SERVICE CLARIFIES OPTION TO USE TAX DEPOSIT OVERPAYMENT TO ESCAPE FAILURE-TO-DEPOSIT PENALTY.

Rev. Proc. 91-52

SECTION I. PURPOSE

The purpose of this revenue procedure is to clarify and amplify the introductory language and Example 4 in Section III.04 of Rev. Proc. 90-58, 1990-2 C.B. 642, and to set forth the manner in which the failure-to-deposit penalty imposed by section 6656 of the Code will be applied in the specific factual situation in that example.

SEC. II. BACKGROUND

01 The purpose of Rev. Proc. 90-58 is to provide guidance regarding application of the failure-to-deposit penalty under section 6656 of the Rev. Proc. 90-58 applies with respect to all taxes required to be deposited under section 6302 of the Code and underlying regulations that are reported on the following Internal Revenue Service forms:

Form 720, Quarterly Federal Excise Tax Return

Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

Form 941, Employer's Quarterly Federal Tax Return

Form 943, Employer's Annual Tax Return for Agricultural Employees

Form CT-1, Employer's Annual Railroad Retirement and Unemployment Repayment Tax Return

Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

02 Example 4 of Rev. Proc. 90-58 implies that an overpayment of tax reported on a return for a completed taxable period will automatically be used by the Internal Revenue Service to satisfy liabilities for the succeeding taxable period. This will only be the case, however, if the taxpayer elects such application of the overpayment. The taxpayer also has the option of claiming a refund of that overpayment.

SEC. III. MODIFICATION

The introductory language and Example 4 in Section III.04 of Rev. Proc. 90-58 are amended to read as follows:

".04 APPLICATION OF OTHER CREDITS TO TAXPAYER ACCOUNTS. As indicated above, other credits to the taxpayer's account will be applied in the same manner as deposits. Thus, a credit will first be applied to satisfy any underdeposits within the same return period, with the oldest underdeposit being satisfied first. Under section 6513(a) of the Code, an overdeposit at the end of a return period becomes an overpayment of tax on the last day prescribed for payment of the tax (the due date of the return for the return period) and the Service will credit the overpayment amount at that time. However, solely for purposes of applying the section 6656 failure-to-deposit penalty, if the taxpayer elects to apply an overpayment of tax from one return period to the next succeeding return period, the amount of the overpayment will be deemed credited to the taxpayer's account as of the date(s) on which the overdeposit(s) occurred which formed the basis for the overpayment. The following examples illustrate how an overpayment credit and other credits to the taxpayer's account will be applied:

Example 4: On April 4, 1991, three banking days after the close of the March 26-31 eighth-monthly period and the close of the first quarter employment tax return period, Employer C makes a payroll tax deposit of $10,000. The deposit is designated as a first quarter deposit and is made to satisfy C's March 26-31 deposit liability. This results in an overdeposit for the first quarter return period of $3,500. For the eighth-monthly period April 1-3, 1991, the beginning of the second quarter return period, C incurs a deposit liability of $3,000. Since the $10,000 deposit made April 4 was designated as a deposit for the first quarter, it cannot be applied on April 4 to satisfy the $3,000 deposit liability for the April 1-3 eighth-monthly period because an overdeposit from one return period cannot be applied forward to satisfy a succeeding deposit obligation in the next return period. See, Section 31.6302(c)-1(a)(1)(ii)(f) of the Employment Tax Regulations. On April 30, 1991, the due date for C's Form 941 for the first quarter of 1991, C files the form and reports an overpayment of $3,500. C will be credited by the amount of the overpayment on the due date of the first quarter return, April 30. On C's Form 941 for the first quarter, C may either claim a refund of the overpayment or elect to apply the overpayment of tax to the next return period. If C elects to apply the overpayment of tax to the next return period, the Service will use that amount on April 30, the return due date, to satisfy liabilities for the second quarter. However, solely for purposes of applying the section 6656 penalty, the $3,500 overpayment will be deemed credited to C's account as of April 4, the date on which the deposit was made creating the overpayment, and will be applied to satisfy any underdeposits for the second quarter, with the oldest underdeposit being satisfied first. Therefore, if C failed to deposit the $3,000 obligation for the April 1-3 eighth-monthly period, but elected to apply the $3,500 overpayment from the first quarter to the next return period, no failure-to-deposit penalty would apply."

SEC. IV. EFFECT ON OTHER DOCUMENTS

01 Rev. Proc. 90-58 is clarified and amplified, effective for deposit liability periods beginning after March 31, 1991, the effective date of Rev. Proc. 90-58.

DRAFTING INFORMATION

The principal author of this revenue procedure is Vincent G. Surabian of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Surabian on (202) 566-5985 (not a toll-free call).