oversight

Tax Policy: Federal Tax Deposit Requirements Should Be Simplified

Published by the Government Accountability Office on 1990-07-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              United   States   General   Accounting   Office

              Report to the Secretary of the Treasury           2
GAO

July   1990
              TAX POLICY
              Federal Tax Deposit
              Requirements Should
              Be Simplified
i
i
    :
4
                   unhed
                     states
GAO                General Accounting
                   Wa&ington,
                                       Office
                                D.C. 20648

                   General   Government   Division

                   B-238346

                   July31,1990

                   The Honorable Nicholas F. Brady
                   The Secretary of the Treasury

                   Dear Mr. Secretary:

                   This report discusses our evaluation of the federal tax deposit (FTD)
                   requirements for withheld income and social security taxes and the
                   Internal Revenue Service’s (IRS) administration of the penalty assessed
                   taxpayers who do not make sufficient and timely deposits. In fiscal year
                   1988 about 5 million employers made over 73 million deposits totalling
                   $627 billion for these employment taxes. About 32 percent of these
                   employers were penalized $2.6 billion for not making timely deposits.


                   The frequency of deposits and when deposits are due is determined by
Results in Brief   the amount of employment taxes withheld by employers each payday
                   and how often paydays occur. The deposit requirements are complex
                   and difficult to understand because employers can be subject to more
                   than one deposit requirement during a tax period and because the
                   exceptions to the requirements can be confusing. The deposit require-
                   ments were established with different deposit frequencies to give small
                   employers more time to pay their employment taxes while at the same
                   time ensuring a constant flow of funds for government operations by
                   having larger employers remit their taxes more frequently. However,
                   the complexities inherent in the requirements have made it more diffi-
                   cult for small employers to comply with the requirements.

                   Standardizing the deposit rules by requiring all employers to deposit
                   within 3 days of a payday could improve employer compliance and ease
                   IRSadministration. A single exception permitting small employers to
                   deposit less frequently than after each payday could reduce the burden
                   on both employers and IRSfrom the increased number of deposits the
                   standard requirement would generate. Eighty-nine percent of the
                   nation’s employers- those with quarterly deposits up to $30,000, could
                   be exempted and the federal government would still save almost $100
                   million annually in borrowing costs by requiring the employers above
                   this threshold to deposit on the expedited 3-day basis. These larger
                   employers account for 88 percent of the employment tax dollars,

                   The complexities of the FI’D system also make it difficult for IRSto
                   administer the ETDpenalty. In 44 percent of the 75 manually assessed
                   penalty cases we examined, IRS tax examiners miscalculated the flat rate


                   Page 1                            GAO/GGDw)-102   Federal   Tax Deposit Requirements
             B238346




             penalty because in most cases they did not properly apply the deposit
             requirements, In addition, 1988 IRSdata show that it assessed over
             300,000 computer-generated deposit penalties totalling $324 million,
             even though it did not have information on which deposit period to
             apply a specific deposit to. As a result, many of these penalty calcula-
             tions were wrong. IRS should revise the FTDcoupon to have employers
             provide this information.


             Employers who withhold income and social security taxes are required
Background   to deposit these employment taxes under the FTDsystem.’ Section
             6302(c) of the Internal Revenue Code gives the Secretary of the Trea-
             sury the authority to set the deposit requirements. Employers deposit
             their tax payments with about 15,000 financial institutions that have
             been authorized by the Federal Reserve to function as federal deposita-
             ries. Employers are required to submit FTD coupons (Form 8109)
             showing the deposit amount and date and the quarterly tax period that
             the deposit should be applied against. Employers show on a Form 941,
             Employer’s Quarterly Federal Tax Return, when their paydays occurred
             during a deposit period and the amount of employment tax liabilities
             they had each payday.

             The frequency of deposits and when the deposits are due is determined
             by the amount of taxes withheld and how often paydays occur. An
             employer owes employment taxes when employees are paid their wages,
             not when the payroll period ends. Employers accumulate their employ-
             ment tax liabilities from payday to payday until one of the following
             deposit rules is triggered, unless they qualify for one of the exceptions
             to the rules discussed in appendix I.

             Rule 1 (End-of-return period or quarterly deposit rule): If the total accu-
             mulated employment taxes are less than $500 in a calendar quarter, no
             deposit is required. Instead, the taxes can be paid directly to IRSwhen
             the business files Form 941, which is due 1 month after the end of each
             calendar quarter.

             Rule 2: If the total accumulated undeposited employment taxes are less
             than $500 at the end of any month, the taxes are carried over to the


             ‘Corporation and exempt organization income taxes, federal unemployment taxes, and businesses
             excise taxes are also required to be deposited under the FTD system. For the purposes of this report,
             employment taxes do not include federal unemployment taxes, which are also considered employ-           f
             ment taxes but are filed on Form 940 with separate requirements.



             Page 2                                       GAO/GGIMO-102       Federal   Tax Deposit   &quirementa
              following month within the quarter and added to that month’s taxes
              until one of the deposit requirements in Rule 3 or Rule 4 is triggered.

              Rule 3 ($500 or monthly deposit rule): If the total accumulated unde-
              posited employment taxes are $500 or more but less than $3,000 at the
              end of any month, the taxes are to be deposited within 15 days after the
              end of the month.

              Rule 4 ($3,000 or 3-banking-day rule): If the total accumulated unde-
              posited employment taxes are over $3,000 at the end of one of eight
              deposit periods within each month, the taxes are required to be depos-
              ited within 3 banking days after the end of the period. For deposit pur-
              poses, each month within the quarter is divided into eight deposit
              periods ending on the 3rd, 7th, llth, 15th, 19th, 22nd, 25th, and last day
              of the month.

              In addition to the deposit requirements set by the Secretary of the Trea-
              sury through regulation, the Omnibus Budget Reconciliation Act of 1989
              requires employers with employment tax liabilities of $100,000 or more
              each payday to make deposits within 1 banking day, beginning
              August 1, 1990.2


FTD Penalty   If employment tax deposits are not timely or of sufficient amount, IRS
              can assess a failure-to-deposit penalty. For deposits made prior to Jan-
              uary 1, 1990, the penalty is 10 percent of the undeposited tax regardless
              of the length of time the deposit was late. For deposits made after this
              date, the Omnibus Budget Reconciliation Act of 1989 changed the pen-
              alty from a flat rate to a four-tier, time-sensitive penalty. IJnder the act,
              an employer is subject to a penalty of 2 percent of the underpayment if
              taxes are late but deposited within 5 days of the due date; 5 percent if
              deposited after 5 days but within 15 days; 10 percent if deposited after
              15 days; and 15 percent if not deposited before the earlier of 10 days
              after the date of the first delinquency notice or the day on which notice
              and demand for immediate payment is given. The penalty can be abated
              if taxpayers submit proof that they had reasonable cause not to make
              sufficient or timely deposits.



              2Under the act, these employers must make deposits within 2 banking days in 1991, within 3 banking
              days in 1992, and within 1 banking day in 1993 and 1994. This provision expires at the end of 1994.
              For calendar year 1996 and thereafter, the Secretary of the Treasury can then issue regulations on
              when these deposits are to be made.



              Page 3                                      GAO/GGB!iWlOZ      Federal   Tax Deposit   Eequiremente
                                         The number and amount of deposit penalties assessed and abated on
                                         employment taxes for fiscal years 1984 through 1988 are shown in table
                                         1.

Table 1: Failure-to-Deporit Penalty
Aa~esrment/Abrtement       Statieticr,   Dollars   in thousands
Fiscal Year8 1984-88                                                       Assessmenta                                      Abatements
                                         Fircal year                  Number           Amount                   Number                    Amount
                                         1984                        5,169,096              $1,622,536           98 1,943                $800,604
                                         1965                        28445,454                1,367,076          936,576                  793,885
                                         1986a                         984,776                  620,180          356,230                  444,775
                                         1987                        3-477.077                2.447.103          519.755                  790.192
                                         1986                        3,545,691                2,612,727          7261335                 1.206,943

                                         aDeposit penalty assessments and abatements decreased in fiscal year 1986 because IRS temporarily
                                         raised its tolerance for assessing the penalty in order to reduce the amount of taxpayer correspondence
                                         it received.


                                         About 90 percent of the penalties are assessed by a computer program,
                                         which compares deposit dates and amounts shown on FTD coupons with
                                         the dates and amounts of tax liability for each payday shown on Form
                                         941. The remaining 10 percent of the penalties are manually assessed by
                                         tax examiners  in IRS’ service centers.


                                         Our objectives were to determine whether (1) IRS appropriately and accu-
Objectives, Scope,and                    rately assesses and abates deposit penalties, (2) IRSguidance to
Methodology                              employers on complying with the deposit requirements is adequate, and
                                         (3) changes are needed to the FTDsystem to improve penalty administra-
                                         tion and employer compliance.

                                         To find out whether IRS appropriately and accurately assesses and
                                         abates deposit penalties, we reviewed a random sample of 150 ITD pen-
                                         alty actions that were taken in fiscal year 1987 at three IRSservice cen-
                                         ters-Fresno, California; Brookhaven, New York; and Austin, Texas.
                                         The sample cases consisted of 25 manual assessments and 25 manual
                                         abatements for each service center. For each of our sample cases, we
                                         analyzed the employer’s Form 941, business master file record, and
                                         available taxpayer and IRS correspondence. We discussed the results of
                                         our case analysis with IRS service center officials in those cases where
                                         we disagreed with either the assessment or abatement action taken.




                                         Page 4                                        GAWGGD-9@102 Federal Tax Deposit &qujrements
                       We also reviewed the computer programs used to administer the FTD
                       penalty as well as a small number of computer-generated penalty case
                       files to identify and analyze potential problems with the programs.

                       To determine whether IRSguidance to employers is adequate, we
                       reviewed IRS’tax form instructions and publications and Treasury regu-
                       lations on the deposit requirements. We also discussed the deposit
                       requirements and IRS’policies and procedures with IRSNational Office
                       officials and the deposit regulations with Treasury officials.

                       To determine whether changes to the FTDsystem are needed, we used
                       the results of our sample cases to analyze the deposit requirements and
                       the penalty procedures. We also discussed the deposit requirements and
                       the draft report with officials of the Small Business Administration and
                       National Federation of Independent Business (NFIB). The NFIB represents
                       670,000 small businesses nationwide.

                       We did our field work between January 1989 and May 1990 using gener-
                       ally accepted government auditing standards,


                       About a third of the nation’s employers are assessed at least one FKI
Complex Deposit        penalty annually. While some may be penalized because they do not
Requirements Make      have sufficient funds to make timely deposits, others may be penalized
Compliance Difficult   because they do not understand the complexities of the deposit require-
                       ments. The deposit requirements are complex because they can vary
                       from month to month depending on the amount of employment taxes
                       withheld each payday and because the exceptions to the requirements
                       can be confusing.


