Failure to make deposit requirement - section 6656

Heartland Automotive Enterprises, Inc., Plaintiff, v. United States of America by and through the Commissioner of Internal Revenue Service, Defendant.

U.S. District Court, Mid. Dist. Ga., Macon Div.; Civil Action No. 5:07-CV-037-HL, May 27, 2009.

[ Code Secs. 6302 and 6656]


A corporation was not entitled to abatement of penalties imposed by the IRS for its failure to deposit employment taxes electronically through the Electronic Federal Tax Payment System (EFTPS). Although the corporation paid the taxes in a timely manner, it was liable for the penalties under Code Sec. 6656 because it deposited the taxes with a federal depository bank, rather than through the EFTPS. The corporation failed to prove that such noncompliance was due to reasonable cause and not willful neglect. The documents the corporation claimed to have relied on did not support reasonable cause. Rather, the corporation's comptroller admitted that he did not refer to the regulations and other published guidance regarding electronic deposits.




ORDER


LAWSON, Judge: This a tax refund case in which the Plaintiff seeks a refund of $24,731.97 in penalties paid to the Internal Revenue Service for failure to electronically deposit certain taxes. Pending before the Court is Defendant's Motion for Summary Judgment (Doc. 20). 1 For the foregoing reasons, the Defendant's Motion is granted.



I. BACKGROUND

The material facts of this case are not in dispute: Heartland Automotive Enterprises ("Heartland") operated a car dealership in Warner Robins, Georgia from 1997 to 2003. From the period of June 30, 2000 through March 21, 2001, Heartland made a timely and full deposit of its federal employment, unemployment, and excise taxes, but failed to do so electronically through the Electronic Federal Tax Payment System ("EFTPS"), as required by 26 U.S.C. § 6302(h). 2 The IRS imposed failureto-deposit penalties under 26 U.S.C. § 6656. 3

There is no dispute that Heartland was required to utilize the EFTPS for the periods in questions. Heartland contends, however, that under § 6656 the imposition of penalties should have been waived because non-compliance with the EFTPS was due to reasonable cause and not willful neglect. Heartland subsequently filed a claim for refund and request for abatement of the assessed penalties with the IRS. Following receipt of notice from the IRS disallowing the claim, Heartland filed suit in this Court on January 30, 2007. The IRS filed a counterclaim in the amount of $74,566.06, representing the uncollected penalties, plus interest, assessed pursuant to § 6656 (Doc. 10). 4



II. DISCUSSION



A. Summary Judgment Standard

Summary judgment must be granted if "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). A genuine issue of material fact arises only when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, (1986). When considering a motion for summary judgment, the Court must evaluate all of the evidence, together with any logical inferences, in the light most favorable to the nonmoving party. Id. at 254-55. The Court may not, however, make credibility determinations or weigh the evidence. Id. at 255; see also Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S. Ct. 2097, 2110 (2000).

The moving party "always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553 (1986) (internal quotations omitted). If the moving party meets this burden, the burden then shifts to the nonmoving party to go beyond the pleadings and present specific evidence showing that there is a genuine issue of material fact, or that the nonmoving party is not entitled to a judgment as a matter of law. Id. at 324-26. This evidence must consist of more than mere conclusory allegations. See Avirgan v. Hull, 932 F.2d 1572, 1577 (11th Cir. 1991). Under this scheme summary judgment must be entered "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.



B. 26 U.S.C. § 6656

The disposition of this case turns on whether Plaintiff's failure to comply with 26 U.S.C. § 6656(a) is due to reasonable cause and not willful neglect. 26 U.S.C. § 6656(a) provides:
Underpayment of Deposits.-In the case of any failure by any person to deposit (as required by this title or by regulations of the Secretary under this title) on the date prescribed therefor any amount of tax imposed by this title in such government depository as authorized under section 6302(c) to receive such deposit, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be imposed upon such person a penalty equal to the applicable percentage of the amount of the underpayment.

