1099 Reporting Takes on New Prominence as Sharp Penalty Increases Take Effect
Important information regarding 1099 reporting from Parker Tax Pro Bulletin
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.
