Source: MSN Money | Author: Bill Bischoff
Small business alert: Beware of stiff penalties for failing to file information returns
Legislation enacted last year included little-noticed changes to the penalty regime for failing to file information returns with the IRS and failing to furnish required statements to payment recipients.
For payments made in 2016, these documents must be sent out early next year. Here’s what small business owners need to know about the penalties for not getting that job done on time.
Our beloved Internal Revenue Code imposes potentially harsh penalties for failing to file complete and accurate information returns with the IRS. The most familiar information returns are the various types of Form 1099 (used to report things like payments to independent contractors and interest income) and Form W-2 (used to report employee wages). However, there are many other less-familiar information returns — see the long list at the end of this column.
In many cases, copies of information returns must be sent to payees (payment recipients). These copies are called payee statements. When payee statements are required, the IRS can impose penalties for failing to file information returns with the IRS and also for failing to send the related payee statements to payees. Ouch! That is the old double whammy in action.
Penalty amounts depend on the duration of the failure to file information returns with the IRS and/or send payee statements (when required), whether the failure was unintentional or willful, and the size of the taxpayer that committed the sin.
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Penalties on ‘small’ taxpayers
Small taxpayers are defined as those with average annual gross receipts of no more than $5 million, based on the three preceding tax years. They face the following increased penalty amounts, thanks to the 2015 legislation.
• The penalty for one unintentional failure to file an information return with the IRS was increased from $100 to $250.
• For unintentional failures that are corrected within 30 days of the information return due date, a smaller penalty applies. However, the per-return penalty was increased from $30 to $50.
• For unintentional failures that are corrected more than 30 days after the information return due date but by no later than August 1, the per-return penalty for one failure was increased from $60 to $100.
• The maximum penalty for multiple unintentional failures during a calendar year was increased from $500,000 to $1 million.
• The maximum penalty for multiple unintentional failures during a calendar year that are corrected within 30 days was increased from $75,000 to $175,000.
• The maximum penalty for multiple unintentional failures during a calendar year that are corrected more than 30 days after the due date but by no later than August 1 was increased from $200,000 to $500,000.
Similar penalties for failure to provide payee statements
Essentially the same penalty regime applies to failures to send out required payee statements.
Even stiffer penalties apply to willful failures to file information returns
While the penalties summarized above are horrifying enough, even stiffer penalties apply to willful failures to file information returns with the IRS. A willful failure means when the taxpayer intentionally disregards the rules. For example, the penalty for willfully failing to file one information return can be $500 and up, and there is no upper limit on the penalty for multiple willful failures to file.
The bottom line
As you can see, the penalties for failing to file information returns with the IRS and failing to send required payee statements to payment recipients are too stiff to ignore. Contact your tax adviser if you have questions or want more information on this important issue.
Affected information returns for small businesses
For small business taxpayers, the penalties for failing to file correct information returns with the IRS and provide copies to payees (when required) can apply to the federal tax forms listed below. Most of these forms have corresponding required payee statements, so penalties can be doubled for both failing to file with the IRS and failing to provide payee statements.
1. Form 1095-B: Health Coverage.
2. Form 1095-C: Employer-Provided Health Insurance Offer and Coverage.
3. Form 1097-BTC: Bond Tax Credit.
4. Form 1099-B: Proceeds From Broker and Barter Exchange Transactions.
5. Form 1099-C: Cancellation of Debt.
6. Form 1099-K: Merchant Card and Third Party Network Payments.
7. Form 1099-MISC: Miscellaneous Income.
8. Form 1099-S: Proceeds From Real Estate Transactions.
9. Form 1099-INT: Interest Income.
10. Form 1099-DIV: Dividends and Distributions.
11. Form 8027: Employer’s Annual Information Return of Tip Income and Allocated Tips:
12. Form 8300: Report of Cash Payments Over $10,000 Received in a Trade or Business.
13. Form 8308: Report of a Sale or Exchange of Certain Partnership Interests.
14. Form 8594: Asset Acquisition Statement.
15. Form W-2: Wage and Tax Statement.
16. Schedule K-1 of Form 1065: Partner’s Shares of Income, Deductions, Credits, etc.
17. Schedule K-1 of Form 1120S: Shareholder’s Share of Income, Deductions, Credits, etc.