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First-time penalty? Here’s what to do

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in Office Management,Payroll Management

It wasn’t your fault. Maybe you went away on vacation and left the payroll tax deposit duties to someone else, who let a deposit fall through the cracks. Uh oh: Now you have a mess—and a penalty notice—to deal with. You have to take care of this missed deposit right away.

Get out of jail free. The IRS will almost always abate a first-time penalty for failing to deposit payroll taxes, but you must have established a good track record beforehand. The IRS may decide on its own to not assess a penalty, but you may have to wait a long time for that.

Best strategy: Write a letter to the IRS asking for a penalty abatement. Be sure to include a copy of the notice and proof that the deposit was made. As a good-faith gesture, enclose a check for the interest.

Dear IRS. Resist the temptation to be intemperate. Here’s some sample language you can consider using:

“[Name of company] has deposited its payroll and corporate taxes in full and on time since [fill in the first year the company was in business]. However, due to a [fill in the reason], the payroll deposit for the [fill in the biweekly, semimonthly or monthly pay period] was not made. This was an inadvertent error, which was corrected on [fill in the date the deposit was made].

“We are enclosing the penalty notice for your reference and a check for the interest. We are, however, requesting that the penalty be abated, based on the company’s past good compliance record. To prevent a recurrence, we have corrected the error and introduced additional internal controls.

Thank you for your attention to this matter.”

THE WAITING IS THE HARDEST PART: You’ve done your part, now the IRS must do its part. It may take as long as six months to hear back from the IRS, so don’t panic. Keep the matter open on your calendar and use that as a reminder to follow up if you don’t hear anything back. Be sure to let your execs know when the matter is resolved.


A step-by-step payroll compliance guide to each pay period, month and calendar quarter of the year is now available. Download it free here.

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