Variable Deposit       Variable deposit dates coupled with the fluctuating nature of some
Requirements Cause     employers’ payrolls make it difficult for such employers to predict with
                       certainty when their deposits are due. The use of eight monthly deposit
Uncertainty            periods also adds complexity. The eight periods vary in length from 3 to
                       6 days, depending on the specific period and the month involved.
                       Accordingly, the amount of time an employer has after a payday to
                       make a deposit can actually vary from 3 to 8 days depending upon the
                       length of the deposit period as well as where in the eighth-monthly
                       period the payday falls To comply with the changing deposit require-
                       ments the employer must monitor undeposited employment taxes from
                       payday to payday and know when changes in payroll amounts will
                       trigger a different deposit requirement that requires an earlier deposit


                       Page I5                         GAO/GGDB@102   Federal   Tax Deposit   Requirements
                          B-228246




                          as well as when each eighth-monthly period ends. Otherwise, the
                          employer could unintentionally make a late deposit and be penalized.

                          In 31 percent of our sample cases, employers were faced with at least
                          one change in their deposit requirement during the quarter. In over half
                          of these 47 cases, the employers made timely deposits under their initial
                          deposit requirement but were penalized when their payroll and associ-
                          ated employment taxes increased later in the quarter and triggered a
                          different deposit requirement.


Deposit ExceptiorIS Are   The deposit requirements are further complicated by exceptions. For
Confusing and             example, employers with large payrolls are allowed more time to make
                          particular deposits than smaller employers. This exception relates to the
Unnecessary               deposit rule that requires undeposited taxes of more than $500 but less
                          than $3,000 at the end of the month to be made within 15 days after the
                          end of the month. The exception allows employers with large payrolls,
                          who were required to make a deposit of $3,000 or more during the third
                          month of the quarter, to have until the end of the next month to deposit
                          any balance of $500 or more but less than $3,000. This exception
                          appears to confuse employers. In 11 percent of our 150 sample cases,
                          the employers were penalized when they made their third-month
                          deposits by the end of the next month as is allowed by the exception for
                          large payrolls. However, they did not qualify for this exception because
                          they were not required to make a $3,000 deposit during the third month.

                          Likewise, exceptions to the deposit requirements that were established
                          to provide relief to certain employers may no longer be necessary. For
                          example, the “safe haven” exception allows employers with unde-
                          posited taxes of $3,000 or more at the end of a deposit period to deposit
                          95 percent of these taxes within 3 banking days and the remaining 5
                          percent after the 15th day of the following month. This exception was
                          intended to benefit large employers who could not determine their
                          actual employment tax liability in time to deposit the exact amount
                          within the required 3 banking days.

                          However, according to IRS,two reasons prompting the creation of the
                          safe haven exception in 1972 may no longer be applicable- First, busi-
                          nesses today have computerized payroll systems that can accurately
                          and efficiently determine the correct amount of employment taxes that
                          must be deposited. Second, it affects relatively few employers. IRSdata
                          show that for the fourth quarter of 1988 about 19,300 employers with
                          quarterly employment taxes of $10,000 or more claimed the safe haven


                          Page 6                           GAO/GGINO-102   Federal   Tax Deposit   Requirements
E238346




on their Forms 941-approximately        .3 percent of the total Forms 941
filed. A Treasury official estimated that Treasury loses about $25 mil-
lion in interest income annually because its use of the safe haven
deposits is delayed. Similarly, IRS estimates its cost to process and ana-
lyze safe haven tax returns and related correspondence is about $1 mil-
lion annually.

The safe haven provision is also open to abuse. Studies by IRS’ Internal
Audit Division and the Railroad Retirement Board have recommended
eliminating the safe haven provision because large employers receive
unintended benefits by taking advantage of the safe haven provision
even though they can accurately determine their actual tax liability. In a
1984 report on the use of the safe haven provision by 78 large corpora-
tions in the Midwest Region, Internal Audit found that in 74, or 39 per-
cent, of the 192 quarterly employment tax returns it reviewed, the
employers deposited the full 100 percent while in 118 returns, or 6 1 per-
cent, the employers claimed the safe haven. However, in 29, or 25 per-
cent, of the 118 safe haven returns, the employers consistently
deposited exactly 95 percent of their tax liability. Internal audit con-
cluded that if these employers could deposit exactly 95 percent of their
tax liability, they had the capability to deposit the full 100 percent.

In a 1989 study on the use of the safe haven provision by the 10 largest
railroads, the Inspector General for the Railroad Retirement Board
found that 6 of the 10 railroads deposited 100 percent of their tax lia-
bility, while the remaining 4 claimed the safe haven. It also found that
of the four that claimed the safe haven, one railroad consistently depos-
ited 95 percent and a second railroad consistently deposited 96 percent
of its total employment tax liability.

These studies indicate to us that the safe haven is being abused by busi-
nesses to delay deposit of their taxes. Other administrative procedures
less prone to abuse could be established to provide the needed flexibility
to accommodate genuine cases where employers cannot accurately
determine their tax liability. For example, penalty abatement criteria
could be established or waivers to the deposit requirements submitted
by employers prior to a quarter could be granted for those employers
who submit evidence that they could not accurately calculate their
employment tax liability.




Page 7                           GAO/GGLM@102   Federal   Tax Deposit Requirements
                         B228245




ChangesNeeded to         the deposit requirements could be substantially reduced if all employers
Deposit Requirements     had the same number of days to make their deposits and if there were
                         no exceptions to the requirements. For example, requiring that all
                         deposits be made within 3 banking days of a payday would be fairly
                         consistent with current deposit requirements and familiar to most
                         employers. If all employers were required to deposit their employment
                         taxes within 3 banking days of a payday, employers would always know
                         when their deposits were due and could plan their operating expendi-
                         tures around this requirement. In addition to reducing the uncertainty
                         faced by employers, such a change would also make it easier for IRSto
                         administer the deposit requirements and to more efficiently and accu-
                         rately assess penalties for insufficient or untimely deposits. Standard-
                         izing the requirements would, however, increase the number of deposits
                         employers would have to make and IRS would have to process.

                         The deposit requirements were established with different deposit fre-
                         quencies to give small employers more time to pay their employment
                         taxes while at the same time ensuring a constant flow of funds for gov-
                         ernment operations by having larger employers remit their taxes more
                         frequently. However, the complexities inherent in the requirements may
                         have made it more difficult for small employers to comply with the
                         requirements. According to IRSdata in 1988, about 72 percent of the
                         deposit penalties were assessed against employers who had undeposited
                         taxes of less than $3,000 at the end of a deposit period.


Simplification Options   Having one standard deposit requirement for all employers would elimi-
                         nate many of the problems in tax administration and employer compli-
                         ance that result from the current varying requirements. If after each
                         payday all employers were required to deposit their taxes within some
                         set time interval, such as within 3 banking days after they paid their
                         employees their wages, employers would know with certainty when to
                         make deposits. This would also eliminate the complexity and uncer-
                         tainty associated with the existing eighth-monthly deposit periods.
                         These advantages led the American Institute of Certified Public
                         Accountants to recommend recently that deposit requirements be simpli-
                         fied by replacing the eighth-monthly period system with a simpler one
                         that provides for deposits 3 days after a payday.

                         While this deposit requirement would be easier for IRSto administer and
                         employers to comply with, it would speed up small employer deposits aa
                         well as increase the number of deposits employers would have to make.


                         Fage Cl                         GAO/GGBB@102   Federal   Tax Depodt   Reqdrementa
                                        Correspondingly, it would increase the number of deposits IRS would
                                        have to process. The impact could be reduced by allowing employers
                                        with quarterly tax liabilities below some threshold to pay their employ-
                                        ment taxes (1) each quarter when they file their Form 941 or (2) within
                                        a certain number of days of the end of each month.

                                        Table 2 shows the impacts of standardizing the deposit rule by requiring
                                        all employers, regardless of size, to deposit within 3 banking days of
                                        payroll. The impacts addressed are the number of employers that would
                                        be making deposits, the number of deposits that would be made annu-
                                        ally, and changes in federal borrowing costs. The table analyzes the
                                        impact of providing for exceptions that would allow employers with less
                                        than $3,000, $10,000, or $30,000 in quarterly tax liabilities to deposit
                                        their taxes within 3 banking days of the end of the month, The table
                                        also analyzes the impact on deposits and federal borrowing costs if
                                        employers with quarterly tax liabilities of less than $3,000 could pay
                                        their taxes when they file Form 941.

Table 2: Estimates of the Number of
Employers Making Deposits, Number of    Dollars in millions
Deposits Made, and the Revenue Impact                                              Number of
of a Standard Deposit Rule                                                 employers making                  Number of
                                                                                      deposit        deposits annually          Borrowing costs
                                                                                    (millions)                (millions)                savings
                                        Current deposit rules                                  3.9                       56                     $n/a
                                        Standard 3-day rule                                    4.5                      171                      367
                                        Exceptions to the standard
                                          rule:
                                        <$3,ODO paid with 941                                  2.3                       65                      209
                                        <$3,000 deposited
                                          monthly                                              4.5                      111                      334
                                        <$lO,OOO deposited
                                          monthly                                              4.5                       60                      248
                                        <$30,000 deposited
                                          monthly                                              4.5                       60                       94
                                        Note: Estimates are based an first quarter 1989 IRS data on the number of Forms 941 filed and the
                                        employment tax liability for these returns. About 5.1 million employers filed Forms 941 in the first quarter
                                        of 1989, but about 630,000 of these employers had no tax liability.


                                        We selected a threshold of less than $3,000 in quarterly tax liability
                                        because under the current deposit requirements these employers do not
                                        have to make deposits more frequently than monthly. The $30,000 in
                                        quarterly tax liability was suggested by the National Federation of Inde-
                                        pendent Business to reduce the paperwork burden on smaI1 businesses
                                        and to mitigate the financial impact of accelerated deposits on “cash



                                        Page 9                                          GAO/GGB9O-102        Federal   Tax Deposit Requhmenta
B238345




poor” companies. Since this represents an expansion of the exemption
beyond the current rules, we also analyzed exempting employers with
less than $10,000 in quarterly tax liability, which is roughly the current
threshold for depositing monthly as opposed to using eight monthly
periods.

When compared with the current rules, a standardized provision with
no exceptions would increase the number of employers making deposits
from 3.9 million to 4.5 million. About .6 million employers that have
quarterly tax liabilities of less than $500 make no deposits. Further, it
would accelerate deposits for all employers because they would be
depositing after each payday instead of after either the end of an
eighth-monthly period, month, or quarter. Accordingly, the number of
deposits per quarter would increase from the current 56 million to 171
million.3 Because of the accelerated receipt of these taxes, about $367
million annually in federal borrowing costs could be saved.

