Proposed payroll tax deposit regulations
On July 31, 1992, Tax Executives Institute filed the following comments on the Internal Revenue Service’s proposed regulations relating to the deposit of employment taxes. The submission, which took the form of a letter to Assistant Treasury Secretary Fred T. Goldberg, Jr. and IRS Commissioner Shirley T. Peterson, was filed under the aegis of the Institute’s Federal Tax Subcommittee on Payroll and Other Taxes, whose chair is Clifford H. Omo of Mobil Administrative Services Company, Inc.
On behalf of Tax Executives Institute, I am pleased to present the following comments on proposed regulations under section 6302(g) of the Internal Revenue Code, relating to the deposit of employment taxes.
Overview of Proposed
Regulations
The proposed regulations (IA-28-91) were issued by the Internal Revenue Service on May 12, published in the Federal Register on May 18 (57 Fed. Reg. 21045), and reprinted in the June 28 issue of the Internal Revenue Bulletin
(1992-26 I.R.B. 27).(1) A public hearing on the proposed regulations will be held on August 3.
The proposed regulations would substantially revamp the payroll tax deposit system. In lieu of the current eighth-monthly system, the proposed regulations would establish a semi-weekly, date-certain, Tuesday-Friday regime that would apply to employers whose accumulated employment taxes during any quarter of the applicable base period is more than $12,000; if an employer’s accumulated employment taxes in all quarters of the applicable base period is $12,000 or less, accumulated amounts would be deposited on a monthly basis, by the fifteenth day of the following month. As under the current regulations, employers whose accumulated employment taxes equal or exceed $100,000 would have to deposit those taxes by the next business day.(2)
Statement of Interest
For the most part, the companies represented by TEI’s membership would not benefit from the revised payment schedule in the proposed regulations. Indeed, they are not the intended beneficiaries of the proposal. This is because the next-day rule of section 6302(g), which is incorporated into both the current and proposed regulations, renders large companies ineligible for either the monthly or the semi-weekly rules.(3) TEI remains interested in the regulations, however, both because of our interest in sound tax administration and because all employers would be adversely affected by the rule in Prop. Reg. [section] 31.6302-1(f)(1), which would reduce the payroll tax safe harbor from five to two percent.
Given the limited application of the proposed scheme to most of the companies represented by TEI’s membership – and the seeming “inevitability” of the ratcheting down of the safe-harbor percentage as the means of “paying for” the new system (if a funding mechanism is necessary) – the Institute has not previously commented on the proposed regulations. Because of our concern that the proposed regulations will not produce their intended result, however, we now feel compelled to submit these comments. In other words, whereas the Institute’s members may have been willing to accept a reduced payroll tax safe harbor as the cost of truly reforming the deposit system for the core of small and medium-sized firms, we believe it is absolutely essential that the Treasury Department and IRS ensure that the regulations effect true reform. Regrettably, we now question whether the current proposal would do so.
Discussion
1. Overview
TEI has previously supported the reform of the payroll tax deposit system. We agree that the current eighth-monthly rules are unacceptably complex. During last year’s congressional hearings on tax simplification, the Institute suggested that a Tuesday-Friday system – similar to that set forth in the proposed regulations – would bring a modicum of stability and certainty to payroll tax procedures.”(4) Because the proposed regulations follow the structure of the proposed legislation, we believe that they, too, would represent an improvement over the current payroll tax regime.
We would be less than candid, however, if we did not express serious concerns about the proposed regulations.(5) Specifically, we believe that, although they would be a step forward, they would not go far enough in achieving true reform of the payroll tax deposit system. Indeed, we believe that many of the employers the regulations are intended to help would he unable to avail themselves of the revised rules.
2. Safe Harbor
Under Prop. Reg. [section] 31.6302-1(f)(1), an employer will not be penalized for a shortfall in the amount of deposited employment tax if such shortfall does not exceed the greater of $100 or two percent of the amount of employment taxes required to be deposited. (A separate safe harbor is available where the accumulated employment taxes for the quarter are less than $500.) Currently, the safe harbor percentage is five percent. The preamble to the regulations contains no policy justification or explanation of why the safe harbor percentage is being reduced.
