Michael Lloyd and Michael Chittenden Comment on Enhanced Information Reporting Penalties and Steps to Minimize Risk in Law360

"3 Tips for Avoiding Enhanced Info Reporting Penalties"

Michael Lloyd and Michael Chittenden commented on enhanced information reporting penalties resulting from the passage of the Trade Preferences Extension Act of 2015 and explained steps companies can take to minimize risk. Inside of the legislation was a little-noticed provision more than doubling penalties for errors on tax information reporting forms, which could result in millions of dollars in additional penalties for large companies. "The bill kind of came out of nowhere," Lloyd said. "It kind of surprised us and I think it surprised other practitioners as well."

Penalties apply to both forms sent by the Internal Revenue Service (IRS) and to duplicate forms sent to payees, and because individual business entities are each subject to the penalty cap, large taxpayers could be subject to several million dollars more in penalties under the new law, and even with very low error rates, large filers can easily reach the penalty cap. "They're just hammering these filers that can't necessarily do anything about it," Chittenden said, adding that mistakes can include reporting dollar amounts that are off by even a penny, which the IRS technically qualifies as a consequential error, or a mismatch between a payee's name and taxpayer identification number (TIN).

The two lawyers described steps taxpayers can take to get their information reporting error rates down and avoid being hit with the enhanced penalties, including using TIN matching. "In our experience it greatly and dramatically reduces error rates," Chittenden said, adding most large filers already use the TIN matching program, but for those who do not, that should be the first thing they look at to help avoid the enhanced penalties, at least to the extent that they make payments subject to backup withholding. Unfortunately, the penalties apply to many kinds of information reporting outside of Forms 1099, such as new forms required under the ACA and FATCA, which taxpayers don't have as much experience with. "The novelty of the new forms is a concern because you've got this huge volume of returns going into the government," Lloyd said.

Another step taxpayers can take is training employees. Reports that cannot be checked against IRS databases are only as good as the information obtained by filers from vendors and payees, and companies often don't realize the importance of filling out accurate information reporting forms, Lloyd said. As a result, information reporting is not closely monitored by the tax department at those companies and instead is delegated to other departments whose staff don't have adequate training. "Staff up and make sure quality people are hired and are trained accordingly," he said.

Taxpayers can also apply for abatements to reduce the risk of reporting penalties if they can show reasonable cause and that they acted with ordinary business care and prudence, Chittenden said. Making sure employees are properly trained and having policies and procedures in place for information reporting, goes a long way towards showing reasonable cause, he added.

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