In comparison to the proposed standardized rule, the exceptions would
delay the receipt of taxes owed for all employers with quarterly tax lia-
bilities of less than $3,000, $10,000, and $30,000. If these smaller
employers were allowed to file monthly, the number of deposits per
quarter would fall from 171 million under the standard rule to 111 mil-
lion for employers with less than $3,000 in quarterly taxes, 80 million
for less than $10,000, and 60 million for less than $30,000. In addition,
federal savings would drop from $367 million to $334 million for
employers whose taxes are less than $3,000, $248 million for less than
$10,000, and $94 million if less than $30,000. If employers with less
than $3,000 in quarterly taxes were allowed to file and pay quarterly,
the number of deposits would drop to 85 million and federal savings
would fall to $209 million.

As shown in table 3, the different exemption options can exempt up to
89 percent of the nation’s employers from the 3-day deposit rule, with
comparatively little financial impact on the government’s employment
tax receipts.


‘3Thenumber of deposits is calculated on the basis of the assumption that 58 percent of the employers
pay wages weekly, 24 percent pay bi-weekly, 8 percent pay semi-monthly, and 10 percent pay
monthly. These assumptions are based on unpublished data we obtained from the Bureau of Labor
Statistics on the payroll frequency of 79,588 nonagricultural business establishments in 15 states.
These data have limited statistical value because they were derived from a highly stratified sample
and are not weighted sample-based estimates. However, since these are the only data available on
payroll frequency, we used these raw data to develop our nationwide estimates of deposit
frequencies.



 Page 10                                     GAO/GGIMO-102 Federal Tax Deposit Requirements
Table 3: Estimates of the Number of
Employers and Amount of Employment                                                                                   Percent of
Taxes Affected by Exemption Options to                                 Number of                      Amount of             total
the Deposit Rules                                                      employers     Percent of      tax liability employment
                                                                        (millions)   employers          (billions)  tax liability
                                         Total employers and taxes             4.6      .    -100          659.;             100
                                         Exemptions to deposit rule:
                                         tS3.000 oaid with 941                 2.2             49           10.0              1.5
                                         -S3.000 dt?DOsited monthly            2.2             49           10.0              1.5
                                         -c$10,000 deposited monthly           3.4             76           35.8              5.4
                                         t$30,000 deposited monthly            4.0             89           80.6             12.2


                                         Nevertheless, when compared with the current rules, more taxpayers
                                         would be paying faster than they do now, even with the exceptions,
                                         resulting in federal borrowing savings under any of the options. For
                                         example, if employers with less than $30,000 in quarterly liabilities
                                         were allowed to pay taxes within 3 banking days of the end of the
                                         month, the remaining .5 million employers with more than $30,000 in
                                         quarterly tax liability would have to deposit at least within 3 banking
                                         days of their paydays instead of after the eighth-monthly periods. As a
                                         result, the total number of deposits would increase slightly from 56 to
                                         60 million. Similarly, the deposits for the 3.4 million employers with
                                         quarterly tax liabilities of less than $10,000 would be accelerated
                                         because they would be required to make deposits within 3 banking days
                                         after the end of the month instead of either after 15 days after the end
                                         of a month or when they filed their Forms 941. The only employers
                                         whose deposits would not be accelerated under this option would be the
                                         .7 million employers with quarterly tax liabilities of more than $9,000
                                         and less than $30,000. These employers, who pay about 7.4 percent of
                                         the employment taxes and represent about 16 percent of the employers
                                         who pay employment taxes, currently deposit taxes within 3 banking
                                         days of an eighth-monthly period and would, if exempted, be able to pay
                                         monthly. However, one concern with this option is whether allowing
                                         these employers to deposit monthly would increase their employment
                                         tax delinquency rate, thereby exacerbating the accounts receivable
                                         problem IRS faces.


Look Back Provision                      Any exception to the standard rule should contain a “look back” provi-
Needed                                   sion that will allow employers to know before a quarter begins when
                                         deposits have to be made. This will avoid the existing uncertainties over
                                         when individual employers are required to deposit their taxes. For
                                         example, one possible look back provision would base the entire year’s



                                         Page 11                             GAO/GGMJO-102    Federat Tax Deposit Requirements
                        B-236345




                        deposit frequency on the employer’s experience in the first quarter of
                        the year. If an employer is exempted from making deposits during the
                        first quarter and instead can pay the taxes when the Form 941 is filed
                        because the quarterly tax liability was less than $3,000, the employer
                        would be exempted from making deposits for the next four quarters
                        even if these quarterly taxes exceed $3,000. Another possible basis for
                        look back would be to base the current year’s deposits on the deposit
                        rule used most frequently by the employer in the previous year.

                        Even under the existing deposit requirements, a look back provision
                        would help eliminate uncertainties currently facing employers whose
                        deposit requirements may change. As stated earlier, in 31 percent of our
                        sample cases, employers were faced with at least one change in their
                        deposit requirement during the quarter. Small businesses have long
                        advocated a look back provision. Treasury has historically rejected the
                        idea because of difficulties with seasonal and new businesses. We do not
                        believe these types of businesses present an insurmountable problem.
                        Seasonal businesses could be required to deposit on the basis of their
                        prior-year experience, while new businesses could be asked to estimate
                        their first-quarter tax liabilities and deposit accordingly.


                        Placing all employers under the same deposit requirement would
Improvements Needed     enhance employer compliance and IRS’ administration of the FTD system.
in Administering        However, IRScould also improve its administration of the current
Deposit Requirements    deposit requirements and the FTD penalty by revising the FrD coupon,
                        clarifying tax forms and instructions, and developing computer pro-
and Penalties           grams to calculate the FTD penalty. This would not only strengthen
                        administration of the current requirements but also enhance IRS’ability
                        to implement any new requirements promulgated.


FTD Coupon ChangesAre   In 1988, IRS assessed 317,000 deposit penalties totalling $324 million,
Needed                  even though it did not know the specific deposit period that the
                        employers’ deposits should have been applied to when calculating the
                        penalties. IRS’computer can make inaccurate assessments in cases where
                        employers are subject to more than one deposit rule during the quarter,
                        because it cannot determine which deposit period the employer wanted
                        specific deposits to be applied against. As a result, IRScannot be assured
                        that its penalty calculations are accurate.




                        Page 12                          GAO/GGB9@102   Federal   Tax Deposit   Requirementa
                             B-233346




                             IRS  does not currently get information linking a specific deposit to a spe-
                             cific deposit period from employers. Having employers provide informa-
                             tion on which deposit periods to apply their deposits to will be essential
                             for IRS to efficiently and accurately administer the four-tier, time-sensi-
                             tive penalty that was enacted in the Omnibus Budget Reconciliation Act
                             of 1989. Unless IRSobtains specific deposit period data from employers,
                             it will not know for certain which of the four-tiered penalty rates will
                             apply to many late deposits.

                             Modifying the deposit coupon to require employers to provide this infor-
                             mation would resolve this problem. (See app. II for an example of a mod-
                             ified coupon.) It would also allow IRS to more accurately calculate
                             penalties when employers fail to fill out the “wages paid” section of
                             their Form 941.


Form 941 Instructions        In many cases, an incorrect penalty amount was calculated because
Should Be Clarified          employers did not complete the section of the Form 941 that shows
                             when they paid wages. This section is important because IRS uses it to
                             determine whether the deposits were sufficient and timely. Without this
                             information, IRS assesses the penalty after averaging the quarterly tax
                             liability. (The method IRS uses to do this is described in detail in app. III.)

                             IRSpenalty calculations under these circumstances will be wrong in
                             many cases. For example, in 91 of the 121 sample cases where we had
                             wage paid data, the averaging method produced variances ranging from
                             $1 to $3,160 of what the correct penalty amount should have been. For
                             the remaining 30 cases, there was no difference between the penalty
                             amount calculated using the averaging method and the wages paid data
                             shown on the employers’ Forms 941.

                             According to IRSdata, in 1988 this section was not completed on 8.3 mil-
                             lion, or 41 percent, of the 20 million Forms 941 filed. We believe that IRS
                             should clarify its instructions for completing the wages paid section of
                             the Form 941, which shows the deposit periods that the employer paid
                             wages and the amount of employment taxes owed for those periods, to
                             emphasize the importance of providing this information,


Instructions on the FTD      IRS’instructions on the deposit requirements could be made clearer so
Requirements Are Difficult   that employers could more readily determine when they should make
                             deposits. Circular E, Employer’s Tax Guide, is the IRS publication that
to Understand                provides taxpayers with instructions and guidance on when to make


                             Page 13                            GAO/GGD+O-102   Federal   Tax Deposit   FLequhments
                            R-238346




                            their deposits. This publication lists the four rules for depositing taxes
                            and gives five examples on how to apply the rules. The examples are in
                            narrative form and contain various dates and dollar amounts, which
                            makes it difficult to visualize exactly when deposits should be made.
                            The examples do not include charts or tables to illustrate the narrative
                            descriptions.

                            IRScould make it easier for taxpayers to understand the deposit require-
                            ments if Circular E contained clear and comprehensive examples of each
                            deposit rule. IRS’Publication 539, Employment Taxes, which discusses
                            an employer’s responsibility for employment taxes, gives one such
                            example. This comprehensive example traces an employer’s paydays
                            and deposit dates for each month of the quarter and uses several charts
                            to illustrate the narrative. IRScould use this example as a model for
                            explaining the deposit rules in Circular E.


Manual Calculation of the   IRS’computers are programmed to calculate the FTDpenalty for the
                            majority of Forms 941 processed* However, the penalty must be manu-
F’TDPenalty Should Be       ally calculated under certain situations, such as when a taxpayer
Computerized                responds to a proposed penalty notice. In 1988, IRSmanually assessed
                            over 325,000 FTD penalties at a cost of about $4 million.

                            We found that 33 of the 75 manually assessed penalties we reviewed
                            were incorrectly calculated. This occurred in most cases because tax
                            examiners did not correctly apply the deposit rules when they calcu-
                            lated the penalty.

                            To overcome the errors that tax examiners make when manually calcu-
                            lating ETD penalties, we had Fresno Service Center staff develop a com-
                            puter program that would calculate the penalty for the examiners. We
                            tested this computer program and found that it accurately calculates FTD
                            penalties. An IRSFresno Service Center official estimated that, using this
                            computer program, a tax examiner could accurately calculate an FTD
                            penalty in 7 minutes, which, according to IRSdata, is less than one-half
                            the time it takes to manually calculate the penalty. This program was
                            developed to be used on Fresno’s local computer system, which is similar
                            to computer systems maintained in IRS’other nine service centers.


                            The deposit requirements are complex, contain several unnecessary
Conclusions                 exceptions, and for many employers may be difficult to understand. The
                            frequency of required deposits for a given employer can vary over the


                            Page 14                           GAO/GGD!W1O2   Federal Tax Deposit Requirements
B233346




tax period so that the employer cannot always predict when deposits
are due. The complexity and uncertainty of the deposit requirements
may be part of the reason why over 30 percent of all employers in fiscal
year 1988 received at least one FTD penalty. Although some of the
exceptions began as well intended efforts to ease the compliance burden
for small employers, the resulting complexity may have made it more
difficult for these employers to comply and more likely they will be
penalized.

