Overview

An IRS “failure to deposit” (FTD) penalty is charged when employers don’t make timely federal tax deposits for withheld income, Social Security, or Medicare taxes. The penalty is separate from any tax owed and increases with the length of the delay. Challenging the notice successfully usually means proving reasonable cause or qualifying for administrative relief. In my 15 years helping small businesses and nonprofits, the strongest cases are those with clear, contemporaneous documentation and a clean compliance history.

(Authoritative sources: IRS, “Penalties for Failure to Deposit” and Form 843 guidance: https://www.irs.gov/payments/penalties; https://www.irs.gov/forms-pubs/about-form-843)

Why you should act quickly

IRS notices include deadlines and interest continues to accrue on unpaid balances. Ignoring a notice increases interest and may lead to collection actions. Many notices include a response period (commonly 30 days) or instructions on how to contest the penalty — check the notice and respond promptly. If you need extra time to assemble documentation, call the IRS or consult a tax professional immediately to avoid missed windows for relief.

Typical penalty rates and how they’re applied

The IRS assesses FTD penalties on the unpaid deposit amount. Current guidance generally applies escalating rates the longer the deposit is late — for example, penalties commonly begin at 2% for deposits 1–5 days late, 5% for 6–15 days, and 10% for deposits more than 15 days late; penalties can reach 15% in situations where the deposit is not made after an IRS notice. See the IRS penalty page for the latest rates and examples (IRS, “Penalties for Failure to Deposit”).

Note: These percentages are applied to the unpaid deposit, not to total payroll. Always confirm current rates on the IRS website because penalty percentages and application rules can change.

Step-by-step process to challenge the notice

  1. Read the IRS notice carefully
  • Identify the notice number (e.g., CP14, CP15, Notice 562) and any listed deadlines. The notice will state the tax period, the amount the IRS says is unpaid, and the assessed penalty.
  1. Confirm whether the deposit was actually missed
  • Check your bank records, EFTPS payment history, payroll provider reports, and IRS online account. If you used EFTPS, pull a payment confirmation or EFTPS receipt. If third-party software or a payroll provider made the deposit, ask them for transaction receipts and a timeline.
  1. Gather documentation to prove your position
  • Transaction receipts from EFTPS or bank statements showing the deposit (or attempted deposit).
  • Proof of bank error or ACH return notices.
  • Payroll provider communications (emails/logs showing failed transfers).
  • Evidence of reasonable cause: medical records, death certificates, natural disaster declarations, repair invoices demonstrating unexpected cash demands, or contemporaneous notes reflecting the event.
  • Historical compliance records (prior clean deposit history) — this strengthens a reasonable-cause claim and may qualify you for first-time abatement.
  1. Decide the best route to request relief
  • Informal response by letter: Suitable for many cases. Include a concise explanation, timeline of events, and attachments that prove the facts.
  • Form 843 (Claim for Refund and Request for Abatement): Use Form 843 when asking for formal abatement of certain penalties. Complete the form carefully and attach supportive documentation. (See IRS Form 843 instructions: https://www.irs.gov/forms-pubs/about-form-843)
  • Online options: For some penalties the IRS offers an online penalty relief tool or allows responses through the taxpayer’s online account. Check your notice for instructions.
  • Tax professional representation: A CPA, EA, or tax attorney can file appeals or work with the IRS on your behalf, especially for complex cases or when large amounts are at stake.
  1. Explain “reasonable cause” clearly and concisely
  • The IRS considers reasonable cause if you exercised ordinary business care and prudence but still could not make the deposit on time due to circumstances beyond your control. Common examples: serious illness or death, natural disaster, inability to access funds due to bank error, or timely but failed automated payment.
  • Avoid vague claims. Tie facts to dates and attach supporting evidence. For instance, if a bank error returned the payment, include the bank’s return notice and email correspondence with the bank.
  1. Include a timeline and checklist in your submission
  • A one-page timeline of events that plainly shows dates of payroll, attempted payments, bank communications, and actions taken to correct the issue helps IRS examiners process your claim faster.
  1. Ask for administrative relief if applicable
  • First-time penalty abatement (FTA): If you have a clean compliance history, you may qualify for FTA for certain penalties. The IRS’s relief page explains eligibility and procedures. If eligible, request FTA in your letter and attach proof of prior compliance.
  • Reasonable cause abatement: For documented events outside your control, request abatement under reasonable cause and provide evidence.
  1. Follow up and document all communications
  • Send correspondence by certified mail when possible and log phone calls with dates, representative names, and reference numbers. Keep copies of everything.
  1. If the IRS denies your request
  • Review the denial letter for the appeal process. You may be able to file a formal appeal through the independent Office of Appeals or pay the penalty and file a refund claim (Form 843) if appropriate.
  • If collection is imminent and you believe the decision is incorrect, consider contacting the Taxpayer Advocate Service for help with unresolved problems (irs.gov/advocate).

