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Even If You Pay Your Taxes on Time You Can Still Be Penalized by Robert S. Horwitz

Justice Oliver Wendell Holmes once wrote, “Men must turn square corners when they deal with the Government.” When you deal with the IRS, deviation from the requirements of the Internal Revenue Code and regulations can be costly, as a bank learned the hard way in Commerce Bank & Trust Co. v. United States, 2016 TNT 21-27 (W.D. Ky. 1/29/2016).  Under Treasury Regulations, a taxpayer who pays more than $200,000 in tax is required to make deposits using the Electronic Federal Tax Payment System (EFTPS).  Commerce Bank routinely paid more than $200,000 in income withholding tax annually.  Following the departure of a bank officer, between 2004 and 2010 the Bank made deposits using paper deposit coupons, rather than electronically.  The IRS assessed failure to deposit penalties against the bank totaling $252,842.87 under Internal Revenue Code Sec. 6656.  That section requires parties to make deposits of tax “as required by this title or regulations.”  The Bank paid the total amount assessed plus interest for all periods (except 2009) and filed a refund claim.  After the claim was denied, the Bank filed a lawsuit in district court.  The Court ruled against the taxpayer, holding that in not depositing tax electronically the bank acted with willful neglect and not reasonable cause.  The court pointed out that the regulations are not complex, the bank was sophisticated and that the departure of an officer did not excuse its failure to follow the regulations.

In 2014, a Colorado marijuana dispensary, Allgreens, LLC, filed a petition with the Tax Court challenging a failure to deposit penalty where it paid by cash, since it was unable to open a bank account and could thus not electronically deposit taxes. The IRS ultimately abated the penalty and issued a directive, SBSE 04-0615-0045, that allows taxpayers who do not have bank accounts who timely make their tax deposits to avoid failure to deposit penalties if they can establish that they attempted to obtain a bank account but were unable to do so.

These cases teach a simple lesson: paying taxes on time may not always be enough to avoid penalties. You have to make sure you use the proper forms or payment methods.

Robert S. Horwitz – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com

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