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PAYING TAXES THE OLD FASHIONED WAY CAN BE COSTLY

March 25, 2004

The F.E. Schumacher Company, Inc. apparently is in no hurry to embrace this "computer" stuff. Searches with Google, Yahoo and Teoma turn up no web site for the Ohio manufacturer of aluminum doors and windows. In fact, the company's web presence now consists largely of stories about the company's costly run-in with the IRS over its insistence on remitting its payroll taxes the old-fashioned way.

In 1999 the IRS told employers to remit their payroll and withholding taxes electronically via the "Electronic Federal Tax Payments System," or EFTPS. Many taxpayers use the Internet to make their EFTPS remittances, but you can also make EFTPS payments with a touch-tone phone.

It's uncertain whether F.E. Schumacher Company was resisting the touch-tone conversion, but for whatever reason it continued to pay its payroll taxes the old-fashioned way, sending someone to the bank to manually transfer funds using a deposit coupon and the bank's TT&L account. The deposits were all made on time, but the IRS hit the company with $84,895.19 in 10% late penalties for 1999, 2000 and 2001 payroll taxes.

The taxpayer admitted that it was supposed to file electronically, but it argued that it shouldn't be penalized because the taxes were paid on time, even if not the right way. It also argued that its concern about the "Y2K" problem (remember that?) and about the "integrity" of the EFTPS gave it reasonable cause to disregard the EFTPS requirements.

The U.S. District Court for the Northern District of Ohio disagreed:

   Other than a bare assertion, Plaintiff provides no  
   facts upon which it depends for the position that the
   EFTPS does not provide internal control and security
   features as sufficient as those Plaintiff maintained 
   under the old system and/or its method of depositing
   employment taxes. In fact, given the superiority of
   the EFTPS with regard to taxpayers' ability to
   personally track funds by computer at any time and
   monitor receipt by the IRS by way of expeditious
   acknowledgment notices, it is difficult to imagine
   how Plaintiff's method was more secure or provided
   more control. Plaintiff's Y2K concerns similarly do
   not support its behavior as being consistent with
   ordinary business care and prudence. As stipulated,
   the time period during which Plaintiff refused to
   comply dates from mid-1999 (second and third
   quarters) through early2001...  Concerns
   generated by Y2K theories were squelched very soon
   after January 1, 2000. Plaintiff's refusal to use the
   EFTPS, however, includes the remainder of 2000
   and even into 2001. Accordingly, the refusal was not
   the result of reasonable concerns over the potential
   for Y2K computer problems which were absent
   shortly after January 1, 2000. 

The moral? Old-fashioned craftsmanship is great, but it is expensive when used to pay payroll taxes.

No link to the case is available.

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