Sample structure for a penalty appeal letter

  • Header: Your name/business name, EIN, address, and the IRS notice number.
  • Opening: One-sentence purpose (“I request abatement of the Failure to Deposit penalty for [period]”).
  • Timeline: Bullet list of dates and actions (payroll, attempted deposit, bank return, corrective payment).
  • Reasonable cause: Concise explanation of the event and why ordinary care was exercised.
  • Attachments: Enumerate bank statements, EFTPS receipts, vendor invoices, doctor’s notes, correspondence with payroll vendor, and any prior compliance records.
  • Closing: Request for abatement, signature, contact information.

Attach copies (never originals) and label each exhibit.

Common grounds that have worked in practice

  • Bank or ACH errors (with bank acknowledgement).
  • Payroll vendor system failures backed by vendor logs or tickets.
  • Natural disasters or emergency declarations (FEMA/IRS guidance).
  • Serious illness, death, or incapacitation of the responsible party (with supporting records).
  • Timely deposit attempt with evidence of technical failure such as EFTPS confirmation but bank rejection.

In my practice I’ve found cases involving third-party system failures or clear bank errors are the most straightforward to document and overturn when the taxpayer acts quickly and provides contemporaneous records.

When the issue is more serious — criminal exposure or trust-fund concerns

A failure-to-deposit penalty is a civil assessment in most cases. However, if the IRS believes taxes were collected but intentionally not paid (trust fund taxes), they may pursue a Trust Fund Recovery Penalty (TFRP) against responsible persons; that is a separate process with stricter standards. If you receive correspondence that suggests potential criminal referral or TFRP, consult a tax attorney immediately. For distinctions, see our internal resource on civil vs. criminal tax penalties and trust fund issues: “Civil vs. Criminal Tax Penalties” (https://finhelp.io/glossary/civil-vs-criminal-tax-penalties/).

Practical tips to prevent future FTD notices

  • Use EFTPS or your payroll provider and keep receipts for each deposit. If you pay through EFTPS, keep the confirmation number for each deposit (see Electronic Federal Tax Payment System: https://finhelp.io/glossary/electronic-federal-tax-payment-system-eftps/).
  • Reconcile payroll and bank activity weekly and assign deposit duties to a single responsible person.
  • Set calendar reminders before due dates and build a small cash buffer specifically for payroll taxes.
  • Keep vendor and banking agreements in writing so you can prove the terms and dates of payment attempts.

Internal resources and related reading

Final notes and professional disclaimer

Challenging an IRS failure-to-deposit penalty is achievable when you act quickly, assemble clear evidence, and explain how reasonable cause prevented timely payment. In my experience, clear timelines and bank/vendor records materially improve outcomes. This article is educational and not a substitute for personalized tax advice. If the penalty amount is large, or if there are indications of trust-fund issues or criminal exposure, consult a qualified tax professional or tax attorney.

(IRS sources: “Penalties for Failure to Deposit” and Form 843 pages: https://www.irs.gov/payments/penalties; https://www.irs.gov/forms-pubs/about-form-843.)

Author: Experienced financial content editor and tax adviser (educational content).