The deposit requirements should be simplified. The employer compli-
ance problems associated with the complexities of the deposit require-
ments could be substantially reduced if all employers had the same
number of days after a payday to make their deposits and if there were
no exceptions to the requirements. A standard deposit requirement
would, however, increase the number of deposits some employers would
be required to make as well as the number of deposits IRSwould have to
process. If Treasury determines the increase would be burdensome, a
single exception for small depositors could greatly reduce the number of
deposits while minimizing the added complexity. For example, a
threshold exempting employers with quarterly tax liabilities of up to
$30,000 from depositing taxes within 3 banking days of their paydays
would permit 89 percent of the nation’s employers to deposit monthly.
At the same time, federal borrowing costs savings would be about $100
million annually because about 93 percent of the employment taxes
would be required to be deposited sooner than under the current deposit
rules.

Any change to the deposit requirements should include the repeal of the
safe haven exception for larger employers needing time to calculate
their tax liability. This exception is subject to abuse, and any flexibility
needed can be provided through waving penalties. In addition, a look
back provision should be added so that employers know what their
deposit requirements are at the beginning of the quarter.

The variable deposit requirements and the exceptions to them also make
it difficult for IRSto administer the requirements and accurately assess
deposit penalties. IRS cannot always accurately assess the lo-percent
flat-rate deposit penalty because it does not receive information from
employers to accurately associate the deposits with the correct deposit
period. This problem will be exacerbated under the multi-tier, time-sen-
sitive penalty enacted in the Omnibus Budget Reconciliation Act of
1989. Modifying the FTD coupon to capture this information should
resolve the problem. IRS also assesses erroneous penalties because it has


Page 15                           GAO/GGIMO-102   Federal   Tax Deposit   Requirements
                      B238346




                      tax examiners manually calculate some penalties instead of developing
                      computer programs to more accurately calculate the penalties.

                      Employers may not comply with the current deposit requirements
                      because IRS’employment tax publications do not adequately explain the
                      requirements or the need to fully complete the returns.


                      To make it easier for employers to understand and comply with the
Recommendations       deposit requirements and for IRSto administer the requirements, we rec-
                      ommend that you change the deposit requirements so that all employers
                      are required to make employment tax deposits within some specific time
                      interval of each payday. Requiring all deposits within 3 banking days of
                      a payday would be fairly consistent with current deposit requirements
                      and familiar to most employers. This change should include the repeal of
                      the safe haven provision and all other exceptions but not affect the stat-
                      utory deposit requirements contained in the Omnibus Budget Reconcilia-
                      tion Act of 1989,

                      If an exception is granted to this standard deposit requirement to reduce
                      the number of deposits made by small employers, we recommend that a
                      single exception be provided to minimize confusion and administrative
                      burdens. A threshold of $30,000 in tax deposits per quarter is one
                      option to consider in that it covers 89 percent of the employers but only
                      12.2 percent of the employment tax revenues.

                      We also recommend that a look back procedure be included, which will
                      allow employers to know what their deposit requirement will be before
                      the start of a quarter. This procedure, which should be adopted even if
                      the deposit requirements are not changed, should also apply to
                      employers required to deposit employment taxes within 1 banking day
                      of each payday under the 1989 Omnibus Budget Reconciliation Act.

                      To improve employers’ compliance with the current deposit require-
                      ments and IRS’ administration of the four-tier, time-sensitive deposit
                      penalty, we recommend that you direct the Commissioner, Internal Rev-
                      enue, to

                  l   modify the FrD coupon to have employers indicate the specific deposit
                      period to apply the deposit to,
                  l   clarify IRS’ guidance to employers on the FTD requirements and instruc-
                      tions for completing the Form 941, and



                      Page 16                          GAO/GGD-Cl&102   Federal   Tax Deposit   Requirements
                      . require all service centers to use computer programs to calculate the mu
                        penalty.


                        Treasury and IRSprovided written comments on a draft of this report.
Agency Comments and     Treasury limited its comments to our recommendation to change the
Our Evaluation          deposit requirements. IRS limited its comments to our recommendations
                        to modify the FED coupon, clarify tax forms and instructions, and
                        develop a computer program to eliminate the need to manually calculate
                        the FTD penalty.

                        Treasury’s March 13, 1990, comment letter responded negatively to our
                        recommendation that the deposit requirements be simplified. Specifi-
                        cally, Treasury opposed elimination of the eighth-monthly periods and
                        the safe haven provision. In subsequent discussions, Treasury officials
                        agreed with us that the deposit requirements should be simplified and
                        the need for the eighth-monthly periods and safe haven rule should be
                        reconsidered. In addition, on May 7, 1990, IRS, with Treasury’s approval,
                        issued a notice requesting public comments on replacing the eighth-
                        monthly system with a less complex deposit system, such as the one dis-
                        cussed in our draft report, i.e., based on employers’ paydays. Comments
                        were also requested on eliminating the safe haven rule. A more detailed
                        response to Treasury’s comments and the comment letter is in appendix
                        IV. A copy of the IRS notice is provided in appendix V.

                        In its letter dated March 20, 1990, IRS stated it would take action on our
                        recommendations, but is considering an alternative to modifying the FTD
                        coupon. The alternative IRS is considering is to revise the deposit regula-
                        tions to require that deposits be applied in deposit date order against the
                        oldest periodic liability first. We do not endorse this alternative because
                        we believe that it could lead to penalties that exceed the amount
                        intended by Congress. When an underpayment exists for one deposit
                        period, IRS would automatically apply the tax payment for the next
                        period to the prior period’s underpayment, thereby creating another
                        underpayment for the next period. This would then prompt IRS to assert
                        a second penalty covering this second underpayment. Essentially, this
                        would subject a single underpayment to at least two separate penalties.
                        An illustration of this situation and a more detailed discussion of our
                        concerns is in appendix IV,


                        As you know, 31 U.S.C. 720 requires the head of a federal agency to
                        submit a written statement on actions taken on our recommendations to


                        Page 17                          GAO/GGD-90-102   Federal   Tax Deposit   Requirements
the House Committee on Government Operations and the Senate Com-
mittee on Governmental Affairs not later than 60 days after the date of
the report A written statement must also be submitted .to the House and
Senate Committees on Appropriations with the agency’s first request for
appropriations made more than 60 days after the date of the report,

We are sending copies of this report to the Joint Committee on Taxation;
the Subcommittee on Private Retirement Plans and Oversight of IRS,
Senate Committee on Finance; the Subcommittee on Oversight, House
Committee on Ways and Means; the Commissioner of Internal Revenue;
and other interested parties We will make copies available to others on
request.

Major contributors to this report are listed in appendix VII. Please con-
tact me on 272-7904 if you have any questions concerning the report.

Sincerely yours,




Paul L. Posner
Associate Director, Tax Policy and
  Administration Issues




Page 18                          GAO/GGDBMO2   Federal   Tax Dewit   Requiremente
Page 19   GAO/GGDW102   Federal   Tax Deposit   Requirements
Contents



Letter                                                                                  1
Appendix I                                                                             22
Exceptions to Federal
Tax Deposit
Requirements
Appendix II                                                                            23
FY’DCoupon
Appendix III                                                                           24
IRS Methodology for
Averaging FTDs
Appendix IV                                                                            25
Comments From the
Department of the
Treasury
Appendix V                                                                             34
Comments From the
Internal Revenue
Service
Appendix VI                                                                        37
IRS Notice 90-37
Appendix VII                                                                       40
Major Contributors to
This Report




                        Page 20   GAO/GGIMO-102   Federal   Tax Deposit Requirementa
             contenta




         -
Tables       Table 1: Failure-to-Deposit Penalty Assessment/                                   4
                 Abatement Statistics, Fiscal Years 1984-88
             Table 2: Estimates of the Number of Employers Making                              9
                 Deposits, Number of Deposits Made, and the Revenue
                 Impact of a Standard Deposit Rule
             Table 3: Estimates of the Number of Employers and                                 11
                 Amount of Employment Taxes Affected by
                 Exemption Options to the Deposit Rules




             Abbreviations

             F-m        Federal Tax Deposit
             IRS        Internal Revenue Service
             NFII3      National Federation of Independent Business


             Page 21                         GAO/GGDW102   Federal   Tax Depodt   Itquhmenta
Appendix I

Exceptionsto Federal Tax
Deposit Requirements

               There are several exceptions to the deposit rules. For example, the “safe
               haven” exception allows employers required to make eight monthly
               deposits to deposit 95 percent of their accumulated taxes within 3
               banking days of one of the eight deposit periods. The remaining 5 per-
               cent can be deposited with the first deposit that is otherwise required
               after the 15th of the following month. This exception was made to
               accommodate employers who are unable to accurately determine their
               employment tax liability in time to make timely deposits.

              One exception allows employers with large payrolls more time to make
              particular deposits than smaller employers. This exception relates to the
              deposit rule that requires undeposited taxes of more than $500 but less
              than $3,000 at the end of the month to be made within 15 days after the
              end of the month. However, this rule does not apply to employers who
              were required to make a deposit of $3,000 or more during the last month
              of the quarter, If these employers have a balance of $500 or more but
              less than $3,000 at the end of the last month of the quarter, they have
              until the end of the next month to make this deposit.

              Another exception allows certain employers to deposit taxes by the 15th
              day of the month following a deposit period that has a tax liability of
              $3,000 or more instead of within the required 3 banking days. This
              exception applies if (1) the employer was not required to make a $3,000
              deposit during the four preceding quarters and (2) the deposit is less
              than $10,000.




              Page 22                          GAO/GGMO-lO%Federd   TaxDeposit   Fkquirements
Appendix II

FTD Coupon



        Current FTD Coupon:


                                                                   iiji   AMOUNT   OF DEPOSIT   (DO NOT WW: dc

                   Mmrk the “x” in th~s
                   b0KOnly il tlwra ina
                   ChanQe 10 Employer
                   ldsntilication Number
                   (EIN) or Name




                         Telephone      number         (       )                                                               FOR BANK USE IN MICR ENCODING


              PadedTuDep#lt~pon
              Form8109oaev.a.w,



        Modlfled FTD Coupon:

                       DEPOSIT       PERIOD                               AMOUNT   OF DEPOSIT   (00 NOT type; plww   print.)




