The Treasury Inspector General of Tax Administration (TIGTA) recently released an audit report titled “Most Employers Paid Their Deferred Social Security Taxes but Some Penalties Were Incorrect” (Report No. 2025-406-049, issued Aug. 27, 2025).

The COVID-19 pandemic brought an array of tax relief measures, including the option for employers to defer the deposit and payment of the employer’s share of Social Security taxes. This relief, authorized under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was a lifeline for many businesses and self-employed individuals. But as the dust settles, a recent audit by TIGTA reveals that while most employers met their obligations, some were hit with penalties that should not have been assessed.

Social Security tax deferral specifics

Under the CARES Act, employers and self-employed individuals could defer the deposit and payment of the employer’s share of Social Security tax for wages paid between March 27 and Dec. 31, 2020. The deferred amounts were due in two installments: half by Dec. 31, 2021, and the remaining half by Dec. 31, 2022. The IRS provided clear guidance and set up special procedures to help taxpayers comply with these conditions.

Most employers paid but some were still penalized

TIGTA’s audit, released in August 2025, reviewed how employers handled their deferred Social Security tax payments and how the IRS processed those payments and assessed penalties. The good news is that the vast majority of employers paid their deferred taxes on time. This is a testament to the resilience and diligence of the business community and their advisors.

However, TIGTA found that some employers were incorrectly assessed penalties even when they paid on time or made good-faith efforts to comply. In some cases, the IRS’s systems did not properly recognize payments as being for deferred taxes, or payments were misapplied. As a result, some businesses received penalty notices for late payment or underpayment, even though they had followed the rules.

Why were these errors made

The IRS had to quickly adapt its processing systems to accommodate the new deferral provisions. Because of the rapid implementation, some payments were not properly matched to the deferred tax liabilities, especially when payments were made through different channels or with incomplete payment information. In other cases, the IRS’s automated systems defaulted to penalty assessments when they could not immediately reconcile a payment.

Steps to take for an erroneous penalty notice

If you or your client deferred Social Security taxes and received a penalty notice, don’t panic. Here’s what you should do:

1. Gather documentation and collect proof of payment. These include bank records, IRS payment confirmations and correspondence.
2. Review the notice carefully, by checking the dates and amounts. Compare these to the internal records of the deferred tax payments.
3. If the penalty was assessed in error, request abatement. The IRS has procedures for removing penalties that were incorrectly assessed due to payment misapplication or system errors (§6404(a)). Abatement of erroneous assessments can be initiated by IRS corrections or by filing Form 843, Claim for Refund and Request for Abatement. No showing of reasonable cause is required when the penalty is erroneous due to IRS or system error.
4. You may call the IRS or use the IRS penalty relief page for more information.

Final thoughts

The IRS and TIGTA are working to resolve these issues, but it’s important for both business owners and tax professionals to stay vigilant. If you deferred Social Security taxes during the pandemic, review your records and IRS notices. If you spot an error, act quickly to resolve it. With good documentation and proactive communication, you can ensure that you and your clients are not unfairly penalized.

If you have questions or need help, don’t hesitate to reach out to your tax professional or the IRS. Staying informed and engaged is the best way to protect your interests and keep your tax matters on track.