Michael Chittenden Comments on New Trade Law's Potential Tax Penalties in CFO

"Beware Stiff Tax Penalties Buried in New Trade Law"

Michael Chittenden commented on potentially large new penalties imposed on businesses by the recently enacted Trade Preferences Extension Act of 2015. The Act was the subject of widely reported debates concerning whether Congress would pass the bills. Lost in the debates, however, was any discussion of Section 806, a provision of the Act that had nothing at all to do with foreign trade or globalization. The provision, which concerns penalties charged against businesses for failing to file correct information on tax returns and provide payee statements, has "no connection to the substance of the bill, and I think that's why it surprised everyone," Chittenden said, noting that the provision is included to provide revenue to offset the costs incurred by other aspects of the law. "If you look at the title of the bill, it wouldn't tip you off at all that there was this provision in there regarding information reporting penalties."

The increased penalties can amount to "several million dollars on an annual basis for a lot of big filers," Chittenden said. "Small errors can result in comparatively large penalties. Any dollar amount that is wrong -- even by a penny -- can justify the imposition of a penalty." For large filers, errors on fewer than 1% of all returns can result in a company having to pay a maximum penalty of $6 million in a year. "Large companies may file well in excess of one million information returns subject to penalties," including W-2s and 1099s, he said. "If you assume that more than 1.2 million returns are filed, an error rate of 1% ... would generate at least $6 million in potential penalties." For some large companies that might not sound like a lot of money. "But most finance people like not to spend an extra $6 million paying penalties to the IRS," he added.

Finance chiefs should make sure their companies take part in the Internal Revenue Service's Taxpayer Identification Number (TIN) On-Line Matching Program in order to protect against paying whopping penalties next year. "The increasing number of returns that are required to be filed and the increasing penalties for errors make it more important than ever that the tax department is involved to insure that there are proper systems and controls in place to avoid errors," Chittenden said. "In the event that there are errors, having the tax department involved and having proper systems and controls in place can help you get those [penalties] abated for reasonable cause."

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