                                                    .;.
                                                 ::(       LtLLL&&l           8 PAUL JONES
                                                 i;        L&PGRAPHIcS




               1                                I
                         Telephone     number          (       )                                                               FOR BANK USE IN MICR ENCODING
                                                                                                                                                                                 I
          FdaralTu          tkpdt      caqoll
          Form8109mev.c~~~




                                                                           Page 23                                                GAO/GGD9O-102        Federal   Tax Deposit   Requirements
Appendix III

IRSMethodology for Averaging FTDs                                                             ’


               In 1988, IRS’ business master file computer may have erroneously
               assessed 317,000 deposit penalties totalling $324 million because IRSdid
               not know the specific deposit period that the employers’ deposits should
               have been applied to when calculating the penalties.
               In many cases, an erroneous penalty occurred because the employer did
               not complete the section of the Form 941 that shows when they paid
               wages. This section is important because IRSuses it to determine
               whether the deposits were sufficient and timely. If the employer does
               not fill out the wages paid section, IRSassumesthat the employer paid
               wages four times each month for a total of 12 times a quarter. The total
               tax liability shown on the Form 941 is then allocated equally to eachof
               the 12 assumed paydays.

               The employer’s actual deposit dates and accounts received are then
               compared by IRSto the assumed paydays to determine whether the
               deposits were sufficient and timely. If this comparison shows that one
               or more deposits were late, IRSsends the employer a notice that a pen-
               alty will be assessed unless a statement is submitted showing the actual
               dates the employer paid wages during the quarter. If the employer does
               not respond to the notice, the computer will automatically assess the
               penalty, which was calculated by averaging the quarterly tax liability.

               These penalty calculations will in almost all cases be wrong because sub-
               stantial variances can occur between penalties that are calculated by
               averaging the quarterly tax liability and those that are based on the
               wages paid section of the Form 941.




               Page 24                         GAO/GG~102    Federal   Tax Depcmit Requirements
Appendik IV

CommentsFrom the Department of
                                                                                                                                                      e
the Treasury

Note: GAO comments
supplementing those in the
report text appear at the
                                                                        DEPARTMENT      OF THE TREASURY
end of this appendix                                                                 W*S”INGTON


                             ASSlSTANT     SECRETARY




                                         Mr. Richard      L. Fogel
                                         Assistant      Comptroller      General
                                         United    States    General
                                            Accounting     Office
                                         Washington,      DC       20548
                                         Dear    Hr.    Fogel:
                                                         Thank you for        the opportunity        to provide    comments on the
                                         draft     General     Accounting        Office   report     entitled   Tax Policy    and
                                         Administration:
                                         3im~-1i.i’gd,-----       Federal       Tax Deoo&it      Requil,emPntc   Should    Be
                                                       -
                                                        The draft       report      summarizes      a GAO review         of a sample of
                                         penalties        assessed     by the IRS on employers                for failures         to comply
                                         with     Federal      Tax Deposit        (FTD) payment        schedules       for    FICA    (Social
                                         security)        taxes     and withheld        income taxes.           Because     of the large
                                         numbers      of employment          tax penalties         which    are assessed         each year,
                                         the GAO draft          report     includes       a recommendation          that    employment
                                         tax payment         schedules       be simplified         and that      most    exceptions         to a
                                         single     payment       rule    be eliminated.           The report       suggests       that     100
                                         percent      of employment          taxes     be deposited       three     days after        each
                                         payroll      date,     with   monthly        or quarterly       payments      permitted        for
                                         very     small     employers.
                                                         The Treasury        Department        agrees      with    most of the GAO
                                         comments        about    the apparent         complexity        of the current         payment
                                         system      for    employment       taxes.       However , we believe            there    are a
                                         number of negative              aspects     to the changes            recommended      by GAO.
                                         Although        the recommended          changes      might     reduce     borrowing      costs   for
                                         the Federal          government       and ease administrative               burden     for some
                                         employers,         for many employers,             the recommended          chaqgee      would
                                         introduce         new difficulties,           thereby      increasing       burdens      and costs
                                         disproportionately              to the benefits          gained      by the Treasury.
                                                       Employment       tax liabilities             are imposed        when the wages
                                         are paid      to employees,        and government              borrowing       costs     would be
                                         minimized       if the the employment              taxes       were paid       to the Internal
                                         Revenue     Service      as soon thereafter              as possible.            However,       since
                                         employers       act as collection           agents       for the Federal             government
                                         without     direct      compensation,         and since          our entire        tax system        is
                                         predicated        on voluntary        compliance,          payment      rules     and schedules
                                         are designed         to balance       the costs        and burdens          imposed      on
                                         employers       against     the benefits         to the government               of earlier
                                         receipt     of tax revenues.              we believe         that    the current         system with
                                         the changes        recommended        in the Administration’s                  1991 Budget
                                         strikes     an appropriate         balance       between         the needs of employers                and
                                         government,        between     simplicity        (with       its    accompanying         certainty)




                                                  Page 26                                        GAO/GGD9@102 Federal Tax Deposit FLequinxnenta
                              Appendix Iv
                              timmenU From the Department of
                              the Treasury




                 and equity,        and between          the costs     and the benefits       of more
                 frequent      deposits.           The Omnibus Budget        Reconciliation        Act of 1989
                 imposed     a temporary           acceieration      of large    employment      tax
                 deposits.        The AdminiXtration’s              1991 Budget     proposal    would make
                 that    change     permanent,          requiring    about   95 percent      of accumulated
                 employment       tax    liability         of $100,000     or more to be deposited
                 within     one business           day.

                                We doubt       that      the employment              tax payment          system      proposed
                 by GAO would          be an improvement                 over the current             system.         Although
                 the recommended            payment        schedule         would      reduce      some employer            costs
                 and burdens,          others     would be increased,                    thereby      offsetting          the
See comment 1     reduction        in the number of penalties                      which      is the goal of the
                 proposed        system.       The proposed              system      would      increase       the
                 aggregate        number of FTDs and would                     require        many employers            to make
                 several       deposits       each week,           including         many small         deposits.
                 Adding       an exception        to avoid           such small          deposits      would       require
                 employers        to keep track            of accumulated              but    undeposited
                 liabilities,          thereby      eliminating             one of the main alleged
See comment 2.   advantages          of the proposed             system.         Not permitting            larger
                 employers        to estimate         liabilities             and to underdeposit                without
                 penalty       by up to five          percent          of liabilities             would significantly
                 increase       costs     and burdens            for larger          employers,        or would         require
See comment 3.   them to overdeposit              in order           to avoid        the possibility             of
                 penalties.
                              The Treasury    Department’s                    more     detailed       comments on
                 GAO’s recommended       payment    system                 are    included      in    the enclosure            to
                 this letter.
                                  The draft        report     includes      some recommendations             to the
                 IRS for        altering       tax forms and instructions                 and for increasing
                 the use of automated                 penalty      computations       in order       to ease
                 employer         burdens,       lessen      employer    uncertainty,        and improve          the
                 efficiency           and accuracy         of penalty       assessment.       Since       the IRS has
                 special        expertise        in administration           and enforcement           and the
                 Commissioner            has been offered            an opportunity        to comment,         we will
                 not discuss           penalties        other    than to point        out that       the employment
                 tax penalty           changes      included       in the Omnibus Budget             Reconciliation
                 Act of 1989 were an attempt                     to assure      that    the sizes       of penalties
                 are     related       to the magnitude            of the offense         committed.
                               We appreciate          the GAO’s attempt            to develop        a more
                 efficient      and less       troublesome         employment        tax payment        system.
                 The Treasury        Department         recognizes       the important          role    of
                 employers      in collecting           most federal        individual        income tax and
                 FICA (social        security)        tax liabilities,           and we want to ease
                 employers’       burdens      to the maximum extent               possible,       consistent
                 with      the need to collect            such revenue        rapidly      and completely.

                                  If you have any questions                   about these   comments              please
                 contact        Allen   H. Lerman of my staff                  at 566-5950.




                                                               $g+-gov
                                                                 Assistant          Secretary
                 tinclosure                                           (Tax       Policy)




                              Page 26                                         GAO/GGD-90-102 Federal Tax Deposit Requirements
                          APL=-     n’
                          thnment.3 From the Department of
                          the Treasury




                                             Tteasury    Department    Comments
                                       on the Draft    of the GAO ReDort       Entitled
                                            Tax Policy    and Adminiairation:
                          Federal       Tax Deposit    Requirements     Should   Be Simplified


                 0   The current           employment         tax payment      system    requires       that
                     larger         amounts     of employment         taxes    be paid to the government
                     more frequently              and with       a shorter     average    delay      between      the
                     payroll         date and payment            to the government.          Except       for the
                     very       largest     employers         covered    by the changes         included        in the
                     Omnibus         Budget     Reconciliation          Act  of 1989,      employers        are
                     never        required      to make more than eight              Federal      Tax Deposits        a
                     month.          Boreover,       even large       employers      do not have to make an
                     intra-monthly             deposit      if accumulated        but undeposited
                     liabilities           are less       than $3,000.

                 0   The GAO draft             report         includes       a recommendation          that
                     employment           tax payment             rules     and schedules        be simplified        and
                     that       most exceptions               to a single         payment     rule    be eliminated.
                     The proposed             system       would       require     that    100 percent       of
                     employment           taxes      be deposited            three    business      days after       each
                     payroll        date,      with      monthly         or quarterly       payments      permitted
                     for      very   small        enployers.            Each employer’s          payment     category
                     would be determined                   before        the beginning        of a calendar
                     quarter.          Large       employers           would no longer          be permitted
                     to estimate            their      liabilities           and underpay        without     penalty
                     intra-monthly             deposits           by up to five         percent     of final
                     liability.
                 a   The     payment      system      recommended        in    the     draft         report         would:
See comment 1.       --      greatly      increase       the   aggregate         number         of    Federal          Tax
                             Deposits;
See comment 1.       --      require      many     deposits      of   lass     than     $3,000;
See comment 1.       --      require  many medium-sized  employers                        to make             tax    deposits
                             most than tight   times a month, even                        daily;
                     --      increase  the reconciliation                    burdens      for        employers          with
See comment 3.               more than one payroll        site;              and
See comment 3.       --      increase      coats   for,     or require    overdeposits          by,                  larger
                             employers      who could       not determine     their    liability
                             precisely      within     three    business   days.
                 0   The GAO staff        assumed that      each employer     has only one pay day
                     every   two weeks.        In order     to make efficient      use of personnel
                     and equipment,        all   but the smallest      employers    typically   have
See comment 1        several    payrolls;      many have a payroll        on every    business  day.
                     Under the GAO proposal,            such employers     would have to make a
                     Federal    Tax Deposit       every    business  day instead      of eight  times
                     a month.




