Simplifying Payroll Tax Deposit Rules

GAO discussed proposed provisions to simplify the payroll tax deposit system. GAO noted that: (1) deposit rules are difficult to understand and to comply with because employers can be subject to more than one deposit rule during a tax period; (2) in 44 percent of 75 penalty cases examined, IRS tax examiners miscalculated the flat-rate penalty due to improper application of deposit requirements; (3) the proposed changes would require employers to make deposits on Tuesdays and Fridays following paydays, permit small employers with small quarterly tax liabilities and new businesses to deposit quarterly, provide a look-back rule for employers to use in establishing the deposit requirement, and allow employers to deposit 98 percent of their accumulated taxes within 3 banking days of the end of a deposit period; (4) more employers can be excepted from the Tuesday/Friday rule without adversely affecting current federal revenues, as long as employers continue to deposit monthly, rather than quarterly; (5) shortening the look-back provision from 8 months to 4 months would be less burdensome, enable small employers to return to the slower deposit schedule more quickly, and still ensure employers' awareness in advance of the deposit requirements they must follow during the quarter; and (6) the safe-harbor provision only reduces the amount of taxes employers can delay depositing, but it does not eliminate the potential for abuse.