Section 6656 does not specifically state failure-to-deposit penalties shall be imposed on a taxpayer for failing to deposit tax payments electronically where the taxpayer otherwise pays the taxes on time and in the correct amount. However, Treas. Reg. § 31.6302-1(h) requires that certain tax deposits be made electronically, as opposed to depositing them through a federally authorized depository bank. Applying cannon's of statutory interpretation, two district courts have read the parenthetical portion of § 6656 in conjunction with Treas. Reg. § 31.6302-1(h) to mandate a failure-to-deposit penalty whenever a taxpayer fails to deposit tax payments electronically, irrespective of whether the taxpayer complied with all other deposit requirements. Fallu v. United States, No. 06 Civ. 13248 2008 WL 397912, *2 (S.D.N.Y. Feb. 13, 2008); F.E. Schumacher Co., Inc. v. U.S., 308 F. Supp. 2d 819, 826-30 (N.D. Ohio 2004); see also 13 Mertens Law of Fed. Income Tax'n § 47A:43.40 ("Absent reasonable cause, a taxpayer that is required to deposit federal taxes by [the EFTPS] is subject to the failure-to-deposit penalty imposed by Section 6656 if the taxpayer deposits the taxes by means other than [the EFTPS], or by [the EFTPS] after the date on which the taxes are due."). This Court need not decide whether it concurs with the above interpretation of § 6656, however. In its brief, Heartland's arguments were all constructed on the assumption § 6656 that penalties are generally applicable to a taxpayer who, when required, does not utilize the EFTPS. Therefore, because Heartland has not challenged the applicability of § 6656, the crux of the issue is whether its failure to abide by the Treasury Regulations was due to reasonable cause and not willful neglect.

Section 6656(a) expressly waives imposition of the penalties described therein where it is shown that non-compliance is due to reasonable cause and not willful neglect. In discussing the same standard in the context of a penalty for failing to timely file a tax return under 26 U.S.C. § 6651, the Supreme Court, in United States v. Boyle, 469 U.S. 241, 245, 105 S. Ct. 687, 689 (1985), held that "[t]o escape the penalty, the taxpayer bears the heavy burden of proving both (1) that the failure did not result from 'wilful neglect,' and (2) that the failure was 'due to reasonable cause." 5 Wilful neglect is defined as a conscious, intentional failure or reckless indifference. Id. Reasonable cause requires the exercise of ordinary business care and prudence with regards to its decisions and/or methods. Id.

In support of reasonable cause, Heartland essentially advances three justifications for its failure to deposit tax payments electronically. First, Heartland argues reasonable cause is established because its comptroller had made previous tax deposits via coupon at a federally authorized bank depository with no objection from the IRS. Second, Heartland points to its reliance upon particular documents that were allegedly misleading as to the requirement to use the electronic payment system. Finally, Heartland opines that the electronic deposit regulations are themselves complex and difficult to understand. Viewing the evidence in the light most favorable to Heartland, as required under summary judgment, this Court finds such justifications do not amount to reasonable cause.

Heartland relies upon Dana Corp. v. United States, 764 F. Supp. 482 (N. D. Ohio 1991), for the argument that a failure to use the EFTPS was due to reasonable cause because of reliance on it comptroller, whom had previously made tax deposits via coupon at a federally authorized bank depository the during the tax periods in 2000 with no penalties assessed by the IRS. In Dana Corp., a company was penalized pursuant to § 6656 for failing to timely deposit the proper amount of payroll taxes 11 times over a two year period from 1982-1983. Id. at 484. The reason for the companies failure to make timely deposits was due to its misinterpretation of the "safe harbor" provision for payroll tax deposits found in Treas. Reg. 31.6302(c)-1(a)(1)(i)(b)(1). Id. Prior to when the penalties were first assessed the corporation had interpreted the provision to mean that "if [it] deposited 100% of its aggregate payroll taxes for one eighth-monthly period and 90% of its aggregate payroll taxes for the subsequent eighth-monthly period, [it] would not be liable for any penalties under § 6656 because it had deposited 95% of its payroll taxes over both periods." Id. The IRS, on the other hand, interpreted the provision to mean that "a company is liable for penalties under § 6656(a) each time an eighth-monthly period deposit is less than 95% of the aggregate payroll taxes due for that period." Id. The court held that although the IRS was correct in its interpretation of the provision, the company was not liable for penalties under § 6656 because its failure to deposit the payroll taxes in the required amounts was due to reasonable cause and not willful neglect. Id. at 487-88. In finding reasonable cause for the misinterpretation, the court noted that the company had a longstanding practice of staggering the percentages of payroll taxes due and that the IRS had never previously penalized them following audits despite occasionally not meeting the requirements of the safe harbor provision as the IRS interpreted them. Id. at 488.

