The Trade Preferences Extension Act of 2015 (Link) was recently signed into law in the United States, providing substantial increases in penalties for failure to timely file information returns (e.g., Forms 1099 series, Form 1042-S, among others) with the Internal Revenue Service (IRS) and failure to furnish payee statements under Internal Revenue Code (IRC) Sections 6721 and 6722. These penalties have remained unchanged since they were last increased in 2010. The increased penalties apply to information returns and payee statements required to be filed or furnished after 31 December 2015. Changes to the penalty structure are summarized in the following table. Lower penalties apply for filers with annual gross receipts of less than $5 million:
Legislation enacted in 2010 implemented provisions to adjust the penalty for inflation every five years. Prior to the increase in 2010, the information reporting penalties had not been changed since 1989.
Observation: The combined maximum penalties for failure to file and failure to furnish are being increased significantly from $3 million to $6 million. Due to the increased penalty amounts, taxpayers who may have in the past opted to pay these penalties may now want to take steps to have these penalties abated and perform the necessary reporting going forward. When requesting a penalty abatement, taxpayers must establish that the failures were due to reasonable cause and not willful neglect (e.g., they must demonstrate a history of tax compliance, good faith efforts to immediately rectify noncompliance, etc.).
In the last 10 years there have been many changes and additions to the information reporting requirements. These changes have included additional requirements pursuant to the Foreign Account Tax Compliance Act and Merchant Card Reporting under IRC Section 6050W, among others. The increased penalties are yet another indication of the government’s focus on information reporting. It has been well publicized that the IRS budget has been significantly decreased over the past five years. The budget reduction requires the IRS to rely on more efficient methods to maintain taxpayer compliance. Third-party information reporting has been proven over the years to significantly improve taxpayer compliance. IRS studies have shown that, where there is third-party information reporting, taxpayer’s compliance is well over 90%.