New Trade Law Raises Penalties for Inaccurate Tax Information Reporting

President Obama signed the controversial Trade Preferences Extension Act of 2015 (TPEA) into law at the end of June 2015. Many harboured concerns about the fact that the President now has alleged fast-track trade authority, but few realized that another provision in the TPEA, unrelated to trade or globalization, could directly influence taxpayers.

According to the new trade law, which is intended to increase earnings to counterbalance costs incurred by other parts of the TPEA, taxpayers could be penalized up to 150% for inaccurate reports to the IRS or payees. Potential penalties can occur as a result of not filing, or incorrectly filing, common information reporting returns such as IRS Forms W-2 and 1099 (all types), 1042, 1042-S, and certain forms required by the Affordable Care Act  (ACA).

Errors Subject to Penalization

Taxpayers may incur dramatically increased fines for including false information on their returns, failing to provide accurate payee statements, filing late returns, or returns missing requisite information. The IRS may also penalize taxpayers for filing on paper, in lieu of electronic filing, reporting an incorrect tax identification number (TIN), or omission of TIN, or filing illegible paper forms.

Some inaccuracies are considered “inconsequential” and taxpayers will not be penalized for them, but other errors are of a more serious nature. On information returns, mistakes relating to the TIN, a payee’s surname, or any dollar quantity are never deemed inconsequential, and can be subject to IRS penalties. On payee statements, mistakes relating to dollar amounts, payee’s address, the type of form, and the furnishing of the statement, are never immaterial.

The new law did not change the penalty exception for de minimis failures to enter all requisite information (IRC Sec. 6721(c) and 6722(c) ).

Penalty Increase

The typical penalty for incorrect returns and statements increased from $100 to $250, per return, or per statement, while the maximum penalty rose from $1.5 million to $3 million. Taxpayers who have gross receipts of less than $5 million (lesser taxpayers) will incur the cap increase from $500,000 to $1 million.

Penalties increase for taxpayers who correct the inaccuracies 30 days after the filing deadline, rising from $30 to $50, per return, with the annual cap increasing from $250,000 to $500,000. The annual maximum increases from $75,000 to $175,000 for lesser taxpayers.

For failures corrected after 30 days, but by August 1 of that year, the penalty increases from $60 to $100, with the annual cap increasing from $500,000 to $1.5 million, and the annual cap for lesser taxpayers increases from $200,000 to $500,000.

Penalties for inaccuracies due to “intentional disregard” increase from $250 to $500, per statement or return, with no annual limit. For specific forms and statements, the fine will be $500 or 10% of the total amount of items required to be reported correctly, whichever is greater.

“Multiplier” Effect

Taxpayers that do not file the necessary information returns, or omit required payee statements, could be penalized for up to twice the annual maximum caps, since the two types of reporting have separate caps. The annual caps are applied on a per filer basis, as opposed to per company.

Reducing Risk

To mitigate the risk of penalties, taxpayers should employ suitable systems and controls to more accurately report information, such as using the IRS’s Taxpayer Identification Number On-Line Matching program, which allows taxpayers to cross-reference their Form 1099 information with IRS records, before filing their returns. The program accepts a maximum of 25 payee TIN/ name combinations onscreen, and can bulk match a maximum of 100,000 combinations through text file submissions. Since payees can now verify inaccuracies between their information and the IRS, they can substantially reduce error rates and penalties.

Effective Date

Section 806 of the TPEA will affect most information returns and statements filed after December 31, 2015, specifically, returns and statements submitted for payments made this year. Some ACA related forms are exempt, on the condition that employers observe reporting requirements. We can assist you in filing accurate and compliant returns and statements. Now is the time to schedule an appointment to review your procedures in meeting this compliance burden.

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