IRS on Late Payroll Tax Repayments
The IRS released guidance on repayments of payroll taxes that have been deferred under the 2020 CAREs Act. As background, many small business clients elected to defer payroll taxes under the CAREs Act. 50% of those deferred payroll taxes were due December 31, 2021 and the remaining 50% will be due by December 31, 2022. The IRS PMTA 2021-07 states the IRS' position that a late payment makes the entire amount deferred subject to a 10% penalty for failure to deposit. If the IRS demands repayment and repayment is not made within 10 days, the penalty increases to 15%. Business owners who were planning to use the funds withheld for the employee retention tax credit should also be reminded that the credit ended early and was no longer available for fourth quarter wages paid late in 2021.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the position the IRS has taken with respect to late repayments of payroll taxes deferred under the 2020 CAREs Act.
Below is a summary of the debate that ensued between the two professors.
Their Votes
Byrnes
Bloink
Byrnes: The IRS essentially gave every single business owner out there an interest free loan. The deadline for repaying that interest-free loan was clear from day one. Employers who failed repay their installments on time should have expected the penalties to be harsh. Like any other situation, that’s eespecially if they have no reasonable cause for failing to make an on-time payment.
Bloink: Many business owners were counting on the funds from advance payment of the employee retention tax credit to help them repay deferred amounts. Nothing magical has happened this year to allow many business owners the funds to pay 150% of their normal payroll tax liability at once. We need to explore options to help struggling small business owners repay their deferred payroll taxes without immediately imposing an increasing-penalty regime.
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Byrnes: The government is not trying to trick taxpayers by imposing interest for failure to satisfy repayment obligations. The IRS has been sending reminder notices to business owners for months, giving employers plenty of time and notice about the harsh penalties for repayment. Business owners reaped the benefits of this optional deferral and now they should be required to pay interest if they continue to be unable to make payments even at the deadline two years later.
Bloink: Simply stating that a late payment will subject the business to penalties on the entire amount deferred, without some additional option for relief, will put many business owners in an impossible situation. I highly doubt that this is what Congress intended when it passed the law to give business owners extra liquidity in an unprecedented situation that, for many, has not fully resolved itself even at this late date.
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Byrnes: We have to impose a penalty for failing to properly pay the deferred taxes by the deadline. Otherwise, no smart business owner would bother making timely repayment. That’s not what Congress intended when it gave business owners the option of taking advantage of what essentially amounts to an interest-free loan. The IRS’ position and their decision to impose interest on the entire amount if payments aren’t made on time is a completely reasonable way to enforce a deadline that has been in place now for years.
Bloink: The challenges being faced by small business owners haven’t gone away simply because we now have vaccines to keep employees safe. Current market conditions, including sky-high inflation and rising interest rates, have only created new challenges for these business owners. While I’m not suggesting that outright forgiveness of deferred payroll taxes is the way to go, we should be working toward a solution that can give business owners time to catch up without immediately incurring interest on the entire amounts deferred.