Increased Tax Penalties Under the Trade Preferences Extension Act of 2015
Posted on 07.22.15
Author: Betsy Glaeser, Senior Tax Associate
On June 29th, President Obama signed into law the Trade Preferences Extension Act. The Act garnered national attention concerning the foreign trade and globalization details contained within its pages, as well as deliberations regarding whether or not the President and Congress would be able to come to an agreement. Not widely-reported, however, was Section 806 of the Act, which increases penalties for the failure to file correct and complete information tax returns under Section 6721 and the failure to timely furnish correct and complete payee statements under Section 6722. The changes affect standard information returns, such as Forms W-2 and 1099, as well as new reporting forms required by the Affordable Care Act (ACA). The Act significantly increases potential penalties, with many applicable penalties doubling from the pre-Act amounts.
In 2015, ACA reporting became mandatory for responsible entities. The first ACA returns will be filed in early 2016 and will reflect the 2015 calendar year data.
Responsible Parties and Forms Applicable to the ACA’s Reporting Requirements
*ALE – 50 or more full-time equivalent employees on average in prior calendar year.
**Non-ALE – Fewer than 50 full-time equivalent employees on average in prior calendar year.
The new penalties apply with respect to returns and statements required to be filed after December 31, 2015. The timing of when these penalties will impact ACA reporting appears to be after December 31, 2016. Presumably, the IRS will continue its previously announced short-term relief for 2015 from ACA reporting penalties under Section 6721 and 6722 where the employer can show that it acted in good faith to comply with ACA requirements and allow the Act to go into effect with respect to ACA reporting penalties for years starting after December 31, 2016. However, the IRS has not explicitly stated that it will continue to conform to the previously asserted relief.
Summary of the New and Old Penalty Amounts
In addition to penalties related to ACA reporting, the new provision could also result in harsh penalties for misstatements on information forms such as Forms 1099 and Forms W-2. Something as seemingly benign of misreporting a name or taxpayer identification number on a W-2 employee compensation form or failing to file the appropriate Forms 1099 could yield significant penalties. For example, if a company files 200 Forms W-2 in early 2016 and 20 of those W-2s contain a misstatement; the resulting penalty could be $2,000 ($100 per incorrect form). Or, if a company is required to file 10 Forms 1099 and fails to do so, the resulting penalty could be $2,500 ($250 per unfiled form). The overall heightened awareness of information reporting, coupled with growing 1099 requirements, simply compound a company’s potential exposure to the new, higher penalties. As such, it is imperative that companies solicit Form W-9, Request for Taxpayers Identification Number and Certification, before issuing any payment to a vendor. Companies should also ensure that records of employees’ full names and social security numbers are up-to-date.
In addition to maintaining accurate internal records for vendors and employees, companies can participate in the IRS Taxpayer Identification Number (TIN) On-Line Match program. According to the IRS website, “TIN Matching is part of a suite of Internet based pre-filing e-services that allows authorized payers the opportunity to match 1099 payee information against IRS records prior to filing information returns.” An authorized payer is one who has filed certain Forms 1099 in at least one of the two previous tax years. These Forms 1099 include Form 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099-MISC, 1099-OID or 1099-PATR. The TIN Matching program could aid companies in reducing errors related to recipient names and tax identification numbers. For additional information on this program, refer to the IRS’ website.
These new, higher penalties certainly add another layer of obstacles to information return reporting requirements, as well as the already complex ACA reporting requirements. Employers should work closely with their insurance brokers and trusted tax advisors when determining how these new requirements will be addressed.
Questions on the penalties that increased under Section 806 of the Trade Preferences Extension Act of 2015? Contact your Keiter advisor. We can help. firstname.lastname@example.org | 804.747.0000
Betsy is a Senior Tax Associate at Keiter. She works to provide tax savings opportunities for clients in a variety of industries with a focus on the Real Estate and Construction industry. Betsy is also a member of the Firm’s Real Estate & Construction Industry team. Read more of Betsy's insights on our blog.