Under-the-Radar Provision More than Doubles Information Reporting Penalties

Employee Benefits Alert

A little-noticed offset provision buried deep within Public Law 114-27 has doubled information reporting penalties under Sections 6721 and 6722. The law, which was signed on June 29 by President Obama, includes an under-the-radar but dramatic increase to the most common information reporting penalties -- penalties often imposed for errors on numerous types of information returns for mistakes that businesses often cannot prevent.

Section 806 of the law increases the penalty from $100 per failure to $250 per failure under each of sections 6721 and 6722, which impose a penalty for each incorrect information return filed with the IRS and each copy sent to the payee or recipient, respectively. In other words, a single error on a 2015 information return (filed in 2016) may result in a $500 penalty unless the taxpayer is granted abatement on reasonable cause or other grounds. Similar increases were made to the reduced penalties for errors that are corrected within 30 days or before August 1.

In addition, the new law doubles the annual maximum penalty that can be imposed on a filer (other than for cases of intentional disregard) under both sections 6721 and 6722. Previously, each penalty was subject to an annual limit of $1.5 million. Under the new law, the annual limit will be $3 million for each penalty or $6 million total -- 12 times the limit only five years ago. Similar increases were made to the lower annual limits applicable to small businesses and for errors corrected within 30 days or before August 1.

The new penalty amounts apply to information returns filed after December 31, 2015, and follow on the heels of a change made in 2014 that would index the penalty amounts for inflation. The chart below summarizes the new penalty amounts with the amounts prior to the law shown in parentheses.

1. In the case of certain returns, the penalty for intentional disregard is the greater of 10% of the amount required to be reported on the return and the amount shown.

For more information, please contact:

Marianna Dyson, mdyson@milchev.com, 202-626-5867

Michael Lloyd, mlloyd@milchev.com, 202-626-1589

Michael Chittenden, mchittenden@milchev.com, 202-626-5814

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