For the second time in five years, Congress has doubled (and in some instances, tripled) both the minimum penalties and the per-employer aggregate penalty caps for erroneous (or unfiled) information returns (on Forms W-2 or 1099 and 1098). Unusually, this provision was contained not in a normal tax bill, but instead as one of the revenue raisers included in the Trade Preference Extension Act of 2015 (P.L. 114-27, section 806). The new penalties have an effectively retroactive application, because they will apply to information returns filed for all payments in 2015.
The new information reporting penalties (imposed under each of Code sections 6721 and 6722) are effective “with respect to returns and statements required to be filed after December 31, 2015,” and are increased as shown below:
|Type of Penalty||Prior Amount||New Amount|
|Erroneous or Nonfiled W-2/1099/1098 (without “intentional disregard” of filing requirements)||$100 per form,
$1.5M per filer
|$250 per form,
$3M per filer
|Lowered Penalty for Corrections by March 2||$30 per Form,
$250K per filer
|$50 per form,
$500K per filer
|Lowered Penalty for Corrections by August 1||$60 per form,
$500K per filer
|$100 per form,
$1.5M per filer
|“Intentional Disregard” of Filing Requirements||$250 per form (or 10% of amount, if greater)||$500 per form (or 10% of amount, if greater)|
|Lower Aggregate Caps for Small Payer-Filers (with no “intentional disregard”) (applicable to employers/payers with average gross receipts of under $5M during the three years before the reporting year)||$500K per filer, lowered to $75K if corrected by March 2, or $200K if corrected by August 1||$1M per filer, lowered to $175K if corrected by March 1, or $500K if corrected by August 1|
Notably, due to the inconsistent structure of the amount of the increase, this increased aggregate maximum penalty (applicable except in cases of intentional disregard) will apply to entities that file 12,000 forms (i.e., $3 million/$250), whereas the prior-law maximum penalty applied to entities that filed 15,000 returns ($1.5 million/$100). There is no aggregate cap in cases of intentional disregard.
Because these increased penalties apply to both the copy of the form filed with the Internal Revenue Service (IRS) and the copy filed with an employee (or, for Forms 1099 or 1098, the payee), this is another enormous increase in the potential penalties for information return filing errors. Certainly these new penalties apply to the information returns filed for 2015 payments; it is possible that the new penalties will also apply to corrections of pre-2015 information returns, where an error is discovered after 2015, and the correction of that error is filed after 2015.
In practice, the IRS generally does not apply both the penalties under sections 6721 (IRS copy of the form) and 6722 (employee/payee copy of the form), but technically both penalties could apply.
Notably, these new penalties apply not only to the information reporting boxes that report total income (or “gross-proceeds”), but also to other information boxes and to a wide variety of information returns, including mortgage interest statements, payments subject to Fair and Accurate Credit Transactions Act reporting, and information returns required under the Affordable Care Act.
The abatement procedures remain the same under the rules outlined in Code section 6724(a), if it can be shown that the failure was “due to reasonable cause and not to willful neglect.”
It remains to be seen whether these changes will increase the accuracy of information returns. Certainly these increases will raise the “worry factor” for return filers, and they may also provide an increased incentive for the IRS to expand its information reporting audit program, given the very large potential revenues for the government resulting from these increased penalties.