Higher IRS Penalties for Information Returns

It’s summertime, so many of us are not on top of tax news. What better time for a new law to increase penalties on a variety of information returns?

The information below summarizes the updates made to the penalties. We once had a client who faced a penalty of more than $65,000 for filing incorrect 1099-MISC returns. In 2016 that amount would be over $165,000. Sticker shock! (Don’t worry. We helped them get the penalty reduced to zero. They are still in business, and still a client.)

Why Now?

Congress passed the higher penalties in June. They included the penalty revision in the Trade Preferences Extension Act (TPEA). The Affordable Care Act (ACA) established penalties for the reporting it requires. The amendments included on the TPEA apply to those forms (1094-B and C and 1095-B and C) as well as W-2s and 1099s.

2015 is the first year companies must file the 1094/1095 series. It makes sense to outline specific penalties for those forms. The 1099 penalties have increased several times since 2011.
In 2012, the $100 penalty became effective as part of the Small Business Jobs Act of 2010. Before that, the largest penalty was $50 per form. If you’re keeping score, the greatest penalty per form has gone from $50 in 2011 to $250 in 2015.

Penalty Specifics

Each form has two deadlines: one for filing, the other for furnishing the form to a recipient. The penalties for failing to meet these deadlines rise the later you file. Filing incorrect information brings a separate penalty.

Penalty ReasonPenalty Amount Per FormMaximum Penalty*
Fail to file or furnish within 30 days of deadline$50$500,000
Fail to file or furnish by August 1$100$1,500,000
Fail to file or furnish$250$3,000,000
Incorrect filing$250$3,000,000

*Businesses with under $5,000,000 gross receipts have smaller maximums.
Keep in mind, these amounts double if you fail to report to the IRS and fail to notify the recipient. If you have one vendor who you should have notified and reported, the penalty would be $500. The penalty maximum doubles to $6,000,000. Ouch.

Avoid the Penalty

File and send forms to your recipient on time. For the 2015 tax year, the deadline to send a recipient statement is February 1, 2016. Since January 31 is a Sunday, the deadline moves to the next business day. The deadline to file with the IRS is February 29, 2016 for paper filing. It is March 31, 2016 for electronic filing. Electronic filing increases submission accuracy. Use electronic filing to take advantage of the extra month before the e-file goes to the IRS.
Always capture a W-9 before paying a vendor or contractor. Then verify the information provided on the W-9 using an IRS TIN Match service.
You already pay enough taxes. Don’t pay more for filing penalties.

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