On June 29, President Obama signed into law the Trade Preferences Extension Act of 2015. Quietly embedded in Section 806 of this new law is a provision thatdoubled the cap on penalties, from $1.5 million to $3 million, for failures to file correct tax information returns and provide payee statements. The provision will be effective for returns and statements required to be filed after December 31, 2015. That means that all information returns and statements for 2015, which are required to be filed in early 2016 (except for certain forms required under the Affordable Care Act, which are covered by a special penalty exemption for 2015 only) will be subject to the new penalties. The impact of the increased penalties cannot be overstated because the penalties apply to a wide range of information returns and statements, including Form W-2s, all types of Forms 1099, and Forms 1042 and 1042-S. The change comes at a time when the Internal Revenue Service (IRS) has formed special units to address information reporting issues both within the Large Business and International (LB&I) Division, i.e., the Foreign Payments Practice, and within the Office of Associate Chief Counsel (International), i.e., Branch 8, which may suggest heightened IRS interest in information reporting audits that could lead to adjustments to which the increased penalties would apply.
Under Section 806, the per-taxpayer penalty caps for the failure to file correct information returns under IRC § 6721 and for the failure to furnish correct payee statements under IRC § 6722 have both been doubled, from $1.5 million to $3 million. The penalty amount for each individual failure has more than doubled, from $100 to $250. The lower penalty cap for when the erroneous return is corrected within 30 days has doubled, from $250,000 to $500,000, and the cap for erroneous returns corrected on or before August 1 has tripled, from $500,000 to $1.5 million. Finally, the lower penalty caps for persons with gross receipts of $5 million or less have also been increased, and the penalty amounts continue to be indexed for inflation. The penalty exceptions for de minimis failures to include all required information, where the failure is corrected on or before August 1 under IRC § 6721(c) and IRC 6722(c), remain unchanged.
Two new information reporting requirements with respect to health insurance under the Affordable Care Act, imposed by IRC §§ 6055 and 6056, will not be subject to any penalties under IRC §§ 6721 and 6722 for 2015 reports, if reporting entities make a good faith effort to comply. In the preamble to the final regulations governing these penalties, published in the Federal Register on March 10, 2014 (79 Fed. Reg. 13220), the IRS has said it will not impose penalties for 2015 returns if the reporting entity shows a good faith effort to comply. For taxpayers making a good faith effort to comply, penalties for erroneous Affordable Care Act information reporting would not apply until the 2016 reports are due, in 2017.
Although Treas. Reg. § 301.6721-1 provides that inconsequential errors or omissions are not considered a failure to include correct information, errors with respect to taxpayer identification numbers, the surname of a payee, and any monetary amounts are not considered inconsequential and, if not covered by the de minimis exception, may lead to the imposition of penalties. In addition, Treas. Reg. § 301.6722-1 provides that information related to dollar amounts, the address of the payee, the use of the correct form, and the manner of furnishing the information statement under IRC §§ 6042(c), 6044(e), 6049(e), and 6050N(b) are also not considered inconsequential. Although relief may be provided under the reasonable cause provision, claims for reasonable cause are being increasingly scrutinized.