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Steep Increases in Information Reporting Penalties Set to Take Effect in January.

(Parker Tax Publishing September 9, 2015)

For the second time in five years, Congress has enacted hefty increases in the penalties imposed under Code Secs. 6721 and 6722 for failures relating to information returns and payee statements. The changes, which were included in the Trade Preferences Extension Act of 2015, take effect on January 1, 2016. Pub. L. 114-27.

Generally, any person, including a corporation, partnership, individual, estate, and trust, which has reportable transactions during the calendar year, must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income.

A failure to file a required information return or payee statement, or a failure to include all necessary information, will subject taxpayers to penalties under Code Sec. 6721 or Code Sec. 6722.

Increased Penalty Amounts

For each information return or payee statement with respect to which a failure occurs, the penalty has been increased from $100 to $250, and the maximum penalty that may be imposed has increased from $1,500,000 to $3,000,000. These penalties are effective for returns or statements taxpayers are required to file after Dec. 31, 2015.

OBSERVATION: This is the second time in the past five years that Congress has sharply increased these penalties. In 2010, the per-item penalty was doubled, from $50 to $100, and the maximum penalty was increased sixfold, from $250,000 to $1,500,000. With the latest changes, taxpayers now face a 500% increase in the per-item penalty compared with the pre-2010 amount, and a staggering 1,200% increase in the maximum penalty.

For failures corrected within thirty days, the penalty amounts have increased from $30 to $50, and the maximum penalty for corrected failures increased to $500,000, up from $250,000.

For failures corrected by August 1, the penalty amounts have increased from $60 to $100, and the maximum penalty for such corrected failures increased to $1,500,000, up from $500,000.

The lower maximum penalties for taxpayers with gross receipts of $5,000,000 or less has also been increased. For such taxpayers, the maximum penalty is now $1,000,000, up from $500,000. For such taxpayers who correct within thirty days, the maximum penalty is $175,000, up from $75,000. And for such taxpayers who correct by August 1, the maximum penalty has been increased from $200,000 to $500,000.

For taxpayers who intentionally disregard the filing requirements for information returns and payee statements, the per failure penalty increased from $250 to $500. In such cases, the maximum penalty amount does not apply, nor can such taxpayers reduce the penalty by correcting the failures.

Information Returns and Statements Affected

Common forms subject to these penalties include: Schedule K-1 (Forms 1041, 1065, and 1120S); Form 1098, Mortgage Interest Statement; Form 1098-E, Student Loan Interest Statement, Form 1099-C, Cancellation of Debt; Form 1099-INT, Interest Income; Form 5498, IRA Contribution Information; and Form W-2, Wage and Tax Statement.

OBSERVATION: The penalties for failure to file Forms 1065 and 1120S remain unchanged. Those penalties were last increased in 2009 from $89 to $195 per month per partner (or shareholder).

The increased penalties are also imposed for failures related to information returns added by the Affordable Care Act: Form 1095-A, Health Insurance Marketplace Statement; Form 1095-B, Health Coverage, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

For a discussion of information reporting penalties, see Parker Tax ¶ 262,130. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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