With hefty increases in information reporting penalties (as high as $250 per late 1099) taking effect on January 1, 2016, timely issuance of 1099s has become a critical imperative for many businesses. The new urgency for timely issuance is compounded by the continued presence of questions on Forms 1065, 1120, 1120S, and 1040, Schedules C, E, and F, asking whether the taxpayer made any payments in 2015 that would require the taxpayer to file Form(s) 1099.
Increased Penalties for Failing to File Correct 1099s
Last June, Congress 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 (Pub. L. 114-27), took effect on January 1.
Information reporting penalties apply if a payer fails to file timely, fails to include all information required to be shown on a return, or includes incorrect information on an information return (including all variations of Form 1099).
The amount of the penalty is based on when the correct information return is filed. For returns required to be filed for the 2015 tax year, the penalty is:
(1) $50 per information return for returns filed correctly within 30 days after the due date (up from $30 under the prior law), with a maximum penalty of $500,000 a year ($175,000 for certain small businesses);
(2) $100 per information return for returns filed more than 30 days after the due date but by August 1 (up from $60 under prior law), with a maximum penalty of $1,500,000 a year ($500,000 for certain small businesses); and
(3) $250 per information return for returns filed after August 1 or not filed at all (up from $100 under prior law), with a maximum penalty of $3,000,000 a year for most businesses but $1,000,000 for certain small businesses.
For purposes of the lower penalty, a business is a small business for any calendar year if its average annual gross receipts for the three most recent tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5 million.
Observation: This year's increase in information return penalties represents the second time in just a few years that Congress has enacted sharp increases. For 1099s filed after August 1 or not filed at all, taxpayers face a 500% increase in the per-item penalty compared with the pre-2010 amount.
Persons who are required to file information returns electronically but who fail to do so (without an approved waiver) are treated as having failed to file the return unless the person shows reasonable cause for the failure. However, they can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.
The penalty also applies if a person reports an incorrect taxpayer identification number (TIN) or fails to report a TIN, or fails to file paper forms that are machine readable.
The penalty for failure to include the correct information on a return does not apply to a de minimis number of information returns with such failures if the failures are corrected by August 1 of the calendar year in which the due date occurs. The number of returns to which this exception applies cannot be more than the greater of 10 returns or 0.5 percent of the total number of information returns required to be filed for the year.
If a failure to file a correct information return is due to an intentional disregard of one of the requirements (i.e., it is a knowing or willing failure), the penalty is the greater of $500 per return or the statutory percentage of the aggregate dollar amount of the items required to be reported (the statutory percentage depends on the type of information return at issue). In addition, in the case of intentional disregard of the requirements, the $5,000,000 limitation does not apply.
The Protecting Americans from Tax Hikes Act (Pub. L. 114-113) added a safe harbor from the application of these penalties in circumstances in which the information return or payee statement is otherwise correctly filed but includes a de minimis error of the amount required to be reported on such return or statement. In general, a de minimis error of an amount on the information return or statement need not be corrected if the error for any single amount does not exceed $100. A lower threshold of $25 is established for errors with respect to the reporting of an amount of withholding or backup withholding.