Tax Penalties Increased for Trade Preferences Extension Act of 2015

Under the recently passed Trade Preferences Extension Act of 2015, Congress increased the penalties for late filing or failing to file correct information returns with the government (under IRC section 6721) or to the payee (under IRC section 6722) for 2015 returns. These penalties apply to Form W-2 and the Form 1099 series, in addition to other returns. Penalties can also be imposed with respect to the new information forms required to be filed under the Affordable Care Act, Forms 1094-B, 1095-B, 1094-C and 1095-C.

The penalties under IRC section 6721 for failure to file an information return with the government are:

• $50 per information return if a late filing is corrected within 30 days (e.g., by March 30 if the due date is February 28), with a maximum penalty of $500,000 per year ($175,000 for small businesses). This penalty is increased from the prior $30 per return.
• $100 per information return if there is a correct filing more than 30 days after the due date but by August 1, with a maximum penalty of $1,500,000 per year ($500,000 for small businesses).
• $250 per information return if there is a correct filing after August 1 or if the information return is not filed, with a maximum penalty of $3,000,000 per year ($1,000,000 for small businesses). Previously this penalty was $100 per return.
• $500 per return (with no maximum penalty) for intentional disregard of the requirements to furnish a correct return.

The same penalty structure applies under IRC sec 6722 for each failure to furnish correct payee statements. There is effectively a doubling effect if there is a failure as to both the information return to be filed with IRS and the corresponding payee statement. In this situation, separate penalties apply to the failure to file with IRS and the failure with respect to the payee, for total penalties of $500. Additionally, separate caps apply so that these penalties can total $6 million.

A small business, for which lower maximum penalty caps apply, is defined as one which has under $5 million of gross receipts.

As under prior law, these penalties can be waived if there is “reasonable cause” for the failure to file an information return or for the filing of an incomplete return.

The new penalty structure is effective for information returns and statements required to be filed after December 31, 2015. This includes 2015 information returns and payee statements required to be filed in 2016. Given these significant penalty increases, it is important to ensure that your business has systems in place and can identify all payees for whom information returns are required. Moreover, businesses should make certain they are capturing all relevant information required, including payee names, addresses and employee identification numbers. This may require a review of records from the beginning of the year.

Contact your Marcum tax professional if you have any questions related to these penalties or how the changes may affect you.