The IRS keeps track of your company’s tax liabilities as separate modules in its Business Master File. If, say, your corporate income tax module is short, the IRS can offset that shortfall with an overdeposit from your payroll module. Worse: The IRS can make these offsets without telling you, thus creating havoc with your accounting systems.
Unfortunately, you don’t have the same discretion when you deposit your taxes. The IRS has concluded in emailed advice (known as an ECC) that depositors can’t designate a deposit as a payroll or a nonpayroll deposit. (ECC 201105034)
Note: ECCs are intended as private advice from the IRS to the requesting party. They may be used for informational purposes only; they may not be used or cited as precedent.
Deposit or payment? You’ve long had the ability to designate a payroll deposit to a specific deposit period after you receive a penalty notice. In fact, doing so will mitigate a failure-to-deposit penalty. So, if you know that your payroll module is overdeposited, and your corporate income tax module is underdeposited, why can’t you just direct that payroll overdeposit into your corporate module, which would eliminate the probability of an undisclosed offset by the IRS?
The key difference, according to the IRS, is that deposits aren’t payments. IRS: Taxpayers are allowed to designate payments. In order to have a payment, there must be an assessment. Assessments can’t be made until the amount due is payable, and payroll taxes aren’t payable until a Form 941 is filed.
PAYROLL PRACTICE TIP: To ensure that all of the company’s tax liabilities are met, it’s a good idea to ask the IRS to provide you with a transcript of the company’s tax accounts on a regular basis by filing Form 4506-T.