There exists a salient difference between the facts presented in Dana Corp and the case at bar-namely, the absence of any misinterpretation of the taxpayer's duties. Here, Heartland does not contend that it understood Treas. Reg. § 31.6302-1(h) to mean it was not required to use the EFTPS. Rather, Heartland only contends that its ignorance of the requirements was reasonable in light of an absence of IRS objection the previous tax periods. Such argument is without merit. When assessing whether the elements of reasonable cause are established the law imparts a legally significant distinction between a taxpayer's misinterpretation of its duties, on one hand, and a taxpayers ignorance as to its duties, on the other. 6 See Univ. of Chicago v. U.S., 547 F.3d 773, 785 (7th Cir. 2008); Lieb v. U.S., 438 F. Supp. 1015, 1021 (D.C. Okl. 1977); Gilmore v. U.S., 443 F. Supp. 91, 98-99 (D.C. Md. 1977) (finding failure to file certain tax returns was due to reasonable cause where misunderstanding of the law under the circumstances, but adding "[m]erely forgetting to file a return is not reasonable cause, nor is ignorance of the law.") (internal quotations and citations omitted).

The court also finds that Heartland cannot establish reasonable cause by claiming reliance upon particular documents that were allegedly misleading on the requirement to use the electronic payment system. Specifically, Heartland points to an IRS Deposit Brochure (which allegedly contains permissive language regarding the use of the EFTPS) 7 , the "Changes to Note" section of the 1999-2001 IRS Employment Tax Instructions for Form 941 (which does not mention the electronic filing requirement), and the actual instructions to Form 941 (which identifies electronic filing and depositing via coupon at an authorized bank as methods for depositing taxes). 8 Notably, Heartland failed to identify any case where reasonable cause was found based upon a taxpayers reliance on these types of documents. Indeed, a cursory review of cases where the taxpayer established reasonable cause based upon reliance of the IRS reveal one common denominator-an act or omission by an actual IRS agent. See Gilmore, 443 F. Supp. 91, 99-100; Koehnemann v. U.S., 322 F. Supp. 1200,1204 (N.D. Ill. 1970); see also Chilingirian v. C.I.R., 918 F.2d 1251, 1254-55 (6th Cir. 1990); U.S. v. Red Stripe, Inc., 792 F. Supp. 1338, 1345 (S.D.N.Y. 1992).

Moreover, assuming for the sake of argument that unsolicited documents from the IRS are not per se unreasonable to rely upon, this Court finds none of the proffered documents provides reasonable cause in the case. Nothing in the text of the documents states that taxpayers are not required to make deposits electronically if they meet the statutory prerequisites for doing so. In fact, a reading of the instructions for Form 941 evinces the opposite conclusion. In pertinent part, the instructions state "[s]ee section 11 of the Circular E for information and rules concerning Federal Tax Deposits." (Wyatt Aff. Ex. B, C, D, and E). Both Circular E, which is an employers tax guide, and Treas. Reg. § 31.6302-1(h) clearly delineate when taxpayers are required to make deposits electronically. Simply put, no reasonable taxpayer exercising ordinary business care and prudence would abstain from familiarizing themselves with the regulations and other published guidance in reliance upon the contents of the documents put forth in this case.

Finally, Heartland contends that the electronic deposit regulations are themselves complex and difficult to understand. Whatever the merits of such an argument, it is merely a red herring under the circumstances. It is undisputed that Heartland's comptroller did not read the relevant regulations or published guidance. Furthermore, in his deposition, Heartland's comptroller states he would have understood the regulations had he read them. Therefore, Heartland's failure to utilize the EFTPS stemmed not from confusion or misinterpretation of the applicable regulations, but rather from a lack of knowledge of them in the first instance.

