Passthrough entity elective tax and e-pay mandate


Many S corporations have been receiving e-pay penalty notices for failing to make their passthrough entity elective tax payments electronically. These penalties applied to S corporations that were subject to the mandatory e-pay requirement prior to making their passthrough entity tax payments, if the S corporations made these payments with a check using Form 3893, Pass-Through Entity Elective Tax Payment Voucher. (Note: Partnerships are not subject to the e-pay mandate.)

Spidell asked the FTB to provide automatic relief from these penalties because:

  • It was unclear to many taxpayers that this new category of tax payments had to be made electronically; and
  • Many taxpayers were unable to utilize Web Pay due to a variety of technical glitches and confusion because of the recent elimination of the ability to use the entity’s FEIN to make Web Pay payments.

The FTB has stated that they will not provide automatic penalty relief, but they will offer penalty relief on a case-by-case basis for the e-pay penalties.

Taxpayers must request the penalty abatement and explain the reasonable cause basis for the relief. The FTB has stated that one example of reasonable cause is explaining that the taxpayer experienced difficulties with Web Pay and was instructed by the FTB to pay via check.

We recommend noting the issues with the FTB’s Web Pay system and citing the FTB’s December 17 Tax News Flash, which recommended that taxpayers having difficulty using Web Pay “mail in a payment”. (www.ftb.ca.gov/about-ftb/newsroom/news-releases/2021-11-making-pass-through-entity-elective-tax-payments.html)

Business entity EFT penalty abatement requests may be faxed to (916) 855-5556. Include the taxpayer’s corporation ID number, amount of payment, tax year, and reason for request.

Future e-payments

If the S corporation was not previously subject to the e-pay mandate but its total tax reported on the 2021 return (including the passthrough entity elective tax) exceeds $80,000, all future payments must be paid electronically. This is important to note for entities that have already filed, or will soon file, their 2021 tax returns. Even if the FTB has not notified the taxpayer, once the return showing the tax liability is filed, all future payments must be made electronically. This includes the S corporation’s April 18, 2022, estimated tax payment and the June 15 prepayment of the passthrough entity elective tax for the 2022 tax year.

Attend Spidell’s 2022 Post-Tax Season Update and Review webinar and get the latest update on this and other issues that came up during tax season. Click here and register today.