The averaged FTD penalty: what a bad Form 945-A costs, and how to repair it

What the schedule is for

A Form 945 filer with $2,500 or more of tax for the year must give the IRS "a valid periodic breakdown of the tax liability": the monthly summary on line 7 for a monthly depositor, or Form 945-A for a semiweekly depositor (IRM 20.1.4.2.1). The IRS uses it to test each deposit against the date the liability arose. The manual states the classic error in one line: "The ROFTL asks for the amounts and dates that each liability was incurred, not for a record of the deposits that were made." A 945-A that lists deposit dates instead of withholding dates is not invalid on its face, but it moves every liability to the deposit date and can make a deposit made on time look early and a later one look late.

How averaging works

"If the ROFTL schedule is incomplete, blank, or has a negative amount, then average the total tax" (IRM 20.1.4.8.8(2)). Averaging is also used when the schedule total is not within a redacted tolerance of the tax on the return (IRM 20.1.4.8.8.1). The method (Exhibit 20.1.4-3):

• Semiweekly depositor: the annual tax is divided by 48 and one forty-eighth is assigned to each of the first four Wednesdays of every month.
• Monthly depositor: the annual tax is divided by 12 and one twelfth is assigned to each month.
• Semiweekly depositor who supplied only a monthly breakdown: each month's figure is divided by four and assigned to the first four Wednesdays of that month.

"A negative entry will invalidate the ROFTL schedule" because "it is impossible to have a negative liability" (IRM 20.1.4.18(1)). A refund to a payee is not a negative liability; it is an adjustment on Form 945-X.

What it costs

Backup withholding is lumpy. A payer that withheld nothing until a CP2100 forced withholding in October, deposited it on time in November, and filed without a 945-A will be penalized as though one twelfth of the year's tax was due every month from February on. The October withholding is treated as ten months' worth of missed deposits at the 10% tier, and the November deposit covers only the most recent averaged periods under the default application rule. The deposit penalty calculator shows the difference: enter the real withholding dates once, then enter twelve equal monthly amounts and compare.

The CP 207 clock

The notice that starts the process is CP 207 (CP 207L for a proposed penalty of $75,000 or more, preceded by a phone call from the large-case unit; a $1 million proposal is mailed only if the payer cannot be reached by phone). The manual version, sent by a tax examiner, is Letter 313-C, which encloses two blank schedules. The timing (IRM 20.1.4.5(3), 20.1.4.18(3) and (4), 20.1.4.16.1):

1. The notice gives 45 days to supply a valid schedule.
2. Master File holds the assessment for 15 cycles (weeks) from the notice.
3. If a valid reply has not been resolved and input "by the 13th cycle (week)," the averaged penalty (TC 186) assesses systemically at week 15.
4. An unacceptable reply to a Letter 313-C draws a 20-day warning before assessment.

A schedule mailed on day 44 that reaches the examiner in week 12 is cutting it close; fax or upload where the notice allows it. A corrected schedule received after the assessment "must be considered and the FTD penalty adjusted" (IRM 20.1.4.18.2), so a late reply is not wasted, but by then the penalty is on the account, a balance-due notice has gone out, and the 15% tier is running on anything unpaid.

Why reasonable cause is frozen

Two sentences from the manual settle the order of operations. "Reasonable cause cannot be considered or denied on an averaged FTD penalty assessment" (IRM 20.1.4.26.1(2)). And in the CP 207 procedure: "Taxpayer requests reasonable cause; corrected ROFTL schedule not provided. If the taxpayer didn't provide an acceptable ROFTL, reasonable cause cannot be considered or denied" (IRM 20.1.4.18.1(4)). A reasonable-cause letter sent in reply to a CP 207 without a corrected schedule is set aside, not denied, and the clock keeps running. Fix the schedule first. Once the penalty is recomputed on real dates, argue cause deposit by deposit, with the dates and the reason for each one (IRM 20.1.4.26(3) to (5)), or request First Time Abate, which does apply to Form 945 deposit penalties.

How to repair the schedule

1. Rebuild the liabilities from the payment system: for each payment on which backup withholding was taken, the date of the payment and the amount withheld. Sum by day (semiweekly) or by month (monthly).
2. Check that the total equals line 3 of the Form 945 as filed. If the return itself was wrong, the fix is a Form 945-X with the corrected schedule attached; see the 945-X timing page.
3. Use Form 945-A if you were a semiweekly depositor for any part of the year (the lookback over $50,000, or the $100,000 next-day rule triggered mid-year). A monthly depositor uses line 7 of the return.
4. Do not put deposit dates on the schedule. Do not put a negative number anywhere on it.
5. Send it with the corrected 945-A cover letter, referencing the notice, within the 45 days, by the fastest channel the notice offers. Sign the letter if the total tax changed; a signature is not otherwise required for a schedule correction (IRM 20.1.4.21.2(3)), but it does no harm.
6. After the recomputation, compare the CP 210 or CP 568 against the calculator, and only then send the reasonable-cause or First Time Abate request.

One warning: a revised schedule triggers a full recompute "even if no penalty was originally assessed" (IRM 20.1.4.21.2(2)). If the real dates are earlier than the ones on a schedule that was accepted, the correction can create a penalty where none existed. That is not a reason to leave a wrong schedule in place, but it is a reason to run the numbers before sending it.

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