The Court is not indifferent to Heartland's position; it failed to deposit certain payments electronically but nevertheless made the payments timely and in full. However, as articulated in Fallu, "[t]he increased efficiency of the EFTPS provides reasonable justification for requiring that certain deposits be made using the system, in service of the legitimate IRS objective of collecting taxes." 2008 WL 397912, *3. Moreover, "'[t]he Government has millions of taxpayers to monitor, and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards." Boyle, 469 U.S. at 249, 105 S. Ct. at 691. The standards set forth in § 6656 do contain a narrow statutory exemption, however. The penalties must be abated when the taxpayer overcomes the heavy burden of proving the failure to use the electronic deposit method was due to reasonable cause and not willful neglect. This Court finds that Heartland has failed to carry that burden. 9



III. CONCLUSION

For the foregoing reasons, the Defendant's Motion for Summary Judgment is granted.

SO ORDERED, this the 27 th day of May, 2009.

1 On June 4, 2008, Plaintiff filed a response to Defendant's Motion for Summary Judgment, styled as a Cross-Motion for Summary Judgment and In Opposition to Defendant's Motion for Summary Judgment (Doc. 29, 30). Under this Court's Rules 16 and 26 Order, all dispositive motions were to be filed within 45 days of the close of discovery. The last day of discovery was March 7, 2008 and, therefore, the filing deadline for dispositive motions was May 1, 2008. Therefore, because Plaintiff's "Cross-Motion" for summary judgment is untimely, the Court strikes Plaintiff's Reply to Defendant's Response to Plaintiff's Cross-Motion for Summary Judgment (Doc. 37).

2 Pursuant to the Current Tax Payment Act of 1943 employers were required to deposit certain federal taxes through federally authorized bank depositories, accompanied by a federal tax deposit coupon. In 1993, however, Congress directed the Secretary of the Treasury to prescribe regulations for the development and implementation of an electronic deposit system, known as EFTPS, to be used for the collection of depository taxes. 26 U.S.C. § 6302(h)(1). Consistent with this directive, the Secretary of Treasury promulgated regulations establishing

SEC. 6656. FAILURE TO MAKE DEPOSIT OF TAXES.

6656(a) UNDERPAYMENT OF DEPOSITS. --In the case of any failure by any person to deposit (as required by this title or by regulations of the Secretary under this title) on the date prescribed therefor any amount of tax imposed by this title in such government depository as is authorized under section 6302(c) to receive such deposit, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be imposed upon such person a penalty equal to the applicable percentage of the amount of the underpayment.

6656(b) DEFINITIONS. --For purposes of subsection (a) --

6656(b)(1) APPLICABLE PERCENTAGE. --

6656(b)(1)(A) IN GENERAL. --Except as provided in subparagraph (B), the term "applicable percentage" means --

6656(b)(1)(A)(i) 2 percent if the failure is for not more than 5 days,

6656(b)(1)(A)(ii) 5 percent if the failure is for more than 5 days but not more than 15 days, and

6656(b)(1)(A)(iii) 10 percent if the failure is for more than 15 days.

6656(b)(1)(B) SPECIAL RULE. --In any case where the tax is not deposited on or before the earlier of --

6656(b)(1)(B)(i) the day 10 days after the date of the first delinquency notice to the taxpayer under section 6303, or

6656(b)(1)(B)(ii) the day on which notice and demand for immediate payment is given under section 6861 or 6862 or the last sentence of section 6331(a),

the applicable percentage shall be 15 percent.

6656(b)(2) UNDERPAYMENT. --The term "underpayment" means the excess of the amount of the tax required to be deposited over the amount, if any, thereof deposited on or before the date prescribed therefor.

