SECTION 2. BACKGROUND

.01 Section 6656 of the Code 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 applicable percentage ranges from 2 to 15 percent depending upon the lateness of the deposit.

.02 Rev. Proc. 90–58 (1990–2 C.B. 642) effective for deposit periods beginning after March 31, 1991, provided that the Service will apply deposits for a specified tax period in a date-made order against deposit liabilities in a due-date order. Thus, the Service applies a deposit first to satisfy the oldest past due deposit liability within the specified tax period. The Service applies other credits to the taxpayer’s account, such as overpayments from previous tax periods, in a similar fashion. Rev. Proc. 91–52 (1991–2 C.B 781) clarified and amplified the provisions relating to the application of other credits to taxpayer accounts.

.03 Under Rev. Proc. 90–58, the oldest deposit liability in the specified tax period is satisfied first, thus preventing the penalty rate on that liability from escalating. If, however, a depositor inadvertently missed a single deposit early in a specified tax period, multiple cascading penalties could result as payments that would otherwise be sufficient to satisfy current liabilities were applied to satisfy earlier shortfalls.

.04 Notice 98–14 (1998–1 C.B. 585) provided interim procedures that depositors may use to request abatement of the failure-to-deposit penalty imposed by section 6656 when the order in which the Service applies deposits against deposit liabilities, as set forth in Rev. Proc. 90–58, produces multiple failure-todeposit penalties as a result of a single failure to deposit. Under that Notice, depositors that wish to request relief are instructed to call the toll-free number shown on the penalty notice. Notice 98–14 applies to return periods beginning after December 31, 1997.

.05 Section 3304(a) of RRA added subsection (e) to section 6656 of the Code, which permits a depositor 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 the penalty notice, the deposit period or periods within the specified tax period to which a deposit of tax shall apply. Section 3304(d)(1) of RRA provides that 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 RRA).

.06 Rev. Proc. 99–10 (1999–1 C.B. 272) provided procedures for implementing section 6656(e) of the Code as added by RRA section 3304(a). In particular, Rev. Proc. 99–10 provided guidance on how a depositor may designate the application of its Federal tax deposits for a specified tax period to minimize the failure-to-deposit penalty under section 6656 with respect to deposits required to be made after January 18, 1999.

.07 Section 6656(e)(1) of the Code (as added by section 3304(a) of RRA) was amended by section 3304(c) of RRA to provide that a deposit shall be applied to the most recent period or periods within the specified tax period to which the deposit relates, unless the person making such deposit designates a different period or periods to which such deposit is to be applied. Section 3304(d)(2) of RRA provides that this amendment is effective for Federal tax deposits required to be made after December 31, 2001.