Michael Lloyd Comments on Congress's Doubling of Information Reporting Penalties in Tax Analysts

"New Law Quietly Doubled Reporting Penalties, and Nobody Noticed"
Tax Analysts

Michael Lloyd commented on Congress's doubling of information reporting penalties in a recently approved trade bill. "When this legislation hit, I just couldn't believe it. It affects almost every business in the United States ... Congress just doubled the penalty. All businesses are going to have to deal with this change, and they are either going to have to pay it or pay lawyers or other tax professionals to fight the assessments," Lloyd said. "The view on the Hill is likely that this is just law-and-order legislation. If the revenue estimates had been presented as more significant amounts, [Congress] would have likely asked more questions, but they thought it was a nothing change .... But to gratuitously double the penalties without giving businesses the ability to validate information before [the IRS] penalizes them, that's unfair."

According to Lloyd, in 2010 the total aggregate penalty per failure was $100 and the new increase means that in five years the penalty has grown fivefold and the aggregate cap has grown twelvefold. "An information return is a W-2. It's a 1099. It's a 1098 mortgage statement … as well as 1042-S's for payments subject to FATCA reporting," he said. "We're talking about perhaps a hundred million new information returns that are going out next year." Lloyd and other practitioners suggest that higher penalty amounts are compounded by the fact that the number of 1099 returns is much higher than it was in the past and the penalty applies even if the amount is off by one cent. Taxpayers, he added, are forced "to go into controversy mode" as it becomes increasingly difficult for taxpayers to request reasonable cause relief.

"A lot of time the errors are not [the filer's] fault. They have been provided with bad information by the payee or recipient," he said. "You can't force someone to give you the right information." He noted that potential prevention could be found in the TIN Matching Program but that expansion of the program would be necessary. Despite practitioner pleas for the program's expansion for more than a decade, Lloyd said TIN matching is not permitted for forms that are not subject to backup withholding, and large filers that use the matching program reduce errors by 99 percent. "There are many returns that are not subject to backup withholding, like your bank mortgage statement or the new ACA reporting forms .... That [TIN matching program forms would] be subject to backup withholding is an IRS requirement. It is not statutory," he said, adding that it has "been a source of frustration in the filer community for 13 years."

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