6656(c) EXCEPTION FOR FIRST-TIME DEPOSITORS OF EMPLOYMENT TAXES. --The Secretary may waive the penalty imposed by subsection (a) on a person's inadvertent failure to deposit any employment tax if --

6656(c)(1) such person meets the requirements referred to in section 7430(c)(4)(A)(ii),

6656(c)(2) such failure --

6656(c)(2)(A) occurs during the first quarter that such person was required to deposit any employment tax; or

6656(c)(2)(B) if such person is required to change the frequency of deposits of any employment tax, relates to the first deposit to which such change applies, and

6656(c)(3) the return of such tax was filed on or before the due date.

For purposes of this subsection, the term "employment taxes" means the taxes imposed by subtitle C.

6656(d) AUTHORITY TO ABATE PENALTY WHERE DEPOSIT SENT TO SECRETARY. --The Secretary may abate the penalty imposed by subsection (a) with respect to the first time a depositor is required to make a deposit if the amount required to be deposited is inadvertently sent to the Secretary instead of to the appropriate government depository.

6656(e) DESIGNATION OF PERIODS TO WHICH DEPOSITS APPLY. --

6656(e)(1) IN GENERAL. --A deposit made under this section 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.

6656(e)(2) TIME FOR MAKING DESIGNATION. --A person may make a designation under paragraph (1) only during the 90-day period beginning on the date of a notice that a penalty under subsection (a) has been imposed for the specified tax period to which the deposit relates.

Failure to Make Deposit of Taxes: Electronic funds transfer

To establish reasonable cause for an abatement of the penalty under Code Sec. 6656 for failure to make a timely deposit, a taxpayer making an electronic fund transfer (EFT) via a debit or credit transaction may use the records of the financial institution that initiated the EFT and/or its own books and records. The books and records can be used to show that it timely informed the financial institution as to payment instructions, the correct amount and type of tax to be deposited, the correct period for which the tax deposit was to be made, the correct date the funds were to be transferred to the IRS and the taxpayer's account number.

Rev. Rul. 94-46, 1994-2 CB 278.

The IRS has ruled that, absent reasonable cause, taxpayers who participate in TAXLINK, the electronic remittance processing system, and who are required to deposit federal taxes by electronic funds transfer are subject to the failure-to-deposit penalty under Code Sec. 6656 if the taxes are deposited by means other than EFT or by EFT after the due date. However, taxpayers not required to deposit taxes by EFT, but who have done so on a voluntary basis, are not subject to the failure-to-deposit penalty imposed by Code Sec. 6656 if the taxpayer instead timely deposits the taxes at an authorized depository using Form 8109.

Rev. Rul. 95-68, 1995-2 CB 272.

The IRS has issued guidance relating to the temporary waiver of penalties for taxpayers first required to make federal tax deposits by electronic funds transfer on or after July 1, 1997. The waiver applies only to deposit obligations incurred on or before December 31, 1997, and includes deposits made after December 31, 1997, provided the deposit obligation was incurred on or before December 31, 1997.

Notice 97-43, 1997-2 CB 294.

The IRS has provided guidance relating to the waiver of the Code Sec. 6656 failure to deposit penalty for the more than one million businesses that were required to make their federal tax deposits electronically beginning on or after July 1, 1997. Pursuant to IR-98-28, those employers were given an extension of time in which to begin making their federal tax deposits by electronic funds transfer (EFT). However, they will remain liable for the penalty if they fail to make the requisite deposits, either by EFT or using paper coupons, in a timely manner. The penalty waiver applies only to deposit obligations incurred before 1999, and includes post-1998 deposits provided that the deposit obligation arises prior to 1999. The waiver does not apply to taxpayers that had to begin using EFT in 1995 or 1996.

Notice 98-30, 1998-1 CB 1164.

The IRS will not impose the 10% penalty solely for the failure to make deposits by electronic funds transfer; however, the penalty will be imposed if the taxpayer fails to make the deposit in a timely manner. The waiver applies to deposit obligations that were incurred on or before June 30, 1999. It includes deposits made after June 30, 1999, if the deposit obligation was incurred on or before that date.

Notice 99-12, 1999-1 CB 641.

