Congress Hikes Reporting Penalties While Filers Remain Stymied

Tax Notes

In this article, Michael Lloyd and Michael Chittenden discuss the little-noticed but dramatic increase in information reporting penalties found in the recently signed Trade Preferences Extension Act of 2015, and explain the impact on taxpayers of increased complexity in information reporting. "In the endless search for revenue on Capitol Hill, few sources seem as painless to taxpayers as an increase in information reporting penalties," the authors said, however Congress has increased penalties, "while at the same time denying a decade-old plea to expand the [Internal Revenue Service (IRS)] taxpayer identification number matching [TIN] program, which has been shown to dramatically decrease error rates on specific information returns."

The penalties come in the wake of the Affordable Care Act, which greatly increased the volume of information returns that must be filed. "Given the volume of information returns that must be filed, even the largest and most diligent of information return filers cannot avoid all information reporting penalties," they said. "Filers can reduce common errors by using the IRS TIN matching program for certain information returns, but the IRS has restricted access to this valuable tool to only those transactions subject to backup withholding, a subset of all information returns that must be filed."

The authors conclude that as potential reporting penalties increase, employers would be wise to focus additional resources on compliance. "Too often, information reporting is left to personnel who lack the expertise and knowledge needed to make correct reporting determinations, an increasingly risky practice now, as the IRS is developing audit teams specifically trained to focus on withholding. Another idea may be to call Congress and ask why businesses should face stiffer penalties when they are denied access to a tool that would help them avoid these errors in the first place," they said.

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Congress Enacts Dramatic Increase in Information Reporting Penalties