TEI has previously raised concerns about the “funding mechanism” for payroll tax reform. We continue to believe that the next-day rule places significant pressure on large taxpayers to accurately compute and pay over their payroll taxes. Indeed, many employers are effectively compelled to overpay their payroll tax obligations because of the difficulties associated with accurately calculating and depositing payroll taxes, especially where multiple payrolls (generated at varying locations), seasonal workforces, and non-routine payments are involved. We continue to believe that employers should be insulated from penalties where they make a good faith effort to comply with the Code’s payroll tax deposit rules. Consequently, we recommend retention of the five-percent safe harbor that is in the current regulations.
3. Base Period Rules
To our mind’s eye, a principal flaw in the proposed regulations is the way the base period (or look-back) rules interact with the monetary thresholds for determining whether an employer must deposit on a semi-weekly as opposed to monthly basis. Under Prop. Reg. [section] 31.6302-1(b)(4), the base period for the quarter is the period that includes each of the four consecutive calendar quarters ending with the preceding calendar quarter. Thus, if an employer’s accumulated employment taxes in any quarter of the preceding year exceeds $12,000, the employer will be a semi-weekly depositor.
More important, employers with substantial seasonal employees (e.g., around the Christmas holidays) or who pay annual bonuses (either of which could easily push their accumulated employment taxes in a given quarter above the threshold) will never be able to escape semi-weekly status. As a consequence, far fewer employers will be eligible for the monthly deposit rules than the 75 percent estimated by the government. TEI recommends that consideration be given to adopting a rule whereby an employer’s depositor status will be based on the accumulated employment taxes for the current quarter. Thus, if an employer’s accumulated employment taxes in the quarter exceeded $12,000, the employer would be a monthly depositor, otherwise, he would be a semi-weekly depositor (unless, of course, the next-day rule applied).
If a multiple-quarter base period is deemed necessary, we believe consideration should be given to basing the employer’s depositor status on the average of the employer’s accumulated employment taxes in each of the quarters in the base period. For example, if the employer’s accumulated employment taxes for the four quarters of the base period were $9,000, $9,000, $9,000, and $13,000, the employer’s average accumulated employment taxes for the base period would be $10,000 and the employer would qualify for monthly depositor status. The use of a weighted average might necessitate the development of special rules, perhaps under Prop. Reg. [section] 31.6302-1(j), to prevent abuse, for example, through the use of multiple employers.
We also share the concern that the $12,000 threshold may be too low, and we encourage the IRS and Treasury to reconsider whether the threshold should be raised in order to increase the percentage of employers eligible for monthly depositor status.
TEI also believes that the rolling base period is fraught with complications and is bound to confuse a large number of employers. Consequently, we recommend that the need for a multiple-quarter base period be reconsidered. At a minimum, consideration should be given to whether the base period should be fixed. For example, final regulations could provide that the base period for the second, third, and fourth calendar quarters of the current year and the first quarter of the succeeding year will be the preceding calendar year.
4. Alternative Proposal
In lieu of the complicated Tuesday-Friday (Except When Monday Is A Holiday), Moving Base Period system in the proposed regulations, TEI recommends that consideration be given to adopting a straight three-banking day rule for semi-weekly depositors.(6) Adoption of such a rule would equalize the treatment of employers and service providers: they would all have the same amount of time to make their deposits.(7) In addition, the fixed banking-day rule would spread deposits more evenly than the Tuesday-Friday approach (which bunches deposits on only two days).
TEI recognizes that employers and, more particularly, service bureaus (including some companies represented by the Institute) would benefit financially by the development of a tax deposit system that lengthens the period between the time the payroll tax liability arises and the time the monies are paid over to the government. We also recognize that the IRS and Treasury cannot ignore the time-value-of-money implications of the deposit rules. Nevertheless, we do not believe that the so-called float should be dispositive of the issue; the simplification – and, hence, the administrability – of the system should. No matter what regime is adopted (the proposed Tuesday-Friday scheme or the alternative banking-day proposal), the question of the float will be present. The only difference will be the number of days involved and whether it is uniform across employers.(8) Thus, we do not believe concerns about the float should preclude the development of improved regulations.
