SECTION 4. APPLICATION

.01 Except as otherwise provided in this revenue procedure, the Service will apply Federal tax deposits for deposit periods beginning after December 31, 2001, to the most recently ended deposit period or periods within the specified tax period to which the deposit relates and will apply any excess to deposit periods ending on or after the date of the deposit in period-ending-date order. The application of deposits to the most recently ended deposit period will, in some cases, prevent the cascading of penalties where a depositor either fails to make deposits or makes late deposits.

.02 Any depositor to whom the Service mails a penalty notice for a specified tax period beginning after December 31, 2001, may, within 90 days of the date of the penalty notice, contact the Service and designate the deposit period, or periods, within such specified tax period to which the deposit(s) of, or credit(s) against, the tax for the tax period are to be applied. The depositor may either call the toll-free number shown on the penalty notice or write (including a revised schedule of deposits) to the Accounts Management Unit at the address of the IRS’s Account Management site shown on the penalty notice. The Service will adjust the penalty amount to reflect the revised schedule of deposits and notify the taxpayer of the adjustment in writing.

.03 Under certain circumstances, employers may deposit employment taxes under the “safe harbor” rule of section

31.6302–1(f) of the Employment Taxes and Collection of Income Tax at the Source Regulations. Under circumstances in which this rule applies, the Service considers a depositor to have satisfied its deposit obligations even if there is a shortfall in the amount of taxes required to be deposited for a deposit period. For purposes of this revenue procedure, a shortfall will be treated as a liability for a deposit period (the make-up period) ending immediately before the shortfall make-up date and after the end of any other deposit period ending before the shortfall make-up date. Thus, if a shortfall make-up date falls on the same date a deposit is due for another deposit period, the Service will apply a deposit made on the shortfall make-up date to the shortfall liability first. Any excess will then be applied to deposit periods other than the make-up period beginning with the most recently ended of such other periods. If a deposit is made before the shortfall make-up date but after the end of a deposit period for which the deposit obligation has not been satisfied, the Service will apply the deposit to the liability for that deposit period first before applying any excess to the shortfall. Similar rules apply with regard to withheld income taxes by agents withholding from nonresident aliens and foreign corporations under section 1.6302–2(a)(1)(ii) of the Income Tax Regulations. Under sections 40.6302(c)–1, 40.6302(c)–2, 40.6302(c)–3, and 40.6302(c)–4 of the Excise Tax Procedural Regulations, depositors of excise taxes reportable on Form 720 also are eligible to use certain safe harbor rules. Because the safe harbor underdeposits are satisfied by later payments, rather than later deposits, no spe

cial rule regarding the application of deposits is needed with respect to satisfaction of the safe harbor underdeposits. The rule for employment taxes is illustrated in section 5.04 of this revenue procedure.

.04 Under section 31.6302–1(c)(3) of the regulations, a depositor that has accumulated $100,000 or more of employment taxes must deposit those taxes by the close of the next banking day. For purposes of applying the rules of this revenue procedure, the deposit required by section 31.6302–1(c)(3) is treated as a liability for a deposit period ending on the day in which the depositor accumulates in excess of $100,000 in employment taxes.