due to reasonable cause and not due to willful neglect, the penalty will be abated.

Each reasonable cause request is evaluated on its own merits. The merits are determined based on the events or parties involved, and whether the taxpayer exercised ordinary business care and prudence but was unable to meet a tax requirement due to circumstances or events beyond the taxpayer's control.

In Situation (1), Bank X's records, which the Service is able to check based on the acknowledgement number or other certification of request provided to the Service by the taxpayer, verify that on January 4 at 1:00 p.m. eastern time, A instructed Bank X to initiate an EFT of $30,000 to Treasury's general account on January 5 for a first quarter employment tax deposit. A has reasonable cause for the failure to make a timely deposit because A timely provided to Bank X the following information: (1) payment instructions, (2) the correct amount of tax to be deposited, (3) the correct type of tax to be deposited, (4) the correct tax period for which the deposit was made, (5) the correct date the funds were to be transferred from A's bank account to Treasury's general account, and (6) the number of A's bank account with sufficient funds to cover the EFT. Therefore, A is not subject to any penalty on the EFT of $30,000. The reason Bank X did not transfer the funds on January 5 is irrelevant (i.e., disaster, software failure, or negligent banking practices).

In Situation (2), Bank X's records indicate that on January 4 at 1:00 p.m. eastern time, A instructed Bank X to initiate an EFT of $30,000 to Treasury on January 6 for a first quarter employment tax deposit. Based on Bank X's records, A gave the incorrect date for Bank X to initiate the EFT to Treasury's general account. Therefore, A does not have reasonable cause for the failure to make a timely deposit and is subject to a penalty on the EFT of $30,000. In order for A to establish reasonable cause in this situation, A's contemporaneous books and records would need to demonstrate that A instructed Bank X to transfer the funds on January 5. Books and records may include, among other things, a recording of telephone instructions or an electronic file saved at the time the instructions were given.

HOLDING

A taxpayer making an EFT through either a debit transaction or a credit transaction may establish reasonable cause for abating the failure to deposit penalty under section 6656 of the Code by using the records of the bank instructed to initiate the EFT (whether a Financial Agent or the taxpayer's financial institution), and/or the taxpayer's books and records (including, among other things, a recording of telephone instructions or a saved electronic file of instructions), to establish that the taxpayer timely provided to the bank the following information: (1) payment instructions, (2) the correct amount of tax to be deposited, (3) the correct type of tax to be deposited, (4) the correct tax period for which the deposit was made, (5) the correct date the funds were to be transferred from the taxpayer's bank account to Treasury's general account, and (6) the number of the taxpayer's bank account with sufficient funds to cover the EFT.

DRAFTING INFORMATION

The principal author of this revenue ruling is John Moran of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact John Moran on (202) 622-6232 (not a toll-free call).