Taxpayers who did not deposit more than $200,000 in aggregate federal depository taxes during 1998 will not be assessed the 10% penalty solely because they did not make their deposits by EFT. However, absent a showing of reasonable cause, the penalty will be imposed against taxpayers that fail to make their required deposits in a timely manner. This waiver applies to deposit obligations incurred after June 30, 1999, and on or before December 31, 1999. The penalty waiver includes deposits made after 1999, provided that the deposit obligation was incurred on or before December 31, 1999. The waiver extends to taxpayers that were first required to deposit by EFT in 1995 or 1996.

Notice 99-20, 1999-1 CB 958.

See ¶38,070.021.

A corporation that failed to deposit its employment taxes electronically pursuant to the Electronic Federal Tax Payment System (EFTPS) was liable for failure to deposit penalties under Code Sec. 6656, even though it actually paid those taxes in a timely manner. By depositing the employment taxes using means other than EFTPS, the taxpayer failed to comply with the substantive purpose of Code Sec. 6302(h), which is to establish an electronic system for making electronic funds transfer deposits. Absent substantial compliance with the statutory, regulatory, and procedural requirements, the taxpayer was not entitled to abatement of the penalties. Further, it was unable to show that its noncompliance was due to reasonable cause and not willful neglect; the taxpayer provided no facts on which it relied for its position that EFTPS did not provide adequate internal control and security features.

F.E. Schumacher Co., Inc., DC Ohio, 2004-1 USTC ¶50,166.

A film production company that did not deposit its employment taxes electronically as prescribed under the Electronic Federal Tax Payment System (EFTPS) was liable for failure to deposit penalties under Code Sec. 6656, even though it paid its taxes in a timely manner. The taxpayer's argument that the statute authorizes penalties only for a deficiency in the amount of taxes paid, not for a deficiency in the method by which payment was made, was rejected. The plain language of the statute emphasizes that the deposit itself must satisfy the requirements of the IRC and the applicable regulations.

Fallu Productions, Inc., DC N.Y., 2008-1 USTC ¶50,199.


Electronic deposits. --Mode or Time of Collection: Electronic deposits

A film production company that failed to deposit its employment taxes electronically as prescribed under the Electronic Federal Tax Payment System (EFTPS) was liable for failure to deposit penalties, even though it paid its taxes in a timely manner. The company admitted that its employment tax deposits fell within the requirements of Reg. §31.6302-1(h), which requires certain payments to be made electronically.

Fallu Productions, Inc., DC N.Y., 2008-1 USTC ¶50,199.

A corporation that failed to deposit its employment taxes electronically pursuant to the Electronic Federal Tax Payment System (EFTPS) was liable for failure to deposit penalties under Code Sec. 6656, even though it actually paid those taxes in a timely manner. By depositing the employment taxes using means other than EFTPS, the taxpayer failed to comply with the substantive purpose of Code Sec. 6302(h), which is to establish an electronic system for making electronic funds transfer deposits. Absent substantial compliance with the statutory, regulatory, and procedural requirements, the taxpayer was not entitled to abatement of the penalties. Further, it was unable to show that its noncompliance was due to reasonable cause and not willful neglect; the taxpayer provided no facts on which it relied for its position that EFTPS did not provide adequate internal control and security features.

F.E. Schumacher Co., Inc., DC Ohio, 2004-1 USTC ¶50,166, 308 FSupp2d 819.

A taxpayer making an EFT through either a debit transaction or a credit transaction may establish reasonable cause for abating the failure to deposit penalty under Code Sec. 6656 by using the records of the bank instructed to initiate the EFT (whether a Financial Agent or the taxpayer's financial institution), and/or the taxpayer's books and records (including, among other things, a recording of telephone instructions or a saved electronic file of instructions), to establish that the taxpayer timely provided to the bank the following information: (1) payment instructions, (2) the correct amount of tax to be deposited, (3) the correct type of tax to be deposited, (4) the correct tax period for which the deposit was made, (5) the correct date the funds were to be transferred from the taxpayer's bank account to Treasury's general account, and (6) the number of the taxpayer's bank account with sufficient funds to cover the EFT.

Rev. Rul. 94-46, 1994-2 CB 278.

