The IRS has increased its information reporting penalties. Being on top of the filing requirements can help financial institutions, and all companies, avoid possible penalties. Mistakes can happen though, and when they do, there may be potential relief from the information reporting penalties, should you find yourself in that situation. Information reporting includes Forms 1098s, 1099s, 5498s, W-2s, and so forth. Penalties may apply for many reasons, including:
- Filing late and/or providing the payee statement late.
- Not filing electronically when required.
- When paper filing is allowed, using non-machine readable forms.
- Reporting with an incorrect or missing taxpayer identification number.
- Providing payee statements with missing or incorrect statement information.
Besides penalties for intentional disregard of the filing requirements, returns due in 2017 have penalties of up to $260 per form. Mistakes can get really expensive at that rate! Penalties may be less if remedied quickly; the IRS has a schedule for penalties that apply based on three windows of time: within 30 days, after 30 days but by August 1, and after August 1. Correcting mistakes quickly will help to minimize the information reporting penalties assessed by the IRS.
While correcting the error more quickly may yield lesser penalties, there are also some exceptions and waivers to the penalties that should be considered:
- Reasonable cause: Events caused by significant mitigating factors and/or beyond the financial institution’s control, so long as the financial institution acted reasonably (both before and after the error occurred) and took steps to avoid the error, can result in the reasonable cause exception to the penalties. There are specific rules regarding these qualifications. If these rules are satisfied, the reasonable cause exception can apply to first-time filers, first-time violators, incorrect or missing taxpayer identification numbers, unavailable relevant business records, and so forth.
- De minimis exception: For certain returns, if the returns were filed timely but had missing or incorrect information, and if the corrections were filed by August 1, the de minimis exception will apply (after applying the waiver for reasonable cause, if applicable). The de minimis penalty exception will apply to the greater of: a) 10 returns or b) 0.5% of the total number of information returns required for the year.
- Inconsequential error or omission of information: This exception can apply for returns and for payee statements as outlined below:
- Returns: As long as the IRS can still process the return, match the information on the return to the recipient’s tax return, and use the return as intended, the error or omission of information can avoid penalty. The matching process requires accurate amounts (except under the de minimis dollar amount safe harbor described below), the recipient’s last name, and the recipient’s taxpayer identification number, so any error or omission of these fields would fail to meet this penalty exception.
- Payee statements: As long as the payee receives the correct information in a timely manner and can report it on his or her income tax return or otherwise use the statement for its intended use, the error or omission of information can avoid penalty. This penalty exception is not available for errors or omission of amounts (except under the de minimis dollar amount safe harbor described below), important item(s) in the payee’s address, appropriate form, or proper method of delivery.
- De minimis dollar amount safe harbor: If the dollar amount reported differs from the correct amount by $100 or less, no correction is required and the reporting is deemed accurate. In addition, if the dollar amount of reported tax withheld differs from the correct amount by $25 or less, no correction is required and the reporting is deemed accurate. There is a catch to this safe harbor though. If the payee wants a corrected statement, then a corrected statement and return must be issued and filed.
- Administrative waiver/first-time abatement waiver: The IRS may grant this penalty relief for first-time offenders.
Overall, the amount of potential penalty is determined based on the type and volume of returns, the error that occurred, the time period of correction, and possible exceptions to the penalty. Intentional disregard for the requirement to file the required information returns and payee statements can result in the highest penalties, with no maximum! Therefore, ignoring the situation and requirements could create an even more costly situation. If you find yourself having identified a mistake with regard to your information reporting, please consider making the correction in a timely manner and/or contacting your Wipfli representative so we can assist with evaluating your circumstances and potential for penalty relief.