Higher Penalties for IRS Information Return Failures

© Mrchan | Dreamstime.com - Tax Form Financial Concept Photo“We can lick gravity, but sometimes the paperwork is overwhelming,” said Wernher von Braun (father of the U.S. space program). That’s how small business owners feel; they innovate and make things and service customers. But their paperwork is time consuming and, if wrong, subject to penalty. And the penalty related to tax paperwork is going up.

The recent Trade Act (the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (P.L. 114-26) and the Trade Preferences Extension Act of 2015 (P.L. 114-27)), which was signed into law on June 29, 2015, raised the penalties for late or incorrect information returns. These information returns apply to such forms as W-2s, 1099s, and the new form (Form 1095-B) related to health insurance coverage that’s mandated for 2016 (reporting 2015 minimum essential coverage).

Penalties for 2015 failures are high. The penalties in 2016 and beyond are going to be higher. Here are the highlights:

  • The penalty for a failure to file correct information returns and to provide statements to payees (e.g., employees) increases from $100 (the current penalty) to $250 (the penalty starting in 2016). The maximum penalty for all failures during a calendar year is capped at $1.5 million currently; this goes up to $3 million in 2016.
  • If the failure is corrected within 30 days of the required due date, the penalty is only $30 now, but will be $50 starting next year. The maximum penalty for all failures during a calendar year is capped at $250,000 currently; this will double to $500,000 in 2016.

There is a small business exception. Businesses with average annual gross receipts for the three prior years of $5 million or less are subject to lower penalties, but these limits are also increasing:

  • The maximum penalty that is $1.5 million ($3 million in 2016) for large businesses but for small businesses is $500,000 now will be $1 million in 2016.
  • The maximum penalty for failure to correct that is $250,000 ($500,000 in 2016) for large businesses but $75,000 for small businesses will become $175,000 in 2016.

Escaping the penalty. Do the best you can, work with knowledgeable people (e.g., use outside payroll providers to handle W-2s and other paperwork for employees), and stay abreast of new paperwork requirements. But even if you do all this, you may still mess up. Fortunately, there’s no penalty for minor errors or failures or if you can show that any failure is due to reasonable cause.

You can also request relief under the IRS’s first-time abatement (FTA) penalty waiver program. To qualify, you must have done things right in the past three years and are otherwise in compliance with all filings and payment requirements.


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