Earlier this month, an angry Virginia man made headlines by paying his $2,987.14 Department of Motor Vehicles bill in pennies…nearly 300,000. We all know someone who has the same contempt for paying federal taxes. But, don’t even think about paying in pennies. Not only will it anger the person who counts them, but there can be a penalty for paying your federal taxes in cash—even if paid on time and in full. As a Tax Warrior, I am driven to help our readers understand the facts around this policy.
Payment of employment taxes and corporate income taxes must be submitted through the Electronic Federal Tax Payment System (EFTPS). However, what happens if a taxpayer can’t open a bank account to send a payment electronically? This issue was disputed in a U.S. Tax Court case filed against the IRS by Allgreens LLC, a Colorado medical marijuana dispensary in 2014. Banks won’t set up accounts for marijuana dispensaries because the marijuana business is still considered illegal under federal law. Allgreens paid its employment tax liabilities on time and in full by hand delivering cash payments to the local IRS office. The IRS assessed a 10 percent penalty per quarter totaling approximately $25,000 because Allgreens’s employment tax payments were not made electronically, despite being paid in full and timely.
The IRS assesses the 10 percent penalty unless failing to pay electronically is due to reasonable cause and not due to willful neglect. Allgreens argued that they met the requirements of reasonable cause because they exercised ordinary business care and prudence in paying their employment tax obligations. Before the case was decided by the Tax Court, the IRS settled with Allgreens and agreed to abate the penalties and refund the portion of the penalty already paid.
The IRS has not abated this penalty for all other cash-based businesses, however. By settling rather than letting the Tax Court set the precedent, other businesses without a bank account must seek penalty relief from the IRS. Other businesses that may have difficulty opening a bank account include those that are considered “high risk” by the Federal Deposit Insurance Corporation (FDIC). This includes businesses such as firearms dealers, tobacco sellers, and payday loan lenders.
After the Allgreens case, the IRS issued favorable guidance for “unbanked” taxpayers in the Internal Revenue Manual (IRM) used by IRS employees. The IRS will not impose a penalty if the taxpayer made reasonable efforts to open a bank account and provides enough documentation of its efforts. The IRS will review penalty relief requests on a case-by-case basis. The taxpayer should make continued efforts to open a bank account regularly to continue to qualify for penalty relief.
The IRS also offered an in-person cash payment option in 2016 for personal and certain business taxes. Taxpayers can submit cash payments at participating 7-Eleven stores in 34 states. Taxpayers must first register at www.officialpayments.com . After the IRS verifies the taxpayer’s information, an email will be sent with a payment code to take to the store. Payment processing can take up to seven business days, so payments must be made prior to the due date. Payments are limited to $1,000 per day and a $3.99 fee is charged for each payment.
So, there you have it. Be aware of the possible penalties when paying your federal tax bill in cash. Think about whether you qualify to have the penalties waived. And, whatever you do, don’t pay in pennies and get a receipt!