Payroll tax notices have a way of arriving at the worst moment, and they tend to use language that sounds worse than the underlying problem. Many are billing notices for a small mismatch that a phone call resolves. Others are warnings that need immediate action. The first job is to tell which you have.
The common reasons for a payroll notice
- Balance due: the return shows more tax than was deposited.
- Penalty notice: the IRS assessed a failure-to-deposit, failure-to-file, or failure-to-pay penalty.
- Missing return: the IRS has no record of a Form 941 or 940 for a period.
- Mismatch: the quarterly totals do not agree with W-2 totals, or deposits do not match the liability reported.
- Escalation: unpaid balances moving toward collection, such as notices that warn of enforced collection.
Read the notice carefully
- 1Find the notice number (printed on the top right) and the tax form and period it covers.
- 2Note the amount, the due date, and what the IRS says it wants you to do.
- 3Check whether penalties and interest are broken out.
- 4Look for any reply deadline and the phone number or address to respond.
- 5Confirm the notice is genuine. The IRS does not demand payment by gift card, wire, or cryptocurrency, and fake notices are common.
Compare to your records
- Payroll reports for the period: gross wages, withholding, and employer taxes.
- Deposit records from EFTPS or your payroll provider, with dates and amounts.
- The Form 941 or 940 you filed, and proof of filing.
- Any earlier IRS correspondence about the period.
- Your bookkeeping records for payroll liabilities.
If the notice is wrong
Respond in writing or by phone with copies of your documents: deposit confirmations, the filed return, and proof of mailing or e-filing. If the notice results from a bad return, file Form 941-X to correct it. See Form 941 filing help. Keep a record of every contact.
If the notice is right
- 1Pay the balance if you can, or pay what you can.
- 2Ask about a payment plan for the rest. See IRS payment plans for small business owners.
- 3Request penalty relief for reasonable cause or first-time abatement where it applies. See payroll tax penalties and IRS penalty abatement help.
- 4File any missing returns right away.
- 5Make current-period deposits on time while you resolve the old balance.
Escalation: watch the tiers
The IRS says the failure-to-deposit penalty rate rises to 15% when a deposit stays unpaid more than 10 days after a first notice, such as CP220, or on receipt of an immediate-payment notice, such as CP504J. That means a notice is also a clock. The longer an unpaid balance sits after the first notice, the more expensive it becomes. A notice warning of intent to levy is more serious still. See IRS Notice CP504.
Trust fund taxes need extra care
If the notice involves unpaid withheld taxes, owners and others responsible for payroll can face personal assessment. Read payroll tax problems before negotiating, and consider professional help.
Who can respond for you
You can authorize a representative with Form 2848. Attorneys, CPAs, and enrolled agents have unlimited rights to represent you. Provide the notice and your payroll records at the outset so they can respond within the deadline.
Our IRS resolution service and payroll service work together on payroll notices. To get help with your business tax situation, send the notice and the tax period. Outcomes depend on individual facts.
