Statement of Richard M. Lipton on the Subject of Tax Simplification
April 26, 2001

4.  Administrative Provisions

1. Deposit Penalty

   The failure to timely deposit taxes is subject to penalty, pursuant to section 6656, in amounts ranging from two percent to fifteen percent of the underdeposit, depending on the lateness of the deposit. The deposit rules are unnecessarily complex and adversely affect small businesses as they move from one payroll deposit category to another.

   For example, professional corporations for which the payroll deposit is normally less than $100,000 per pay period and are permitted at least semi-weekly deposits (i.e., a three-day deposit rule) may be adversely affected. In order to pay out all, or almost all, of the corporation’s income, such corporations frequently make bonus payments on the last day of the taxable year (often December 31). The amount of the bonus payment for each employee, a prerequisite to determining the appropriate withholding tax, cannot be ascertained until the annual books are closed. The books cannot be closed until receipts and expenses for the last day of the taxable year are recorded.

   Financial intermediaries generally require at least one day’s advance notice to make electronic federal withholding tax deposits. Banks and taxpayer businesses are frequently shorthanded at year end and find it difficult to determine the amount of the Federal tax deposit due until after the financial intermediaries’ cutoff time to make withholding tax deposits on the next business day. This is particularly true for taxpayers in the western U.S. time zones. A two percent penalty is excessive for a deposit that is only one day late, particularly if the depositor is normally a semi-weekly depositor but is required to make a one-day deposit.

   Congress recently recognized that the changing of deposit requirement time frames is a complexity that causes great confusion and that waiver of the penalty should be permitted for the first change period. See I.R.C. § 6656(c)(2)(B). While this amendment helps, it does not fully address the problem. The current provision requires an administrative waiver request that may be expensive and time consuming and applies only to the first instance of a problem that is likely to occur annually. Section 6302 (or the regulations) should be modified to require next day electronic depositing only in those instances in which next day depositing (i.e., a deposit of $100,000 or more) is required of that taxpayer with respect to ten percent or more of its deposits. Alternatively, taxpayers could be given a minimum of two days to make deposits of $250,000 or less.