Trade Preferences Extension Act of 2015 Increases Information Reporting Penalties
It is important to note that information reporting penalties also apply to the new employer reporting requirements under IRC §6055 and §6056 (Form 1094 and Form 1095 series) as introduced by the Affordable Care Act.
Background
Prior to the Act, under IRC §6721, the penalty for failure to file information returns timely or with correct information with the Internal Revenue Service (“IRS”) was $100 for each incorrect information return with a maximum annual penalty of $1,500,000 ($500,000 for small businesses). Please note that the failure to file timely includes the failure to file such returns electronically when required to do so (250 or more information returns).
Similar penalties exist under IRC §6722 for failure to provide and/or include all required information on an information return provided to a payee.
These penalties could potentially be decreased if the error(s) is corrected in a timely manner, if the error(s) is deemed to be de minimis or if the taxpayer meets the gross receipts test as outlined in these IRC sections in order to be categorized as a “small business”. A taxpayer is considered a small business if its average annual gross receipts for its most recent three tax years does not exceed $5,000,000.
The penalty amount is reduced if corrections are made in a timely manner as follows:
| If corrected within 30 days, the penalty is reduced to $30 per return with a maximum of $250,000 per filer ($75,000 for small businesses), or |
| If corrected on or before August 1st, the penalty is reduced to $60 per return with a maximum of $500,000 per filer ($200,000 for small businesses). |
If the IRS determines that the error(s) was due to intentional disregard, the penalty is $250 per information return with no maximum.
The Act
The Act has significantly increased the penalty amounts imposed under IRC §6721 and §6722 for all 2015 calendar year information return filings which are required to be filed in early 2016.
The penalties under IRC §6721 have been revised as outlined below:
| $50 per information return if the taxpayer correctly files within 30 days with a maximum penalty of $500,000 per year ($175,000 for small businesses). |
| $100 per information return if the taxpayer correctly files more than 30 days after the due date but by August 1st with a maximum penalty of $1,500,000 per year ($500,000 for small businesses). |
| $250 per information return if the taxpayer correctly files after August 1st or does not file required information returns with a maximum penalty of $3,000,000 per year ($1,000,000 for small businesses). |
As with the penalty amounts prior to the Act, the increased penalties under IRC §6722 are similar to those outlined above under IRC §6721.
The penalty due to intentional disregard of the requirements to furnish a correct payee statement has been increased to $500 per payee statement with no maximum.
Conclusion
Taxpayers facing penalties imposed under IRC §6721 and §6722 may receive a reduction or full abatement of the penalties if they can establish that the error(s) was due to reasonable cause. In addition, inconsequential errors or omissions are generally not considered a failure to include correct information. However, taxpayers should not rely on this and need to be aware of these increased penalties when preparing 2015 calendar year information returns.
Information return reporting penalties are discussed in detail in Section O of the 2015 IRS General Instructions for Certain Information Returns.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