                          Page 27                                       GAO/GGD!W102             Federal      Tax Deposit Requirements
                       Appendix IV
                       Comments From the Degartment of
                       the Treasury




                 0   If even        small      employers     were required           to use the current
                     eighth-monthly             deposit     system,      many small        deposits     would be
                     required         except     for the rule         that    allows      undeposittd
                     1iabiLitits          of under       $3,000     to be carried          forward.       Under the
See comment 1        daily       system      recommended       in the draft          GAO KtpOKt,      even more
                     small       dtposits       would be required.              It is not efficient           for
                     either        employers       or the IRS to handle              small    payments.       Thus,
                     as a practical             matter,     a de minfmur          deposit     rule would be
                     required         which would elim=ate               small     deposits      and reduce       the
                     total       number of deposits.              That     exception,        however,     would
                     require        employers       to track      accumulated,          undeposited
See comment 2.       liabilities          which      is exactly       what the GAO proposal             is
                     designed         to eliminate.
                 0   The extra        deposits       required        under     the GAO proposal           could      be
                     especially          burdensome       for smaller         businesses         who mail      their
                     FTD deposits.             In order       to be assurtd          that     they will       avoid
                     penalties         for late      receipt,        mailed      deposit8       must be sent at
                     least      two days before           the due date.             Thur , employers         would
                     have only         one day to determine               the amount        of their      mailed
                     deposit       with     complete      certainty.          Under the present             eighth-
                     monthly       system,       employers       have more time to reconcile                   payroll
See comment 5.       recordB       for payrolls         which      art    not paid on the last              day of
                     the eighth-monthly              period,       and their        deposit      may be based on
                     an estimate,           since    underdeposits           of up to five          percent      are
                     not subject          to penalties.
See comment 3.   0   Even with         greater      payroll      automation,           the Treasury     Department
                     has been advised             repeatedly         that    it is very difficult            and
                     COBtly       for some employers,              including         some large     employers,     to
                     determine         their    payroll      tax liability            within   three    banking
                     days.        Problems      may stem from the use of multiple                     payroll
                     sites,       certain      portions      of payrolls           (such as corrections)
                     that    still       must be processed             manually,         etc.  Thus, while       some
                     employers         may not need the ability                  to underdeposit        by up to
                     five   percent,         others     definitely         do need such leeway.
See comment 3    0   The draft      report    suggests     that    the underdeposit          rules    are no
                     longer     necessary     since    they are used by only             19,300
                     employers.        The underdeposit         provision       is generally       used by
                     larger     employers,      and the largest         19,000    employers       account
                     for over      55 percent      of all    employment       tax liability.
See comment 3.   0   In 1981,      the underdeposit            leeway      was reduced        from ten percent
                     to five      percent      of liability.           Even if developments              since
                     then suggest         that   a further         reduction       is warranted,         complete
                     elimination        is not appropriate.                Elimination        would cause
                     employers       to incur     additional          compliance       costs,      to make
                     overdeposits         to avoid      penalties,         or to incur        additional
                     penalties.




                       Page 28                                        GAO/GGJM@102 Federal Tax Deposit Requirements
                        AppendixN
                        CemmentsFromtheDepartment           of
                        theTreasury




                                                                                                                                    d




                 r   The underdeposit        rule is Optional.               of ita      use leads   to
                                                                                                                                1

                     additional     costs    or to penalties,              employers       may avoid   them          by
                     depositing     100 percent     of liability             at the      end of each
                     eighth-monthly       period.
                     The changes         proposed     in the GAO report            would be most
                     appropriate         for larger      enployers        with    payroll     6yStem6      capable
                     of handling         the required        increase       in deposit      frequency.
                     However,      many of the6e         same employers           will    be subject       to
                     similar      rules     beginning      in AugUSt,         1990, as the result           of
                     employment        tax acceleration           provisions       enacted     in the      Omnibus
                     Budget      Reconciliation         Act of 1989.
                     The system       recommended       by GAO would provide             certainty         about
                     deposit     date6    by determining         deposit     rules      at the beginning
                     of a calendar        quarter      based on the employment              tax level         of
                     that    employer      in some prior       quarter.        Similar      provisions          have
                     been rejected         in the past because           of problem6        stemming        frqm
                     seaeonal     and new businesses.             En addition         to the inequities
See comment 4        from the competitive            advantage6       or disadvantages             for euch
                     businesses,       there     could    be significant        collection           problems      if
                     large    amounts      of employment       taxes     were left       uncollected          for a
                     month or a quarter.             Employer6       could   incur      penalties,         and the
                     government       could    lose tax revenue.
                     The       textof the report        does not indicate       an awareness   that
                     current     rules   provide      that    most employer6     who became subject
                     to intra-monthly         deposits      for the first     time within    a year
See comment 6.       are not subject        to penalties        for the first     month for which
                     they   fail     to make such deposits.
                     Employer         burdens    could     be reduced          if deposit    schedules       were
                     liberalized,           but that      would     cause the federal          government       to
                     incur      significant        additional          borrowing     costs,    about   $100
See comment 7        million        a year for each one-day                 delay.     In addition,      tax
                     revenue6         would be reduced           by billions       of dollars       in the
                     fiscal       year during       which     liberalizations           were implemented,
                     thereby        increasing      the federal            budget  deficit.       The exact
                     revenue        changr     would depend on the proposed                 schedule     change
                     and on the date on which                 the change would be implemented.
                     The Treasury         Department      agrees     with     moet of         GAO'S comments
                     about     the apparent        complexity      of the current             payment    system
                     far FICA taxes         and withheld        income      taxes.       The only
                     substantial        reservation       concern6       GAO's assertion           that   most
                     penalties      are attributable          to employers’           inability       to
                     understand       the rules.        We believe        that     some employers*          lack
                     of attention         to admittedly       stringent        rules     is also an
                     important      factor     which    should     not be minimized.               Because
                     employment       taxes     are being     held     in trust       for the federal
                     government,        we believe      that    the current         standard6        of conduct
                     required     of employers         should     be maintained.




                       Page 29                                       GAO/~~90-102FederalTarDeposit               Requirements
 ---
                       Appendix N
                       Comments Prom the Department of
                       theTreamry




                                                                                                                       1
See comment 8.   0   The draft      GAO report      contains       several       inaccuracies,
                     especially       concerning      numbers      of Federal         Tax Deposits         and the
                     additional       borrowing     costs     or saving8         to the government            from
                     various     changes.        In addition,        certain       calculations        are not
                     consistent       with    the stated      a8sumptions.            Finally,      certain
                     assumptions       oversimplify        payroll      practices        to the extent          that
                     analyseo     which u8e those          assumptions         to compare       alternative
                     payment     rules     may be misleading.




                                                                            Office   of Tax Analysis
                                                                            Department   of the Treasury
                                                                            March 2, 1990




                       Page 30                                       GAO/GGD3DlOP Federal Tax Deposit Requirements
               Appendix Iv
               Comments From the Department   of
               the Treasury




               The following are GAO’S comments on the Department of the Treasury’s
               letter dated March 13, 1990.


GAO Comments   standardized deposit requirement such as we recommended. We agree
               with Treasury that the number of deposits would increase under our
               proposed change. However, the impact of the increases could be miti-
               gated in several ways. These include the use of a single exception to
               exempt small businesses from our proposed standard rule of requiring
               deposits to be made after each payday. The exception could be set at a
               level that would minimize the number of additional deposits these
               employers would have to make. Our draft report stated that an excep-
               tion of less than $3,000 in quarterly tax liability is an option that Trea-
               sury should consider.

               Comments we received from the National Federation of Independent
               Business, which represents 570,000 small businesses nationwide, sup-
               ported our recommendation for simplifying the deposit requirements
               but suggested the exemption threshold be raised to $10,000 a month or
               $30,000 a quarter. When combined with our proposed standard require-
               ment, excepting employers with less than $30,000 in quarterly tax liabil-
               ities would result in only a small increase in the number of deposits IRS
               must process. The final report analyzes this option and other options for
               exceptions to the standardized rule. However, Treasury could set the
               threshold for an exception at any level it deemed appropriate. We rec-
               ommend that a look back provision be included to reduce the problems
               with administering the exception.

               In regard to Treasury’s concern that requiring a deposit to be made after
               each payday rather than at the end of an eighth-monthly period would
               increase the number of deposits that many employers who have more
               than one payday in an eighth-monthly period (3-6 days in duration)
               would have to make, neither we nor Treasury have data to verify this.
               However, data from the Bureau of Labor Statistics shows that about 95
               percent of all employers have fewer than 50 employees. On the basis of
               discussions with the Small Business Administration and NFIB officials,
               we do not believe it is likely that these small employers would have
               more than one payday in a 4-day period. Large employers could very
               well have more frequent paydays, but many of these employers prob-
               ably also have employment tax liability of $100,000 or more each
               payday. In that case, they would come under the Omnibus Budget Rec-
               onciliation Act of 1989 deposit provision requiring deposits be made the


               Page 31                             GAO/GGD90-102   Federal   Tax Deposit   Requirements
Appendix N
Conunents From the Departmat   of
theTreasury




day after a payday. This provision would not be affected by our
recommendations.

2. Treasury also argued that our recommendation that deposit require-
ments be tied to actual paydays rather than the end of an eighth-
monthly period would create many small deposits that are currently not
required. For example, if an employee is terminated immediately after a
business makes a payroll and is compensated at that time for work to
date, in Treasury’s view, payment of wages owed to this employee
would constitute a payday and under our proposal would require a
deposit, no matter how small the amount. We disagree, because the regu-
lations could be written to allow this type of deposit to be made in the
next regular payroll deposit.

3. Treasury objected to eliminating the g&percent safe haven exception
because it would significantly increase the costs and burdens for large
employers or require them to over-deposit in order to avoid being penal-
ized and increase their reconciliation burden. We agree that some
employers may be faced with an increased reconciliation burden
because they may not have the capability to determine, within several
days of paying their employees, how much taxes they withheld from the
employees’ paychecks. However, studies by IRS’Internal Audit division
and the Railroad Retirement Board have recommended eliminating the
safe haven provision because large employers receive unintended bene-
fits by taking advantage of the safe haven provision even though they
can accurately determine their actual tax liability. A more targeted way
of dealing with the problem would be for IRSto grant a waiver to
employers who demonstrate a legitimate need for this flexibility.

4. According to Treasury’s comments, a look back provision, which
would allow employers to know at the start of the quarter what their
deposit requirements are, has been suggested before but rejected
because of difficulties in determining when seasonal and new businesses
should deposit. A standard deposit requirement would eliminate part of
the problem. In addition, we believe the regulations could be written to
address this problem. For example, seasonal businesses could be
required to make deposits based on their prior-year deposit require-
ments. New businesses could be required to estimate their first quarter
liabilities and deposit accordingly as they do with income taxes. Or new
businesses, in light of their high failure rate and concerns over employ-
ment tax delinquencies, could be required to deposit after every payday,
regardless of the amount of their deposit, until a payment history is
established.


Page 32                             GAO/GGD90-102   Federal   Tax Deposit   Requirements
6. Treasury commented that our proposal could be especially burden-
somefor smaller businesseswho mail their FTDcoupons,because,to be
assuredthat they will avoid penalties for late receipts, the deposits
must be sent at least 2 days before the due date. We believe that this
potential problem would be minimized if Treasury allows employers
with quarterly tax liabilities of less than $30,000 to deposit within 3
banking days of the end of the month. The only time these employers
would have just 2 banking days to mail their deposits would be if they
paid wages on the last day of the month.

