Earlier Date for Information Returns Brings Penalty Risk
We are all now facing a new Jan. 31 deadline for filing Forms W-2 with the Social Security Administration and 1099-MISC (when reporting nonemployee compensation payments in box 7) with the IRS. The earlier deadline will allow faster matching of W-2 and 1099 information with tax returns, which helps combat identity and refund theft. Unfortunately, when something is done to combat identity theft, it sometimes means extra work for practitioners, and with this new rule comes increased risk of penalties for not timely filing so we urge you to act quickly.
Filing and Reporting
The previous deadline of Feb. 28 for submitting Forms W-2 and 1099-MISC has been in the law for many years and would have been considered “written in stone” prior to this change. All our clients are accustomed to it. We will have a steep learning curve in orienting ourselves, staff and clients to conform to this new deadline. (The deadlines for Forms 1120 and 1065 reverse this year as well.)
Timing requires us to start the education process immediately. The assembly of the necessary data can be a significant task when dealing with clients. You might also need to alert staff that assembling the required data will require an increased effort. And, while the new W-2 and 1099 deadline is being implemented, we must simultaneously educate our business clients about their new deadlines and adapting our system for the 1120 and 1065 deadline switch that immediately follows.
Bottom Line: We need to shift into overdrive now!
The new filing deadlines could put clients at greater risk for penalties, particularly as the penalty regime has grown quite strict. Since 2009, we have seen information return penalties increase and “stacking,” or increasing, of the penalty amount, depending on the date the information return is filed. In addition, these penalties are indexed for inflation.
Everyone engaged in the process of preparing information returns should become familiar with Code sections 6721 and 6722 and the applicable regulations listing the returns covered and applicable penalties for not timely filing information returns. It appears the IRS covered all the information returns and there is no way to avoid the imposition of a penalty for filing an information return late.
Terms and code sections we need to become familiar with are:
- Code section 6041(a) covering the rule for payments of $600 or more
- Reduction when corrected in a specified period (Code section 6721(b))
- Exceptions for de minimis failures (Code sections 6721(c) and 6722(c))
- Safe harbors for de minimis errors (Code sections 6721(c)(3) and 6722(c)(3))
- Lower limitations for persons with gross receipts of not more than $5,000,000 (Code sections 6721(d) and 6722(d))
A new term, “intentional disregard,” has been added, resulting in larger penalty amounts for failure to timely file the information return.
Recent conversations with practitioners from all areas of the country have indicated that the IRS is actively assessing these penalties, is not bashful about including the intentional disregard penalty and is hesitant in granting penalty abatement for either first-time violations or determining reasonable cause if these penalties are imposed. (A recent Tax Adviser article offers tips on seeking relief for clients facing penalties.)
On the bright side, IRS has just issued Notice 2017-9 for the safe harbor that the AICPA requested from Congress, which means taxpayers do not have to correct an error on an information return or payee statement (or face a penalty) if the dollar amount reported differs from the correct amount by $100 or less ($25 for withholdings). The safe harbor and related penalty relief do not apply if the payee opts out and requests a corrected return.
The compliance tasks we are facing in preparing and filing these returns are greater because of the shorter time window, and the penalty exposure is more severe, so we cannot stress enough that our clients will need to be educated quickly and warned of the consequences of delay.
As practitioners, we understand your frustrations in bearing the burden of anything requiring extra time because so many criminals are out there. But we have to believe the extra protection will be worth it in the end.
Gerard Schreiber Jr., CPA, Partner, Schreiber & Schreiber CPAs in Metairie, LA. Gerard specializes in tax, accounting and consulting matters for individuals and small businesses. He serves on the AICPA IRS Advocacy and Relations Committee and has authored numerous courses and articles on various tax subjects. In 2016, Schreiber received the AICPA Tax Division’s Distinguished Service Award for his outstanding contributions. He can be reached at firstname.lastname@example.org.
Valrie Chambers, CPA, PhD, Associate Professor of Accounting, Stetson University in Celebration, FL. She has over a decade of public accounting experience as owner/partner-in-charge of a CPA firm in Houston that specialized in advising small business owners. Dr. Chambers has been published in numerous journals and received the Texas Society of CPAs Outstanding Accounting Educator Award for mid-sized Texas universities in 2012. She has volunteered for the AICPA and the IRS’ Volunteer Income Tax Assistance in Corpus Christi.
Time for Action courtesy Shutterstock.
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