Tax Policy:

Federal Tax Deposit Requirements Should Be Simplified

GGD-90-102: Published: Jul 31, 1990. Publicly Released: Jul 31, 1990.

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Pursuant to a congressional request, GAO evaluated the federal tax deposit (FTD) requirements for withheld income and social security taxes, focusing on whether the Internal Revenue Service (IRS): (1) appropriately and accurately assesses and abates deposit penalties; and (2) guidance to employers on complying with the deposit requirements was adequate.

GAO found that: (1) one-third of the nation's employers are assessed at least one FTD penalty annually, due to either insufficient funds to make timely deposits or failure to understand the complexities of the deposit requirements; (2) variable deposit dates made it difficult for employers to predict with certainty when their deposits were due; (3) IRS cannot be assured that its penalty calculations are accurate; (4) placing all employers under the same deposit requirement would enhance employer compliance and IRS administration of the FTD system; (5) IRS could clarify its instructions on the deposit requirements so that employers could more readily determine when they should make deposits; and (6) IRS could make it easier for taxpayers to understand the deposit requirements if publications included clear and comprehensive examples of each deposit rule.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS stated that instructions for completing Form 941 were clarified in November 1991 as appropriate in the form's instructions for the fourth quarter (to be filed in January 1992) and in Publication 15, Employers Tax Guide.

    Recommendation: To improve employers' compliance with the current deposit requirements and IRS administration of the four-tier, time-sensitive deposit penalty, the Secretary of the Treasury should direct the Commissioner of Internal Revenue to clarify IRS guidance to employers on FTD requirements and instructions for completing Form 941.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: IRS has decided not to modify the coupon because of concern about taxpayer confusion. It issued new procedures that clarify for taxpayers how IRS will decide which time period a particular deposit applies to.

    Recommendation: To improve employers' compliance with the current deposit requirements and IRS administration of the four-tier, time-sensitive deposit penalty, the Secretary of the Treasury should direct the Commissioner of Internal Revenue to modify the FTD coupon to have employers indicate the specific deposit period to apply the deposit to.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: IRS and Treasury revised applicable regulations on September 22, 1992.

    Recommendation: The Secretary of the Treasury should include a look-back procedure, 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.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: IRS and Treasury revised applicable regulations on September 22, 1992.

    Recommendation: If an exception is granted to this standard deposit requirement to reduce the number of deposits made by small employers, the Secretary of the Treasury should provide for a single exception 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.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: IRS and Treasury changed the regulations for tax deposit requirements on September 22, 1992.

    Recommendation: To make it easier for employers to understand and comply with the deposit requirements and for IRS to administer the requirements, the Secretary of the Treasury should 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 statutory deposit requirements included in the Omnibus Budget Reconciliation Act of 1989.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Not Implemented

    Comments: According to IRS, a computer program was developed, but changes in methods for calculating the penalty have changed to the point of invalidating that program. No further action is intended, according to IRS, because officials believe the FTD program will be changed statutorily and they do not intend to revise the computer programs until Congress takes action.

    Recommendation: To improve employers' compliance with the current deposit requirements and IRS administration of the four-tier, time-sensitive deposit penalty, the Secretary of the Treasury should direct the Commissioner of Internal Revenue to require all service centers to use computer programs to calculate the FTD penalty.

    Agency Affected: Department of the Treasury

 

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