Take Steps to Avoid This Tax “Gotcha”
Last summer the Trade Preferences Extension Act (TPEA) was signed into law, giving the President fast-track trade authority. But like many complex pieces of federal legislation, some provisions buried deep in the law don't get as much publicity as the headline provisions. However, they can have a big impact on business.
One of these is Section 806, which has nothing to do with trade or globalization but everything to do with raising revenue. Specifically, Sec. 806 increases by up to 150% the potential penalties that must be paid by businesses that fail to file correct information returns or that provide incorrect payee statements.
Specifically, failing to file Forms W-2 and 1099 will trigger the increased penalties. So will failing to file new information returns required by the Affordable Care Act (ACA) for the first time in 2016. They include Forms 1094-C and 1095-C for applicable large employers and forms 1094-B and 1095-B for small employers.
Effective Dates are Imminent
The new penalties are effective for statements and information returns filed after December 31, 2015. Short-term penalty relief is provided under IRC Sections 6721 and 6722 for companies that demonstrate a good-faith effort to comply with the new ACA information reporting requirements. But this relief applies only to reported information that's incorrect or incomplete (such as Social Security numbers). Relief isn't available for companies that fail to file or furnish statements in a timely manner.
The general penalty for failing to file a correct information return with the IRS or provide correct payee statements has increased from $100 to $250 per return or statement. Meanwhile, the maximum annual penalty a company may be subject to has doubled — from $1.5 million to $3 million for large businesses and from $500,000 to $1 million for small businesses (those with gross annual receipts under $5 million).
Companies that correct their filing failures or inaccuracies within 30 days can pay a lower penalty. However, this also has been increased — from $30 to $50 per return with a maximum annual penalty of $175,000 for small businesses (up from $75,000) and $500,000 for large businesses (up from $250,000).
Intentional Disregard is Costly
If a failure is due to what the IRS considers to be intentional disregard, the penalty rises from $250 to $500 per return or statement with no annual maximum. The penalty amounts are expected to be adjusted for inflation every five years.
Also, failing to file required information and to provide required payee statements could lead to penalties that are double the annual maximum. This is because each of these errors is treated as a separate infraction. So, a large business that doesn't file W-2 forms with the IRS or provide W-2 forms to employees could face annual penalties of up to $3 million for each error, for a total of up to $6 million.
Systems and Controls are Recommended
One of the best ways to guard against making the kinds of errors that lead to these increased penalties is to implement appropriate systems and controls for information reporting.
For example, consider using the IRS's Taxpayer Identification Number On-line Matching service, which enables you to compare the 1099 information you have to the IRS's records before filing an electronic return. If the information doesn't match, you can ask payees for verification — and that can help reduce mistakes and subsequent penalties.
Don't let Section 806 sneak up on you. Take steps now to make sure you aren't subject to these tougher penalties.
For more information, contact one of our tax experts on (973) 328-1825.