6. Treasury states that we did not recognizein the text of the report the
current deposit rule exception that doesnot subject employers to FMI
penalties for failure to deposit within 3 banking days if, in the four pre-
ceding quarters, they did not comeunder the 3-banking-day rule. We did
discussthis exception in appendix I. We did not discussit in the text of
the report because,according to IRS data, only about 8,600 employers
claimed this exception in the fourth quarter of 1988 and 6,700
employers in the first quarter of 1989.

7. Treasury stated that liberalizing deposit scheduleswould causethe
federal government to incur additional borrowing costs.On the basis of
the analysis presented in the report (seep. S), we believe the deposit
requirements can be standardized in a way that both reducesthe burden
on employers and generatesadditional federal revenue. The additional
revenue comesfrom the acceleration of deposits through the elimination
of the eighth-monthly periods for the relatively small share of
employers whose deposits composethe bulk of the dollars received
under the deposit program.

8. Treasury states that our methodology for calculating increasesin the
number of deposits and anticipated savings contained someinaccuracies
and was oversimplified. On the basis of these comments,we refined our
methodology to reflect actual data on how often employeesare paid. We
also used actual federal interest rates to calculate the potential bor-
rowing costs savings that would occur if the deposit requirements were
simplified.




Page 88                          GAO/GGD-B&102   Federpl   Tax Ihqmit   lbquhmati
Appendix V

CommentsFrom the Intemal RevenueService


Note: GAO comments
supplementing those in the
report text appear at the
                                                        DEPARTMENT       OF THE TREASURY
end of this appendix.                                      INTERNAL     REVENUE    SERVICE
                                                               WASHINGTON.     D.C. 20224




                             Mr. Richard   I. Fogel
                             Assistant   Comptroller General
                             United States General   Accounting              Office
                             Washington,   DC 20548
                             Dear Mr.    Fogel:
                                      We have reviewed        your     recent draft report entitled,          “Tax
                             Policy    & Administration:             Federal Tax Deposit Requirements
                             Should    Be Simplified”.
                                    Because of the         significance    that the Federal Tax Deposit
                             System plays in our         system of tax administration,          we appreciate
                             your efforts   to seek        improvements.      We have recently     undertaken
                             a study to simplify         the rules and procedures        governing    federal
                             tax deposits.    Your       report     will be very helpful     in this regard.
                                       We have enclosed      comments on the report        recommendations
                             directed     to IRS regarding       the modification       of FTD coupons,
                             clarifying      IRS’ guidance and requiring          service   centers    to use
                             computer programs to improve the manual calculation                    of the FTD
                             penalty.      Although     we endorse the general concept of
                             standardizing       deposit   rules when possible        and simplifying     the
                             rules for small businessmen,            specific    comments on your proposed
                             changes will      be provided      by the Department of Treasury.
                                      Best   regards.
                                                                               Sincerely,




                             Enclosure




                                  Page 34                                     GAO/GGD-90-102Federal Tax Deposit Rquirementa
                       Comments   Prom the Internal RevenueService




                                      IRS COMMENTSON RECOMMENDATIONS
                                   CONTAINED IN GAO DRAFT REPORT ENTITLED
                            “TAX POLICY 6 ADMINISTRATION:   FEDERAL TAX DEPOSIT
                                     REQUIREMENTS SliOULD BE SIMPLIFIED”

See comment 1   RECOMMENDATIONSTO IRS
                       To improve employers’        compliance    with the current       deposit
                       requirements      and IRS’ administration       of the four-tier,
                       time-sensitive       deposit  penalty;    we recommend that the
                       Secretary      of the Treasury   direct    the Commissioner,       Internal
                       Revenue to:
                       Recommendation:   Modify the FTD coupon to have employers
                       indicate the specific   depos it period to apply the deposit.
                Comment :
                         We concur with GAO that the proper crediting                of payments is
                critical     to solving    the problems in this area.           However, we would
                like to carefully       consider    the suggestion       to revise     the FTD coupon
                along with other suggestions           under consideration        by our study
                group.      We have some concerns        that additional      handwritten
                information      on the FTD coupon will        make it more difficult         for the
                optical     character   recognition      equipment    to scan the documents.
                This could increase,         rather   than decrease,       the errors     in coding.
                         As an alternative,        we are considering         whether we should
                revise    the deposit     regulations      to require     the application     of
                deposits     and credits     against    the oldest    liability      based on the due
                date.     Under this approach,        the taxpaying      public     will  know exactly
                how deposits     will    be applied.
                       Recommendation:        Clarify   IRS’ guidance to employers on the
                       m-requirements         and instructions    for completing  the Form
                       941.
                Comment:
                          We agree with the recommendation     to clarify    the instructions
                for completing      the “Record of Federal Tax Liability”         section   of
                Form 941.      Appropriate    action will be taken, either      in the Form’s
                instructions      or in Publication   15, Employer’s     Tax Guide.
                        Recommendation:    Require all service     centers         to use computer
                        programs to calculate     the FTD penalty.
                Comment:
                        We agree that improvements          are needed in manual calculations
                of FTD penalties.       We will    review the program developed         by our
                Fresno Service     Center to determine          if it is appropriate    for
                nationwide    implementation.       The program has the potential           to be
                used not only in our service          centers     but also our district       offices
                to improve the accuracy         of calculations       field employees make when
                full   payment is secured or adjustments             must be made.




                        Page 36                                GAO/GGIHO-102Federal Tax Deposit Requirements
               Appendix V
               Chnmenta From the Internal   Revenue service




               The following are GAO’S comments on the Internal Revenue Service’s
               letter dated March 14, 1990.


               1. In regard to modifying the FTDcoupon, the Commissioner stated that
GAO Comments   as an alternative, IRS is considering revising the deposit regulations to
               require that deposits be applied against the oldest periodic liability first.
               IRSis concerned that additional hand-written information on the FTD
               coupon could increase errors in coding. We believe the advantages of
               modifying the coupon outweigh any potential increase in errors
               employers may make in completing the modified coupon.

               We believe that applying deposits against the oldest liability first could
               lead to inconsistent penalty assessments and to penalties that exceed the
               amount intended by Congress in cases in which an employer underpays
               one employment tax liability period early in the quarter and does not
               make up this underdeposit until several liability periods later.

               For example, suppose an employer pays wages once a month or three
               times a quarter and each payday has a $10,000 employment tax lia-
               bility. However, the employer, for whatever reason, makes a timely
               deposit of $7,000 instead of the $10,000 that is required for the first
               month’s tax liability. Therefore, the $3,000 underpayment is subject to
               the FTD penalty. A month later the employer makes a timely deposit of
               $10,000 to cover the second month’s employment tax liability. Under
               IRS’alternative, it would apply $3,000 of the second month’s deposit
               against the $3,000 underpayment for the first month. While resolving
               the first underpayment, this would create an underpayment for the
               second month. The employer would be assessed a lo-percent, or $300,
               ITD penalty for the $3,000 first month’s underpayment. A month after
               the second deposit, the employer makes a timely deposit of $13,000 to
               cover both the third month’s $10,000 tax liability and the $3,000 that
               was underdeposited for the first month’s taxes. However, IRSwould
               apply $3,000 of the third month’s deposit against the $3,000 underpay-
               ment that was created for the second month and assess the employer
               another $300 FTD penalty for making a late deposit for the second
               month. In this example, the employer would receive a total FTDpenalty
               of $600, or two $300 penalties-$300 for the first month’s $300
               underpayment and $300 for the second month’s $3,000 underpayment
               caused by IRS’ applying the $3,000 to the first month’s underpayment.
               We believe that this double penalty is contrary to the intent of Congress
               in that it subjects a single violation to two separate penalties.



               Page 36                                  GAO/GGLWO-102   Federal   Tax Deposit   Requiremente
A&xhice
PW
     90-37



                                        INTERNAL REVENUE SERVICE ADVANCE NOTlCE 90-37,
                                         DEPOSITS OF WITHHELD TAXES, ISSUED MAY 7,199O
                                                             CrEXr)

                   (Note: Notice SO-37aill appear h Internal FlevcnueB&tin                                 IPQO-21,dattd May 21.1990.)




           (1~InG-mf.-If,uabrN&utuapratrkibytbt
         swrtbry,rgcnwb~toMLe~boftua
         impcd by cbaptcrr 21 ud 24 on the bulr of tigbtb-
         montb@ah,totbptnto&aU.ftrkbtytuttpttlfltd
         in parapph       (I), make dcporlb of aucb lur 011 the
         applicable bankinS day rftw My day on rkb        w&l
         ptncmllw8100.Qooormortofulebtuaferdtpadt.
            (2) SptcWtd years- Ftr parpmm cd pamgraph (IF
             lnthecwtol:                          The rpplloblr              bsnkhS dry Ir:
                lo90       . .. . . , . . . . . *. . .. . . . . .            Id
                199l         .I. I.. . I.. . . . . . . . . . . . . . . .     IDd
                1992       . . . . . . . . . . . . . ..I I . . . . . . . .   8rd
                1993       .. .. . . .. .. . ... .. .. . . .. ...            lat
                1994       .. .. . . .. . .. . .... .. .. . .. ...           Id
       Pendlag ltgialauve propah      ccald mcdlfy this acbeduh tar
       years alter 1990.)
          The Act pravidts that for calahr     year toOI and then
       dtr. mt st=tbry     shall prmtrlbt rtgubuow       dtb mpect
       to the date on rbleb depoaib of web taxes wiJl be mmk In
       order to minimbt the untvtmtai      ID tht rt~tnut tffttts tf
       tht ntw wctlerdkm     pfovblm.

