If you received an IRS notice regarding deferred social security taxes that you partially paid back in December 2021, then you are not alone. The IRS has recently issued CP256V Notices to taxpayers that assert penalties and interest for failure to make proper federal tax repayments relating to Form 941. This article will discuss why the IRS is issuing these notices and how you can respond to get the penalties abated.
The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allowed taxpayers to defer the employer’s share of Social Security taxes and certain self-employment taxes, which for most employers were reported on Form 941 (Employer’s Quarterly Federal Tax Return). Employers that elected to defer eligible taxes had until December 31, 2021, to repay 50% of the deferred amount and have until December 31, 2022, to repay the balance.
Why Is the IRS Sending CP256V Notices?
Even though you timely paid 50% of the amount due to the IRS by December 31, 2021, there are several reasons why you may have received an IRS notice relating to a failure to make a proper federal tax deposit on your Form 941:
- The payment did not clear the bank;
- The payment was not allocated properly among the relevant calendar quarters in 2020; or
- The payment was never initiated
Before reaching out to the IRS, check your bank statements or request an IRS transcript to make sure the taxes were paid and applied to the correct account. Assuming the tax was timely paid, and the amounts were applied to your federal employment taxes, then the issue likely stems from an incorrect allocation of tax payment between the relevant calendar quarters of 2020.
The IRS instructed employers to make payments on their tax-deferred balances separately using EFTPS (an electronic payment system), by credit card or debit card, or by check or money order, but not through a regular federal tax deposit on its payroll tax return. Additionally, 50% of the balance for each calendar quarter should have been paid by December 31, 2021, not just 50% of the total of all the deferred quarters.
For example, if you deferred $50,000 in tax for Q3 2020 and $50,000 for Q4 2020, then you should have made a payment on or before December 31, 2021, of $50,000 to be split equally between Q3 and Q4. If however, you paid $50,000 and allocated all of it to Q3, then you would have repaid all the deferred amount relating to Q3, but none of the deferred amount relating to Q4, and you would receive a CP256V Notice for the unpaid amount relating to Q4 2020. Each quarter is considered separately for this purpose, and the obligation to pay 50% by December 31, 2021, relates to one-half of the deferred taxes for each calendar quarter.
What Is the Fix?
To resolve this issue, you must reply to the notice immediately. If you do not reply to the notice the IRS will assume you agree with the balance due and charge additional interest and penalties until the balance is paid in full.
If you disagree with the notice, then you should respond either by telephone or by mail to the number or address listed on the notice. You should inform the IRS of the mistake and request that it apply the overpayment in one quarter to the deficiency in the remaining quarters. To qualify for penalty abatement, you will need to write a letter to the IRS including a signed statement and provide supporting documentation.
Don’t Go It Alone
Dealing with the IRS can be difficult especially when it involves COVID-19-related pandemic relief programs. If you received a CP256V notice from the IRS, please reach out to your Withum advisor for help in getting the penalties abated. Do not throw out or ignore the notice! Failure to respond will only generate more penalties and interest.