SECTION 5. EXAMPLES

.01 Example 1—Elimination of Cas- cading Penalty for Insufficient Timely Deposit.

The following employment tax example illustrates how the Service will apply deposits to the most recently ended deposit period. This ordering rule is similarly applicable to deposits under section 6302 of railroad retirement taxes, FUTA taxes, excise taxes, and income tax withheld from nonresident aliens and foreign corporations.

For the second calendar quarter of 2002, A, a semi-weekly employment tax depositor within the meaning of section 31.6302–1 of the regulations, accumulates the following employment tax deposit liabilities for its bi-weekly pay dates, and makes the following deposits on the deposit due dates:

During July 2002, A completes its Form 941 for the second quarter and discovers the April 17, 2002, and June 12, 2002, underdeposits. On July 31, 2002, the due date for the Form 941, A files the

Form 941 and deposits $3,000. The Service applies the deposits actually made to the most recently ended deposit periods. The Service then mails a notice to A dated October 21, 2002, advising that A is

subject to the failure-to-deposit penalty in the amount of $300. The penalty is calculated as follows:

2001–50 I.R.B 580 December 10, 2001

its deposits. For the second calendar quarter of 2002, C, a semi-weekly employment tax depositor, pays its employees every Friday. C accumulates $10,000 in employment tax deposit liability for each of its weekly pay dates.

The table below shows the deposit period ending date and due date for C’s deposits. It also shows the date of each deposit and the deposit period to which it is applied under section 6656(e) of the Code. The table shows how, under section 6656(e) and this revenue procedure, the Service applies C’s deposits to the most recently ended deposit period. Accordingly, under section 6656(e), the Service applies C’s deposit of April 22, 2002, and subsequent deposits through June 24, 2002, to deposit liabilities for periods which have ended, but for which the due dates have not occurred. Applying deposits in this manner, C’s deposit liability for the period ending April 12, 2002, is not satisfied until C makes its deposit of June 26, 2002. Nonetheless, applying the deposits to the most recently ended deposit period avoids cascading penalties and minimizes the failure-to-deposit penalty for the quarter.

A would have 90 days from October 21, 2002, in which to call the toll-free number on the notice, or write the Accounts Management Unit at the appropriate IRS Service Center, and designate the deposit period, or periods, within the specified tax period to which the deposits are to be applied. In this case, however, the manner in which the Service applied the deposits avoids cascading penalties and minimizes the failure-to-deposit penalty for the quarter.

.02 Example 2—Cascading Penalty Under Section 6656(e) .

This example will show how the application of deposits to the most recently ended deposit period will not always eliminate cascading penalties. For the second calendar quarter of 2002, B, a monthly employment tax depositor within the meaning of section 31.6302–1 of the regulations, pays its employees on the first of every month. Instead of waiting until the 15th day of the following month to make its deposits, B normally makes deposits on the 25th (or next banking day thereafter) of each month in which the liability is incurred. B pays its employees on April 1, 2002. For some reason, B fails

to make the deposit on April 25, 2002. For May, B pays its employees on May 1, 2002. On May 28, 2002 (the first banking day after Saturday, May 25, 2002), unaware of the underdeposit for April, B makes a deposit to cover its May liability. The Service applies this deposit to the most recently ended deposit period, which in this case is April 2002, instead of the May 2002 liability as intended by B. This cycle of deposits continues until the end of the quarter. Instead of having a failure-to-deposit penalty only for April, B will be subject to a penalty for every month in the quarter. B can, however, minimize cascading penalties and reduce the penalty amount by timely following the procedures in section 4.02 of this revenue procedure and designating May and June as the deposit periods to which the deposits are to be applied.

.03 Example 3—Elimination of Cas- cading Penalty for Late Deposits.

This example will show how the application of deposits to the most recently ended deposit period or periods will affect the calculation of the failure-todeposit penalty in situations where the depositor is late in making some or all of

06/14/02 06/19/02 06/17/02 $ 0

December 10, 2001 581 2001–50 I.R.B.

TOTAL PENALTY $ 1,000

ment taxes. Accordingly, the Service applies E’s deposit on April 9, 2002, to the one-day deposit liability for the deposit period ending April 8, 2002. E’s deposit on April 10, 2002, is then applied to the liability for the deposit period ending April 5, 2002.