Congress Increases Tax Return Penalties for Inaccurate Information

Last week, the IRS passed stiffer penalties for inaccurate information found on any tax return filed after Dec. 31, 2015.

In the new legislation, penalties for inaccurate information on a tax return may have more than doubled for failure to file accurate information on returns or payee statements.

The new provision and penalties for inaccurate information on a tax return

The new rules mark the second time since 2010 that Congress has voted to increase the minimum penalties for inaccurate information under Section 6721(b) and per-employer penalty caps under Section 6722(b) for an inaccurate or un-filed tax return. However, this provision was significant because it was passed in a revenue increase, rather than a tax bill, as part of the Trade Preference Extension Act of 2015. These penalties for inaccurate information will also be imposed under Code sections 6721 and 6722 retroactive to 2015 tax returns.

Stiffer penalties for inaccurate information

The previous penalties for inaccurate information on a tax return for both sections 6721 and 6722 are $100 for each return, and up to $1.5 million for each year. However, under the new provision, the penalties will increase to $250 for each erroneous tax return, and up to $3 million per year. Although there are ways to reduce the penalties if  a tax return is amended within 30 days after filing. The penalty is now reduced by $50 per inaccurate return if corrective actions are taken within 30 days, and a threshold of $500,000. This is a significant change as the previous penalty reduction was $30 per return with a $250,000 threshold. This benefit increases to $60 per return if corrective actions are taken on erroneous returns within 30 days, but before Aug. 1, 2015. These reductions extend for erroneous returns with a threshold of $1.5 million as the amount per return increases to $100 if corrective actions are made by Aug. 1. Finally, for gross receipts with a threshold of $5 million, the new legislation allows a reduction between $250 to $500 for cases of unintentional error.

The tax forms to be penalized

The new penalties for inaccurate information under Sections 6721 and 6722 are Forms 1099 “Miscellaneous Income”, 1098 “Mortgage Interest Statement”, 1097 “Bond Tax Credit”, W-2 “Wage and Tax Statement”, W-2G “Certain Gambling Winnings” and 5498 “IRA Contribution Information”. Although taxpayers need to be aware that these new penalties apply to both total income reported and information returns for a variety of gross proceeds, including mortgage interest statements, payments subject to the Fair and Accurate Credit Transactions Act as well as various information returns required under the Affordable Care Act. However, under Section 6724, the IRS does allow certain penalties to be abated if the failure to submit accurate information is the result of reasonable cause.

Criticism of the new penalties

According to The National Law Review, due to the fact that the new penalties apply to the copy of the form filed with the IRS and the copy filed with an employee, the penalties for inaccurate information are not only more strict, they impact more taxpayers. These new penalties will now also apply to inaccurate tax returns before 2015 if they are discovered this year, or if the corrective actions are taken after 2015.