[Date]
Internal Revenue Service
Accounts Management
[Address shown on the penalty notice]
Re: Designation of federal tax deposits under IRC 6656(e) and Rev. Proc. 2001-58, and request for recomputation of the failure-to-deposit penalty
Taxpayer: [Employer legal name] EIN: [EIN]
Return: [Form 941 / 943 / 944 / 945 / 940 / 720 / 1042] Tax period: [Quarter or year, e.g. quarter ended June 30, 2026]
Penalty notice: [Notice number] dated [Notice date] assessing a failure-to-deposit penalty of [Amount] (copy enclosed)
Date of this designation: [Date], within 90 days of the notice date
To whom it may concern:
I represent the taxpayer under the enclosed Form 2848. Under IRC 6656(e)(1) and section 4.02 of Rev. Proc. 2001-58, the taxpayer designates the deposit periods within the tax period above to which each of the following deposits is to be applied, and requests that the failure-to-deposit penalty be recomputed on that basis.
1. Designation of deposits
Deposit periods and liabilities for the tax period, as reported on [Schedule B (Form 941) / line 16 of Form 941 / Form 945-A / the return]:
- Deposit period ending [Date], liability [Amount], deposit due [Date]
- Deposit period ending [Date], liability [Amount], deposit due [Date]
- [Continue for each deposit period in the tax period]
Deposits made for the tax period and the deposit period to which each is designated:
- Deposit of [Amount] made [Date] (EFTPS confirmation [Number]): apply to the deposit period ending [Date].
- Deposit of [Amount] made [Date] (EFTPS confirmation [Number]): apply to the deposit period ending [Date].
- [Continue for each deposit; where one deposit is to be split between periods, state the amount for each]
[Alternative: The taxpayer designates that all deposits for the tax period be applied on a first-in, first-out basis, to the earliest unpaid deposit period first (a FIFO computation under IRM 20.1.4.26.3).]
A revised schedule of deposits showing each liability, each deposit and the designated application is enclosed as Exhibit A. The liability amounts and dates are as reported on the return and are not changed by this letter.
2. Request for recomputation
Please recompute the penalty for the tax period applying the deposits as designated above. The taxpayer’s computation is enclosed as Exhibit B and shows a penalty of [Amount] rather than [Amount assessed]. Please abate the difference, send the taxpayer and the undersigned a copy of the FTDPN penalty computation with the adjustment notice, and confirm the adjustment in writing as section 4.02 of Rev. Proc. 2001-58 provides. If the designation would produce a higher penalty on any computation, the taxpayer elects to keep the lower penalty and does not consent to any increase.
3. [Delete this section if not applicable:] First-time depositor waiver under IRC 6656(c)
The taxpayer first became required to deposit employment taxes in [Quarter and year], the tax period of the penalty notice; the failure to deposit occurred during that first quarter and was inadvertent because [brief reason, e.g. the taxpayer did not yet have an EFTPS enrollment / the payroll provider was engaged on [date]]. The [Form 941 / 943 / 944] for the period was filed on [Date, on or before the due date]. The taxpayer’s net worth did not exceed [$2 million (individual) / $7 million (corporation or partnership)] at the time, as required by IRC 7430(c)(4)(A)(ii). The taxpayer asks that the penalty be waived under IRC 6656(c) to the extent it is not eliminated by the designation above. [If a change in deposit frequency: In the alternative, the penalty on the deposit due [date] relates to the first deposit after the taxpayer's deposit schedule changed from [monthly to semiweekly] effective [date], and the taxpayer requests abatement of that penalty under IRC 6656(c)(2) and IRM 20.1.4.26.2.]
Please direct any questions to me at the number below. Thank you.
Sincerely,
[Representative name, credential]
[Firm, address, phone, fax, email]
CAF [CAF number]
Enclosures: Form 2848; copy of the penalty notice; Exhibit A, revised schedule of deposits; Exhibit B, penalty computation; [EFTPS payment history for the period].
When a designation is the right request
A failure-to-deposit penalty is computed deposit by deposit, and the rate depends on how late each liability was paid; see the failure-to-deposit penalty. How the IRS matches deposits to liabilities therefore changes the penalty without changing a payment. IRC 6656(e)(1) sets the default: a deposit “shall be applied to the most recent period or periods within the specified tax period to which the deposit relates, unless the person making such deposit designates a different period or periods to which such deposit is to be applied.” IRC 6656(e)(2) limits the designation to “the 90-day period beginning on the date of a notice that a penalty under subsection (a) has been imposed for the specified tax period to which the deposit relates.”
Use this letter when the failure-to-deposit penalty calculator or your own schedule shows that a different application lowers the penalty and the notice is less than 90 days old. It is not the tool for an averaged penalty, a missing payment or a disputed liability; IRM 20.1.4.21.2 adds that “Oral requests to change the dates or liability amounts on the ROFTL schedule are NOT accepted.”
