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.  [...]

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