Absent reasonable cause, a taxpayer that is required to deposit federal taxes by EFT is subject to the failure-to-deposit penalty imposed by Code Sec. 6656 if the taxpayer deposits the taxes by means other than EFT, or by EFT after the date on which the taxes are due. A taxpayer that is not required to deposit taxes by EFT, but has done so on a voluntary basis, is not subject to the failure-to-deposit penalty if the taxpayer instead timely deposits the taxes at an authorized depository using Form 8109.

Rev. Rul. 95-68, 1995-2 CB 272.

The IRS has released a revenue procedure providing information about the Electronic Federal Tax Payment System (EFTPS). Code Sec. 6302(h) requires taxpayers with federal depository taxes in excess of certain specified thresholds to transfer their federal tax deposits and federal tax payments electronically. The revenue procedure includes a list of definitions used in the EFTPS and describes the EFTPS enrollment process. It also notes that no refunds of tax deposits will be made through EFTPS. Instead, refund requests should be made under the existing refund procedures. The revenue procedure is effective on July 11, 1997. Rev. Proc. 94-48 is obsoleted for federal tax deposits and federal tax payments made after July 15, 1997.

Rev. Proc. 97-33, 1997-2 CB 371, modified by Rev. Proc. 98-32, 1998-1 CB 935.

The IRS has provided mandatory procedures for banks and financial institutions that, as batch and bulk filers, submit enrollments and make federal tax deposits (FTDs) and federal tax payments (FTPs) on behalf of multiple taxpayers via the Electronic Federal Tax Payment System (EFTPS). These guidelines are generally effective April 27, 1998. Rev. Proc. 97-33 is modified.

Rev. Proc. 98-32, 1998-1 CB 935, modifying Rev. Proc. 97-33, 1997-2 CB 371.

The IRS is terminating the magnetic tape program for the reporting of federal tax deposits and certain estimated income tax payments for deposits or payments made after January 31, 2000. After the effective date, current magnetic tape filers may use paper coupons, estimated tax vouchers or the Electronic Federal Tax Payment System (EFTPS).

Notice 99-42, 1999-2 CB 325.

The IRS has announced that a major upgrade of the Internet version of the Electronic Federal Tax Payment System (EFTPS) --the EFTPS-OnLine website --includes several new improvements to help taxpayers. Taxpayers using the system will be able to (1) schedule all four estimated tax payments (Form 1040ES) in one session without logging out; (2) access payment history for a 16-month period; and (3) search, print, or download payment history by date, tax type, amount, tax form, and other factors. With the user-friendly system, taxpayers can change bank accounts by phone without completing new enrollments; select PINs online; access links to states with electronic tax payment systems; use an enhanced and updated glossary and information; and take advantage of improved accessibility if visually impaired. Payments can be made 24 hours a day, seven days a week from home or office, and taxpayers receive an EFT Acknowledgement Number for every EFTPS transaction.

Internal Revenue News Release IR-2003-90, July 21, 2003.

The IRS has launched an initiative, which will be available using the Electronic Federal Tax Payment System (EFTPS), to provide businesses with a faster system for the electronic payment of taxes. EFTPS Express Enrollment for New Businesses will affect all businesses receiving a new employer identification number. Business taxpayers with a federal tax obligation will be automatically pre-enrolled in EFTPS to make all federal tax deposits.

Internal Revenue News Release IR-2004-10, January 15, 2004.

The IRS announced an incentive program offering a refund of the federal tax deposit (FTD) penalty to qualified business taxpayers in exchange for enrollment in and use of the Electronic Federal Tax Payment System (EFTPS). This one-time refund is available to approximately 1 million employers. To qualify for the refund, the employer must use EFTPS for four consecutive quarters, make all Form 941 payments on time, and have previously paid the FTD penalty in full. The offer is available to employers who are not mandated to use EFTPS, and is only available for penalties paid within a year (four quarters) prior to the four-quarter compliance period.

Internal Revenue News Release IR-2004-70, May 24, 2004.