The default rule and the designation
Rev. Proc. 2001-58, section 4.01, states the rule applied without a designation: deposits go “to the most recently ended deposit period or periods within the specified tax period to which the deposit relates,” with any excess to later periods in period-ending-date order; IRM 20.1.4.7.4 repeats it. The rule “will, in some cases, prevent the cascading of penalties.” The procedure covers deposits reported on Forms 720, 940, 941, 943, 944, 945, CT-1 and 1042.
Section 4.02 is the authority for the letter: “The depositor may either call the toll-free number shown on the penalty notice or write (including a revised schedule of deposits) to the Accounts Management Unit at the address of the IRS’s Account Management site shown on the penalty notice. The Service will adjust the penalty amount to reflect the revised schedule of deposits and notify the taxpayer of the adjustment in writing.” No form is prescribed; the letter supplies the identifying information and the two lists that make up a revised schedule of deposits.
The revenue procedure’s Example 2
Example 2 is the case the letter is built for. A monthly depositor pays employees on the first of each month and deposits on the 25th. It misses April. On May 28, unaware of the shortfall, it deposits the May liability. Because the May period has not ended, the IRS applies that deposit “to the most recently ended deposit period, which in this case is April 2002, instead of the May 2002 liability as intended by B.” June is pulled to May, and so on: “Instead of having a failure-to-deposit penalty only for April, B will be subject to a penalty for every month in the quarter.” The cure: “B can, however, minimize cascading penalties and reduce the penalty amount by timely following the procedures in section 4.02 of this revenue procedure and designating May and June as the deposit periods to which the deposits are to be applied.” A $100,000 next-day liability is its own period ending the day the threshold is crossed (section 4.04).
What each section does
The reference block dates the designation against the notice, because IRM 20.1.4.26.3 is categorical: “A request not received within 90 days of the 23C date of a notice containing an FTD penalty assessment cannot be considered per IRC 6656(e)(2).” Section 1 is the designation. The IRM confirms that “The taxpayer may designate more than one deposit,” that a FIFO computation may be designated “either in writing or orally,” and that where software produced the designations the employee will ask for the computation, hence Exhibit B. The sentence that the liabilities are unchanged keeps the letter from being read as a revised ROFTL. Section 2 asks for the recomputation, the FTDPN printout and written confirmation, and makes the election the IRM provides for: “If the re-designation results in a higher penalty amount, provide an explanation to the taxpayer along with the option of keeping the lower penalty amount. Do not assess the additional penalty unless the taxpayer agrees.” Section 3 is the optional waiver.
Where to send it and what happens next
- Compute first: lay out every deposit period, liability and deposit, run the default application, your designation and a FIFO application, and keep the lowest. The calculator shows all three.
- If time is short, call the toll-free number on the notice and designate orally, noting the date, the employee’s ID and what was designated. Follow with the letter.
- Mail or fax the letter to the Accounts Management address on the notice so it is received within the 90 days, and keep proof of mailing.
- The campus recomputes on command code FTDPN, reduces the penalty “using PRC 012” and sends an adjustment notice. Ask for the FTDPN computation; the IRM has the employee provide it when a penalty remains.
- If a penalty remains, the remaining routes are First Time Abate for one period and reasonable cause for the rest; see the First Time Abate letter and the reasonable cause letter.
The IRC 6656(c) waiver paragraph
IRC 6656(c) lets the IRS waive the penalty for an inadvertent failure to deposit employment tax if the person meets the net worth limits of IRC 7430(c)(4)(A)(ii), the failure “occurs during the first quarter that such person was required to deposit any employment tax” or relates to the first deposit after a required change in frequency, and the return was filed on time. It is discretionary and covers subtitle C employment taxes only. IRM 20.1.4.26.3 notes the first-time depositor penalty on Forms 941, 943 and 944 “is systemically waived” with CP 238, so section 3 is needed when that did not happen. For a change in frequency, IRM 20.1.4.26.2 records an administrative decision to allow “a full abatement of the FTD penalty” on the first deposit after the change, including a change caused by the $100,000 rule. The designation fixes the application of deposits; the waiver removes what the designation leaves on the first deposit.
Mistakes
- Counting the 90 days from when the client opened the mail. The window runs from the date of the notice; the IRM measures it from the 23C date of the assessment notice.
- Designating by amount without periods. The campus applies deposits to deposit periods; say which period each deposit pays, with the period-ending date.
- Sending it to the examiner or to Appeals. The revenue procedure routes the designation to the Accounts Management address on the notice.
Questions practitioners ask
Can the designation be made by phone?
Yes. Section 4.02 of Rev. Proc. 2001-58 allows the depositor to call the toll-free number on the notice, and IRM 20.1.4.26.3 allows a FIFO designation orally. The letter with the revised schedule gives the campus a record and the computation to work from.
Does the designation apply across tax periods?
No. IRC 6656(e)(1) applies a deposit to periods “within the specified tax period to which the deposit relates.” A deposit posted to the wrong quarter or form is a credit transfer request, not a designation.
Is a designation available for Form 945 backup withholding deposits?
Yes. Rev. Proc. 2001-58 section 3 and IRM 20.1.4.26.3 list Form 945 among the returns covered. The IRC 6656(c) first-quarter waiver applies only to subtitle C employment taxes.