       R CNANGE IN DEPOSIT PENALTY                                                            81 cl&b-mtethly perid b rt least Ib percat         of rbe
          b wbtUle C (atch        lf42) of tht Act, Congrtst rtvbtd                           amountrtqdredtakdtpudtedwd,Utbtdgbtb-monthlg
       the penalty provlaiow   der     actlm 6656 of tbt Cbde for the                         pwdisiatkfMarmcadlmntbaithquutw,the
       fails ta nuke acpatb. effuztive tith nspa to fallarsr                                  lm&dqdthmldttadwRbtbeilntdepalt~
       made after December Bl. 19119.                                                         required after tbt 15th day of tbt ntxt month.
                                                                                                                                         If tht tighib.
          Under rewed section 6656 of tht Code, tbe penalty rate ia                           monthly ptritd ft in tbt Ittt month of tbt qutrttr; tbt
       2prrnatol~tundndcpattUCtf~~bImaolmwc                                                   undadcpadtmtibcranltbdbyUml8atdmyoftbem




                       Page        37                                                         GAO/GGl%9@102          Federal Tax Lkpoait Requirements
                     Appendix     VI
                     IRS Notice    90-37




month followin      tit close of tht qurttr. Thlr prtvWm b             lamm      tax witbhtld     and FICA LUCI. Under saction
tk  wdld       ‘u*veu”         rub                                     21.5202(c~1(a~1)(1) d the reg&tioo*      B ia not requimd to
   Newactlou6SO2(g)otthtCddc~r~~~~                                     nukt m rddltlu~l       dqait    uttb rape(    0 that ekhth-
ptmw       dep03uhg ua         on (be hub of tlgbtb~mmthlg             nxmthly ptrlal rhct tht mmnmt on bud ts lut than 13.000
ptws.It.alMyday.tuch1pwmahumbdrllh                                     Tltt tmdepodtcd g2,566 b urritd furwxrd tu the m tightb-
respect to any eighth-montbly pertut, 9160,666 or mom of                monthly prlod. 08 TbumI~g. Auguet II. 1990. B xccumu-
tht tua imptal by chaptan tl (FICA tax) aud 24 (tucome                  tates an additional 298,006 in wlthheld mcome tax and FICA
tar wIthheM tacludmg bxekxp wttbbotdtng) for doycdt. tbm                taxa, kconbgly,      ml th8t d&e. B has on band Hoo.5oo in
that parxm must deposit tbwe taxes by the clac of the                   undeposlted txxu. B lx required to deposit that amount by
“rpplkdlt      banking day” after xucb day, xs ptwfdsd by              tbt   ntd hankla# day. Friday, August 17.1999. under ssction
aectttm 7632 of            tht
                          Act. kom August I. 1999. lbmugb              63’W.
Dmtmbw 31,1#so, thhr rppltc&lt         b8nktng day ir lk hat             Ebmpltk          AL the chrc of bushas uu w-g,           ml~
brntiaL &Y.                                                            15. mo. the dax oi M eighth-moathly peria Employer               C
  Uutilf~2tlidUXSbIllllsd,tbs~wfllxpply                                ~oobud$SO,~dLnromctunithbcldrad~CAtrxa.
ntw sectiun 6262(g) of the C&t u tolluws. lt. during UI                Pursuant to soctioa 2l.6262(c~l(r)(lxi)   of the rtgu~ations.
d#th-mmtbly~rpwsmrtqulredtooktdrpDdtl                                  tbe $W$OO must be dtpudttd wlthiu thrte banking days
m xn tlghth-mmthlp taeb hat 011hand fur depoxlt at hat                 Il~Au~lSInordcrLopmemt~olthefPllun-
$1oo,ow wltll rapttt       to umt tlghth-mmtblypaw.         thl        M~JUBU pat&y. On Thurtday, A-              16. C hu on hand
thatuaouxtmmtkdqoattadbytbeolaeuftbxnoxt                               an rddltlmd      ~66,000 ot lwme      tu wlthbeld and FICA
bmkblg day. tt, by tbt cad tf tk lame tlgbtb-mm(hly                    tua.tlmaawlwatlunprorLLoanteectlm6S~douwt
pwicd. uut IMC ptlaat ka rccnmnbttd                rt but woo          rtquirtptymtIl~byultntdbtnkhgdtytwaulougbCbu
botIrrtblng1oo,Ooolnrlkuttolultuestor&pmttrith                         ou llud r110,ooo (f50.002 + $50,020) of FICA tu d
respect to that eigbtb+moathly m               tlmo that unoant        lncume txx ulthheld, because tlx obIig&oa to deposit tht
 mrtbt~t@dWiti~4lIlbgdrp~~tkdOf                                        $50,000wuf~~uaftbeclareofkaiDa~w~y,
 the dgltth-mattbly pwicd, undw tbl? gtntml Nit tf stcth               August 15, ti that rmmmt la q st to k trken Into account
 tl.w2&~l(r~t~l)         of tLa lqnwocs.                               turparpaaottbeacceltNuatproddaaotaectluu
     lf.rttbeauldAIlelgwkmolwype4-lod.adcpaltorbu                      6t62Jg). Tbx $50,666 mast be depostted by Moudxy, August
 u8M~adfklmtu8depodtadrmouuttn~vorbttor                                20. lwo, thr# blnkhg dAys rfter wedwnhy. August 15tb.
 dcpaltobupumwltbmopocttothetrmormfthcatkot                             Tk~~UmoftbcdPtc~Whkhtbt1W,000m~tbe
 dspodtobllpuatbtlxtd,md~tmllwatbwcticnkuto                             depmitod~ttlrhtwldltlmdmmml~tf48p,we
 -iB~hlUWlldIbgWbXtbWOr~tWSdblgd8~tlIt                                  atcomdatod
                                                                                 hrlq theArm 1blt eQh&mcatbly
                                                                                                           period.
 fO$OOOOO~            ~monat in mctlat 6262(g) of tbt Code baa              &amp&       5: Tba factx uo tbx same as tn Example 4
                   owtvtf,ul8tbeprst.ltamllnlmalbw+d4t                  txeept tba xddfttoMl xmmult ox hand on TlWsday, AUgusl
 tbemddMtl@wmuypabduwhrLhralSPOIMd                                      16. b $lcS,DOO, not $W,OOO. The $105.002 mtmt be dtposlttd
 ptismt~~J21podt                   obuptl=l      tbge ammmlx will       byFH&y,AugWt1?,2969,pWMnttotkpTWWouxol
                             dttwmbgu8uuntsonlIwdlntlte                 section 6262(r) of the Cab.
 --w          dck*-w             prbd. PLarlll, -       95 P==t             Example C (la Tbund~y. August 2% 1BSO.Employer VI
 “uft.h&veu”Nlt wiu bel ppumbbto depaltJrequfrtdto                       pqrroll datt, D &mated         that It bad on hul $2 millton in
 btnudtcHlMafdtNttdbabun&rxectloE6so2(l).                               FtCA tu aad tacome tax withbtld. Purrmat to Kction
    ma@lbwbgexunpla~tebuw~mwaetlm                                        6~dtbaCudfi,f.7daya2tiU1at#oufdbytttuctoaaof
 6so2@Qcceltntlat”           prwblat   appm                              tht nut b&lug       dry, hi&y,       Am     24,19@0. On Ma%hy.
    &omyfafzAttbcloaaufbxxtnmxcaItmtxday,Aagust                          An-        27, D datwmbd         that the rctual FICA tax ad
 2, 1999. Empbyw A't plyroll dab, A has 00 hand $105.666                 lmome tu wltbbdd for tke Att@tel22 p&ytoll Ctt was 62.1
 t8FICAtu~LromctUWUbbUNttWl~                                             mmkaI~t                   tbt llndepdttd     9169,999 is dapostrsd
 aelal    2l.asqC)~(8~l)(l)     uf tlw w-J=.A.Pu--t~                                             aPthwbtrapibad~ttrsepteulhtr            15.
 aacttm6~oftbaCo6e,mtutdquxtttbxtamouutby                                1220, D h dmmtd mukr s&km 21.6202(e~2(aXlKl) of the
 Friday. August S, 1990. the next baaktng dry alter Augusl2.             rtgulatlons, to be In complirnee wtth s&ion 6302 because
 In or&t to pmvtat ustrtlon of the faUur+to+lepmit            genal-     at least 95% (95.24% tn tbts case) was deposited. Under
 tymdwactlma666.                                                         that-,tht$lw,ooalnnudQotlttdtuabwt
    Example t Tbt frclr xre tht same as la Examplt 1.                    subject to tht accekratbm          rub  of section 6262(g) of tht
 ucepc that on Friday, August 2,1990, the elm? of xx eigbtb-             Code but tbe geuerrl rule of section Sl5202(ctl(axl)(i)          of
 mmtl~Iy ptrlod. A made a payroll pqment tit pvt rbe to                  tbt ngnlatlom.
 l t ddlUmal~10.900         in undepmlttul &~a. A must dapait
 tbr 910.669 by Wodaaday, August 8. 1996. tbroa ban&g                   C. REQUEST FOR COMMEMIl
 drp rfftr (k dat of tie tlghth-monttdy p&al. u&r cbc                      Tba taxas bnm       by chapter 24 of the Code include
 genml rule of mctioo 2l.g2o2@~l(r~l~l)          02 UN?regtlhtl~.       waemta subject to the backup wlthholdl8g pmvitiom      of
 Bez~urc tbc 1tO5.000 obllgatioa dacrlbcd ln Example 1 was              sectlou 2466 of the code. Theservice invite comlnent3 on
 fixed xx of tbx &xx of buxhtxx on Tbumdxy, An@st 2, the                whttbtr wnouub subject to backup withholdttg should con-
 S16,666 withbtld on Augwt 3 is tht bcginuhg of t stprstt               tinue to be tahan into account iu determining amounta
 ~VWobw--                                                                xubjxcttuOdepuxttrulesofsxctiou6242&)ufthtCaderad
    Ezample S On bfonday, Attgnst 12.1996. Employer B                    atctlm 21.6262(c)“1(a)(1l(i) of tbe regulatfolm.
 accumuhtes $105.000 in income tax withheld ati FICA                        The Service is considering possible changes to the esisting
 tutsPamtnttattcUon6362@d(h&&t,Bdtpmits                                  rula for tbr deposft of tbc taxes @cued by chapters 21 and
 thxt amouxt on Tuesday, August 14, 1996. At the ctoae of                24, lntludlq but ti lImited to (x) the and for the 95
 business on Wedmacby, August 15, 1990. the close of an                  ptmat “saft-bavtrl” exception in section 31.6SOZ(ck
 eighth-monthly period. B has on hand an additional $2,500 in            l(aX1 xi) of the regulations. and (a) the possibility of replac-




                                                                          GAO/GGLMO-102                 Federal   Tax Deposit   Requirements
Appendlx VI
WI3 Notice !W37




Page 39           GAO/G4XNMO2   Federal   Tax Deposit   Requirementa
Appendix VII                                                              t
Major Contributors to This Report


                       Lynda Wiilis, Assistant Director, Tax Policy and
General Government       Administration Issues
~h&iOIl, Washington,   Ronda Rogers,Evaluator
DC.
                       Ralph Block, Deputy Project Manager
San Francisco          Art Davis, Evaluator
Regional Office        SusanLynch, Evaluator
                       SusanChin, Evaluator
                       Lisa Yesson, Evaluator

                       Tom Wolters, Project Manager
Kansas City Regional
Office




(zs.9sse)              Page 40
Requests for copies of GAO reports     should be sent to:

U.S. General Accounting     Office
Post Office Box 6015
Gaithersburg, Maryland     20877

Telephone   202-275-6241

The first five copies of each report   are free. Additional   copies are
$2.00 each.

There is a 25% discount    on orders for 100 or more copies mailed to a
single address.

Orders must be prepaid by cash or by check or money oFder made
out to the Superintendent of Documents.
.




        _-         ..                          -
                                   _   .   :
    -        :.-        ..-   ..




                                                       -:       A,        :: .   :        .   .        .
                                                   .::.
                                                   .,.      .        .:              .-
                                                   -..          .         _-.                     _.




                                                                                                            -..   ‘,




                                                                                                           ..