Taxpayers may pay their taxes electronically by authorizing an electronic funds withdrawal from a checking or savings account or by using a credit card. The e-payment method can be used to pay taxes reported on a 2005 income tax return, pay past due taxes owed for years 1996 and after, pay projected tax due when requesting an automatic filing extension, or pay estimated taxes for tax year 2006. Electronic funds withdrawal is free and the taxpayer decides when the tax payment is to be withdrawn from his or her account; however, this payment method is available only to e-filers. Credit card payments will be accepted whether a return is filed electronically or by mail. Credit card payments can also be made over the telephone. While the IRS does not impose a fee for credit card payments, the private-sector companies authorized to process the payments do impose convenience fees. Finally, the Electronic Federal Tax Payment System (EFTPS) offers another method by which taxpayers may pay their taxes; EFTPS is a free service and is available year-round to individual and business taxpayers.

IRS Fact Sheet FS-2006-5, January 3, 2006.


when the electronic deposit system was required. 26 C.F.R. § 31.6302-1(h). For calendar quarters beginning in 2000, the regulation provided that, if the aggregate deposits in a calender year exceeded $200,000, the employer was required to use the electronic deposit system for all tax periods after the calender year following the year in which the threshold was reached. 26 C.F.R. § 31.6302-1(h)(2)(ii). According to those standards, Heartland was required to use the EFTPS in 2000 and 2001.

3 Of the penalties assessed, Heartland only made a payment for the tax period ending on March 31, 2001, which after interest totaled $24,731.97.

4 This amount also includes a failure-to-pay tax penalty, imposed on March 18, 2002, pursuant to 26 U.S.C. § 6651(a)(2), in the amount of $107.47, and interest in the amount of $81.57.

5 The terms "reasonable cause" and "willful neglect" found in §§ 6651(a) and 6656(a) are construed consistently, and therefore, precedent discussing the former is applicable when analyzing the latter. See Staff IT, Inc. v. U.S., 482 F.3d 792, 798 n.17 (5th Cir. 2007) ( "The analysis in Boyle only concerned failure-to-file penalties under § 6651(a)(1) and not failure-to-pay or failure-to-deposit penalties under §§ 6651(a)(2) and 6656, respectively. The language concerning the relevant standard is identical in all three provisions. Thus, we find no reason to treat the language in § 6656(a)(1) differently from that in §§ 6651(a)(2) and 6656.") (internal citations omitted); see also Del Commercial Properties, Inc. v. C.I.R., 251 F.3d 210, 218 (D.C. Cir. 2001) ( "Although the Boyle Court did not address the meaning of the terms 'reasonable cause' and 'willful neglect' as used in § 6656(a), the same terms used in the same statute for the same purpose presumably have the same meaning.") (internal citations omitted); Valen Mfg. Co. v. U.S., 90 F.3d 1190, 1193 n.1 (6th Cir. 1996) ( "Although Boyle involved only a § 6651(a)(1) violation, the language of the 'reasonable cause' exceptions in §§ 6651(a)(2) and 6656 is identical and should be given the same construction.").

6 This is not to suggest that general allegations of a misinterpretation of a taxpayer's duties is sufficient in establishing reasonable cause. The sufficiency of such claims must be reasonable and supported by the evidence. Univ. of Chicago, 547 F.3d at 785.

7 Heartland points to the following language in the IRS Deposit Brochure:

Now there's an easier way to pay your Federal business taxes .... Now you can enroll in the most convenient tax payment service .... EFTPS is the most convenient way to pay .... Make a Call When You're Ready.... Want to Give it a Try? ... Enroll Today! Enjoy the convenience of making your tax payments....

(Wyatt Aff. Ex. A).

8 The instructions read, in pertinent part:

If your net taxes [exceed a certain amount] for the quarter, you must deposit your tax liabilities at an authorized financial institution with Form 8109, Federal Tax Deposit Coupon, or by using the Electronic Federal Tax Payment System (EFTPS). See section 11 of the Circular E for information and rules concerning Federal Tax deposits.

(Wyatt Aff. Ex. B, C, D, and E).

9 Because the Court finds that Heartland cannot establish that noncompliance with § 6656 was due to reasonable cause, an analysis of willful neglect is unnecessary.