The IRS doesn't often refund penalties, but if you're ready to take the plunge into electronic tax filing, you could be eligible for an employment tax-penalty refund under a new IRS program. To encourage greater use of the Electronic Federal Tax Payment System (EFTPS), the IRS will provide an automatic one-time penalty refund to some business owners. The IRS estimates that approximately 1 million employers could qualify for the abatement.
The EFTPS enables taxpayers to pay federal employment and income taxes electronically. Taxpayers can use the phone, PC or the internet to initiate tax payments to the EFTPS directly. The IRS says the electronic payment system is more accurate and less burdensome for taxpayers than mailing payments. Many businesses are required to use the system, but smaller companies still have the option of mailing their payments.
To be eligible for the abatement, you can't be a mandatory EFTPS user, and you must have paid a deposit penalty for a quarterly federal employment tax payment (Form 941). The federal tax deposit penalty is usually imposed if you fail to make a deposit of taxes on time or in the proper manner.
Here's the obvious catch: To qualify for the abatement, you must use the EFTPS for one year (four consecutive quarters), make all your employment tax payments on time during that period, and have previously paid the penalty in full.
Under the new program, you are not required to do anything special at the time of enrollment in the EFTPS. The refunds begin automatically in April 2005, after fourth-quarter 2004 forms have been processed. The IRS will determine whether you qualify by looking back over the previous four quarters to see that you have made all deposits in a timely manner using the EFTPS. The refunds will continue through the year as taxpayers complete their one-year compliance period.
"For those who have complied for four quarters, we will check the previous four quarters to see if there was a federal tax deposit penalty assessed and paid. Only the most recent penalty will be abated," says Don Roberts, an IRS public affairs specialist in Washington, DC.
"This offer from the IRS is a good one," says Jennifer A. Jones, a CPA in Fairfax, Virginia. Jones has a number of small-business clients and says switching to the EFTPS makes good tax sense. The IRS adds that using the EFTPS eliminates the vast majority of the errors found on paper submissions, which result in late or misapplied payments and a federal tax deposit penalty.
To enroll, visit www.EFTPS.gov, or call the EFTPS customer service line at (800) 555-4477 to receive an enrollment form by mail.
Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 17 years.