As part of its audit of taxpayers’ excise tax compliance, the Alcohol and Tobacco Tax and Trade Bureau (TTB) may impose several different types of financial penalties stated in the Internal Revenue Code (IRC). Indeed, TTB can impose more than one penalty with respect to the same excise tax liability, and the total combined effect can reach a maximum exposure of 65 percent of the amount of tax due.
Failure to File, Failure to Pay and Failure to Deposit Penalties
1. Delinquency Penalty
Generally, if a taxpayer files a late excise tax return or fails to file the return at all, the IRC imposes a delinquency penalty under IRC section 6651(a)(1) that is based on the net amount due on the return. For any failure to file a return, the penalty is 5 percent of the amount of such tax for the first month of the failure, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, up to a maximum of 25 percent of the amount of such tax. For purposes of calculating the penalty, the “mailbox rule” does not apply, and instead, the penalty runs from the due date of the return until the date TTB actually receives the late return, and not the date of the return was mailed by the taxpayer. If TTB deems the failure to file timely or not file at all was the result of taxpayer fraud, the penalty is increased to 15 percent for each month or fraction thereof, with a maximum penalty equal to 75 percent of the amount of tax due.
2. Failure to Pay Tax Penalty
Additionally, if a taxpayer fails to pay the amount shown as tax on an excise tax return, on or before the date prescribed for payment of such tax IRC section 6651(a)(2) imposes a penalty of 0.5 percent of the amount of tax shown on the return for each month or fraction thereof during which the taxpayer fails to pay the amount due. The failure to pay penalty, however, may not exceed 25 percent of the amount of tax due.
A taxpayer can also be subject to a failure to pay penalty under IRC section 6651(a)(3) if the taxpayer does not pay the amount of assessed tax, within 21 calendar days from the date of notice and demand. This period is shortened to 10 business days if the amount assessed and shown on the notice and demand equals or exceeds $100,000. The amount of the penalty is 0.5 percent of the amount stated in the notice and demand for each month or fraction thereof during which the tax remains unpaid. This penalty may not exceed 25 percent of the amount of tax due.
3. Failure to Deposit Penalty
Generally, taxpayers must make timely deposits of excise taxes when they reach a certain dollar amount. IRC section 6656 imposes a penalty for a taxpayer’s failure to make timely deposits of excise taxes. The graduated penalty is computed as follows: (a) 2 percent of the amount of the underpayment if the failure is for more than five days; (b) 5 percent of the amount of the underpayment if the failure exceeds 5 days but not more than 15 days; and (c) 10 percent of the amount of the underpayment if the failure to deposit persists for more than 15 days. Moreover, if the tax is not deposited on or before the earlier of (i) 10 days after the date of the first delinquency notice to the taxpayer, or (ii) the day on which notice and demand for immediate payment of tax is given in cases of jeopardy, TTB can impose the penalty at the rate of 15 percent of the amount of the underpayment.
4. Interaction of Penalties
If TTB applies both the penalty for failure to file and the penalty for failure to pay a tax shown on a return to any month, the failure to file penalty for that month (5 percent) is reduced by the failure to pay penalty for that month (0.5 percent). In that circumstance the combined total penalty can be a maximum 47.5 percent of the amount due where both penalties apply for the maximum period.
The IRC provides no offset where both the failure to pay an assessed amount and failure to file apply. Thus, the combined total amount of these two penalties can reach a 50 percent maximum of the amount due. Similarly, no offset applies where there is a failure to deposit, failure to file, and failure to pay an assessed amount. Accordingly, the combined total of these penalties can reach a 65 percent maximum of the amount due.
5. The Reasonable Cause Exception
A taxpayer can avoid the penalties for failure to deposit, failure to file, and failure to pay by showing that such failure was due to “reasonable cause” and not willful neglect. In order to assert a reasonable cause defense to the assertion of a penalty, the taxpayer must provide a written statement to TTB describing the basis for the defense, signed under penalties of perjury. This written statement should contain all the facts that show that the taxpayer exercised ordinary business care and prudence but was nevertheless: (a) unable to make a timely deposit; (b) unable to file the return within the prescribed time; or (c) unable to pay the tax shown or assessed or suffer undue hardship if paid on the due date.