District Court upholds imposition of failure-to-deposit penalty despite full, timely tax deposits

Recently the District Court for the Western District of Kentucky upheld the imposition of a penalty under I.R.C. sec. 6656(a), which provides a penalty in the case of any failure to deposit a tax payment on the due date unless that failure is due to reasonable cause and not due to willful neglect. Commonwealth Bank and Trust Company v. United States, Civ. No. 3:13-CV-01204-CRS (July 3, 2014). At first glance, the ruling may seem peculiar in that it upholds the imposition of a failure-to-deposit penalty even though the taxpayer made full, timely payments to the IRS. However, the Treasury Regulations require that taxpayers who deposit more than $200,000 in taxes must use electronic funds transfer (EFT) to make deposits of these taxes. Treas. Reg. sec. 31.6302-1(h)(2)(ii).

When Commonwealth failed to remit its tax deposits via EFT, the IRS assessed section 6656 penalties in the amount of $252,842.87. Commonwealth paid the assessment and filed a claim for refund. When the IRS denied that claim for refund, Commonwealth filed a refund suit in district court alleging that there was no actual failure to make a deposit, so therefore the penalty was inapplicable. The court dismissed Commonwealth's first count, finding that Commonwealth erroneously used paper deposit forms provided by the IRS to deposit its tax payments rather than utilizing EFT, as required by the Treasury Regulations.

After this ruling, Commonwealth's second count remains at issue, and it will be entitled to present evidence that its failure to deposit via EFT was due to reasonable cause and not due to willful neglect.

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