5. Effective Date of
the Regulations
Under Prop. Reg. [section] 31.6302-1(a), the new deposit rules would be effective with respect to payments to be made after December 31, 1992. Although TEI appreciates the desire to implement the regulations as expeditiously as possible, we believe the regulations provide too short a transition period. Even if final regulations were promulgated on August 4 (the day after the public hearing), employers would have less than four months to make the necessary changes to their payroll systems to implement the new rules. (The first step, of course, would be for the IRS to revise Circular E.) The development, testing, and debugging of software programs (by the employers themselves, by service providers, or by third-party vendors) takes time. In our experience, four months will not provide enough time, and in all likelihood, there will be less than four months between the promulgation of final regulations and December 31, 1992.
Implementation of a new payroll tax deposit system should not be hurried. If the effective date of the regulations is not delayed, the result will likely be the imposition of penalties on the very employers the regulations are intended to benefit. Consequently, we urge the IRS and Treasury to delay the effective date of the regulations.
6. Delay in Raising Concerns
In conversations with government representatives, some concern has been expressed about the timeliness of the concerns now being expressed about the efficacy of the Tuesday-Friday rule. Specifically, it has been noted that the scheme set forth in the proposed regulations is more or less the same as was set forth in legislation last year and that no widespread opposition developed during hearings on the legislative proposal. Although we cannot say with certainty, one possible explanation for the absence of critical comments last year is the widespread – and probably justifiable – belief that any proposal would be better than the current eighth-monthly scheme. Thus, interested parties may not have subjected the proposal to sufficient scrutiny.
It is not accurate to say, however, that the Treasury Department’s evaluation of the initial legislative proposal was taken at face value. Many commentators – including TEI – raised questions about the proposed two-year base period and the $3,500 per quarter threshold for monthly depositors, as well as proposed reduction in the safe-harbor percentage. In retrospect, louder objections should perhaps have been voiced about the Tuesday-Friday regime during the legislative process. As the prospects for legislation dimmed in late 1991 and early 1992, however, we believe it is understandable that employers turned their attention to other matters.
More important, no matter how frustrating the lack of earlier comments may be to government representatives, we do not believe it should cloud the real issue: Whether the rules in the proposed regulations will work and thereby deliver on their promise to bring meaningful relief to small and middle-sized employers. Upon review, we regrettably conclude that the proposed regulations do not go far enough to relieve employer burden and bring meaningful reform to the payroll tax deposit system. The regulations do, however, represent a good beginning, and we urge the IRS and Treasury to use the notice-and-comment period for its intended purpose: improving the regulations.
(1) For simplicity’s sake, the proposed regulations are referred to as “the proposed regulations” and specific provisions are cited as “Prop. Reg. [section]”. References to page numbers are to the proposed regulations (and preamble) as published in the Internal Revenue Bulletin. (2) This next-day rule is mandated by section 6302(g) of the Internal Revenue Code. (3) Some members of the Institute may work for companies whose accumulated employment taxes are less than $100,000 and therefore would qualify for the semi-weekly deposit rule; no company represented by the membership, however, would qualify for the monthly deposit rule. In addition, other members work for companies that operate as payroll service providers; these companies will be directly affected by the revised deposit scheme. (4) We did, however, recommend that the small-depositor threshold in the legislation be raised and the base period be shortened in order to allow more employers to qualify for the small-depositor rules. (5) Our analysis of the proposed regulations is based in part on our review of comments filed by a cross-section of the small and middle-sized business community, including the Small Business Administration, the American Institute of Certified Public Accountants, the American Payroll Association, and the National Conference of State Social Security Administrators, as well as comments filed by the IRS’s own employees. (6) We note that at least one IRS employee has submitted written comments recommending the adopting of a two-banking-day rule. (7) To minimize undue burdens on small employers from the banking-day rule, consideration should concomitantly be given to increasing the $500 de minimis amount in Prop. Reg. [section] 31.6302-1(f)(4). (8) Under the proposed regulations, different employers will have different floats, depending on when their payday is. For example, if payday were Wednesday, there would be a six-day [four-banking-day] float. In contrast, the float would only be four days [two banking days] if payday were Friday (unless, of course, the following Monday were a holiday, in which case, there would be a five-day [two-banking-day] float).
COPYRIGHT 1992 Tax Executives Institute, Inc.
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