On June 29, the Trade Preference Extension Act of 2015 (TPE) was signed into law. The TPE mainly focuses on foreign competition and retraining domestic workers. But if you read the fine print, you’ll see that it also includes important — but little-noticed — changes to the penalty regime for failing to file required information returns with the IRS and failing to furnish required statements to payees (recipients of payments).
Here’s what you should know to protect yourself from unexpected IRS penalties.
Information Return and Payee Statement Basics
The Internal Revenue Code imposes potentially harsh penalties for failing to file complete and accurate information returns with the IRS. The most familiar information returns are Forms 1099, which are used to report various types of income (such as interest and dividends) and payments to independent contractors, and Form W-2, which companies use to report wages paid to employees. But there are also many other less-familiar information returns. (See “Affected Information Returns” below.)
In many cases, copies of the returns must be sent to payees as well as to the IRS. For these types of returns, penalties can be imposed for both failing to send returns to the IRS and failing to send copies to payees.
Penalty amounts depend on the duration of the failure to file with the IRS (and send copies to payees if applicable), whether the failure was unintentional or willful, and the size of the taxpayer that committed the transgression.
Penalties for Unintentional Failures to File
Beginning with affected information returns required to be filed with the IRS after December 31, 2015, the TPE increases the failure-to-file penalties as follows:
• The penalty for one unintentional failure to file an information return with the IRS increases from $100 to $250, and the maximum penalty on any one taxpayer for multiple unintentional failures during a calendar year increases from $1.5 million to $3 million.
• For unintentional failures that are corrected within 30 days of the information return due date, lower penalties may apply. However, the TPE increases the lower per-return penalty from $30 to $50. In addition, the maximum penalty on any one taxpayer for multiple unintentional failures during a calendar year that are corrected within 30 days increases from $250,000 to $500,000.
• For unintentional failures that are corrected more than 30 days after the information return due date but by no later than August 1, another set of lower penalties applies. However, the TPE increases the per-return penalty for one failure from $60 to $100. The maximum penalty on any one taxpayer for multiple unintentional failures during a calendar year that are corrected by August 1 increases from $500,000 to $1.5 million.
Maximum Penalty Amounts for Small Taxpayers
“Small” taxpayers — defined as those with average annual gross receipts of no more than $5 million for the three preceding tax years — are subject to lower maximum penalty amounts than larger taxpayers. However, the TPE raises their limits for unintentional multiple failures to file information returns as follows:
• The maximum penalty on any one small taxpayer for multiple unintentional failures during a calendar year increases from $500,000 to $1 million.
• The maximum penalty on any one small taxpayer for multiple unintentional failures during a calendar year that are corrected within 30 days increases from $75,000 to $175,000.
• The maximum penalty on any one small taxpayer for multiple unintentional failures during a calendar year that are corrected more than 30 days after the due date but by no later than August 1 increases from $200,000 to $500,000.
Penalties for Willful Failure to File Information Returns
Even stiffer penalties apply to willful failure to file information returns with the IRS. For example, the penalty for willfully failing to file one information return can be $500 and up. And there’s no upper limit on the penalty for multiple willful failures to file under the TPE. A willful failure occurs when a taxpayer intentionally disregards the rules.
Similar Penalties for Failure to Provide Payee Statements
The same penalty regime that applies to failure to file information returns with the IRS generally applies to failures to provide required statements to payees. The best-known example of a required payee statement is the copy of Form W-2 that an employer must send to employees shortly after the end of the preceding calendar year.
Given the double-whammy between failing to file with the IRS and failing to provide copies to payees, IRS penalties under the TPE will quickly add up. Contact your tax adviser if you have questions or want more information on this important issue.
Affected Information Returns
According to the Internal Revenue Manual, a resource provided by the IRS to its auditors, the penalties for failing to file correct information returns and provide copies to payees, when required, can apply to the federal tax forms and schedules listed below. Most of these forms also have corresponding required payee statements.
• Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding”
• Form 1097-BTC, “Bond Tax Credit”
• Form 1098, “Mortgage Interest Statement”
• Form 1098-C, “Contributions of Motor Vehicles, Boats, and Airplanes”
• Form 1098-E, “Student Loan Interest Statement”
• Form 1098-T, “Tuition Statement”
• Form 1099-A, “Acquisition or Abandonment of Secured Property”
• Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions”
• Form 1099-C, “Cancellation of Debt”
• Form 1099-DIV, “Dividends and Distributions”
• Form 1099-G, “Certain Government Payments”
• Form 1099-INT, “Interest Income”
• Form 1099-K, “Payment Card and Third Party Network Transactions”
• Form 1099-LTC, “Long-Term Care and Accelerated Death Benefits”
• Form 1099-MISC, “Miscellaneous Income”
• Form 1099-OID, “Original Issue Discount”
• Form 1099-PATR, “Taxable Distributions Received From Cooperatives”
• Form 1099-Q, “Payments from Qualified Education Programs”
• Form 1099-R, “Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.”
• Form 1099-S, “Proceeds From Real Estate Transactions”
• Form 3921, “Exercise of an Incentive Stock Option Under Section 422(b)”
• Form 3922, “Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)”
• Form 5498, “IRA Contribution Information”
• Form 5498-ESA, “Coverdell ESA Contribution Information”
• Form 5498-SA, “HSA, Archer MSA, or Medicare Advantage MSA Information”
• Form 8027, “Employer’s Annual Information Return of Tip Income and Allocated Tips”
• Form 8282, “Donee Information Return”
• Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business”
• Form 8308, “Report of a Sale or Exchange of Certain Partnership Interests”
• Form 8594, “Asset Acquisition Statement Under Section 1060”
• Form 8935, “Airline Payments Report”
• Form W-2, “Wage and Tax Statement”
• Form W-2G, “Certain Gambling Winnings”
• Schedule K-1 of Form 1065, “Partner’s Share of Income, Deductions, Credits, etc.”
• Schedule K-1 of Form 1120S, “Shareholder’s Share of Income, Deductions, Credits, etc.”
• Schedule K-1 of Form 1041, “Beneficiary’s Share of Income, Deductions, Credits, etc.”
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