IRS SPELLS OUT PROCEDURE FOR DESIGNATING TAX DEPOSITS.

Rev. Proc. 99-10

SECTION 1. PURPOSE

This revenue procedure provides guidance with respect to the failure-to-deposit penalty provisions of section 6656 of the Internal Revenue Code, as amended by section 3304(a) of the Internal Revenue Service Restructuring and Reform Act of 1998. Pub. L. No. 105-206, 112 Stat. 742 (1998) (RRA). This revenue procedure describes how a taxpayer may designate the application of its federal tax deposits for a particular return period in order to minimize the failure-to- deposit penalty under section 6656 with respect to deposits required to be made after January 18, 1999.

SECTION 2. BACKGROUND

.01 Section 6656 provides that in the case of any failure by any person to deposit (as required by the Code or regulations) on the date prescribed any amount of tax in a government depository, there will be imposed upon such person a penalty equal to the applicable percentage of the amount of the underpayment, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The penalty ranges from 2 to 15 percent depending upon the lateness of the deposit.

.02 Revenue Procedure 90-58, 1990-2 C.B. 642, effective for return periods beginning after March 31, 1991, provides that deposits for a return period will be applied in a date-made order against deposit liabilities in a due-date order. Thus, the Service will apply a deposit first to satify the oldest past due deposit liability within the same return period. Other credits to the taxpayer's account, such as an overpayment from the previous return period, will be similarly applied.

.03 The rationale underlying Rev. Proc. 90-58 is that it is generally in the best interest of depositors that strive to be compliant to have the oldest deposit liability in the return period satisfied first, thus preventing the penalty rate on that liability from escalating. However, if a depositor inadvertently misses a deposit early in a return period but makes all succeeding deposits on a timely basis, the result can be multiple failure-to-deposit penalties.

.04 Notice 98-14, 1998-8 I.R.B. 27, provides an interim procedure that taxpayers may use to request abatement of the failure- to-deposit penalty imposed by section 6656 when the deposit liabilities against which the Service applies deposits, as set forth in Rev. Proc. 90-58, produces multiple failure-to-deposit penalties as a result of a single failure to deposit. Under that notice, taxpayers that wish to request relief are instructed to call the toll-free number shown on the penalty notice. Notice 98-14 applies with respect to return periods beginning after December 31, 1997.

.05 Section 3304(a) of the RRA added new section 6656(e), which permits a taxpayer receiving a penalty notice (with respect to any deposit of tax made for a specific tax return period) to designate, during the 90-day period beginning on the date of a penalty notice, the deposit period or periods within the return period to which a deposit of tax shall apply. Pursuant to section 3304(d)(1) of the RRA, section 6656(e) is effective for federal tax deposits required to be made after January 18, 1999 (180 days after the July 22, 1998, enactment of the RRA).

SECTION 3. SCOPE

.01 Applicability.

(1) This revenue procedure applies to a taxpayer requesting abatement of the failure-to-deposit penalty imposed by section 6656 when the deposit liabilities against which the Service applies deposits or credits, as set forth in Rev. Proc. 90-58, produces multiple failure-to-deposit penalties for any tax specified in section 3.01(2) of this revenue procedure.

(2) This revenue procedure applies with respect to all taxes required to be deposited after January 18, 1999, pursuant to section 6302 and the regulations thereunder that are reported on the following Internal Revenue Service forms:

(a) Form 720, Quarterly Federal Excise Tax Return;

(b) Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return;

(c) Form 941, Employer's Quarterly Federal Tax Return;

(d) Form 943, Employer's Annual Tax Return for Agricultural Employees;

(e) Form 945, Annual Return of Withheld Federal Income Tax;

(f) Form CT-1, Employer's Annual Railroad Retirement and Unemployment Repayment Tax Return; or

(g) Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

.02 Inapplicability. This revenue procedure does not address changes made to section 6656 by section 3304(c) of the RRA for deposits required to be made after December 31, 2001. The Service intends to provide future guidance with respect to those changes.

SECTION 4. RELIEF PROCEDURE

Any taxpayer that receives a penalty notice for a return period showing multiple failure-to-deposit penalties for any tax specified in section 3.01(2) of this revenue procedure that is required to be deposited after January 18, 1999, may, within 90 days of the date of the penalty notice, call the toll-free number shown on the penalty notice and designate the deposit period, or periods, within such specified return period to which the deposit(s) of, or credit(s) against, the tax for the return period are to be applied. To the extent that the taxpayer's designation is within the scope of section 6656(e), the Service will adjust the multiple penalties to reflect the penalty amount due on the remaining failure(s) to deposit and so notify the taxpayer in writing.

SECTION 5. EXAMPLES

.01 Example 1. For the first calendar quarter of 1999, A, a semi-weekly employment tax depositor within the meaning of section 31.6302-1 of the Employment Taxes and Collection of Income Tax at Source Regulations, accumulates the following employment tax deposit liabilities for its bi-weekly paydates, and makes the following deposits:

                               Amount applied

The Service mails a notice to A dated July 21, 1999, advising that A is subject to the section 6656 failure-to-deposit penalty as follows:

   Date of          Amount of                 Applicable    Penalty

   Date of          Amount of                 Applicable    Penalty

  Deposit

               Application of deposit

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective for federal tax deposits required to be made after January 18, 1999.

SECTION 7. EFFECT ON OTHER DOCUMENTS

.01 Notice 98-14 is superseded with respect to federal tax deposits required to be made after January 18, 1999. Notice 98-14 continues to apply to deposits required to be made on or before January 18, 1999, with respect to return periods beginning after December 31, 1997.

.02 Rev. Proc. 90-58 is amplified.

DRAFTING INFORMATION

The principal author of this revenue procedure is Marc C. Porter of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Marc C. Porter at (202) 622-4940 (not a toll-free call).