Earlier this month, the IRS announced in interim guidance that it would amend Section 20.1.7 of the Internal Revenue Manual to provide a methodology for the calculation of intentional disregard penalties under Section 6721 for filers who fail to file information returns electronically when required.  In general, filers of more than 250 information returns are required to file such returns electronically with the IRS.  For this purpose, each type of information return is considered separately, so that a filer who files 200 Forms 1099-DIV and 200 Forms 1042-S is not required to file electronically.  In contrast, if the filer was required to file 300 Forms 1099-DIV and 200 Forms 1042-S, it must file the Forms 1099-DIV electronically, but may file Forms 1042-S on paper.

Section 6721 imposes a penalty of $250 for failures that are not due to intentional disregard.  Section 6721(e) provides an increased penalty for cases of intentional disregard.  In general, the increased penalty is equal to $500 or, if greater, a percentage of the aggregate amount of the items required to be reported correctly on the returns.  Information returns required under Section 6045(a) (Form 1099-B and Form 1099-MISC, Box 14), Section 6050K (Form 8308), and Section 6050L (returns by donees relating to dispositions of donated property within two years of the donor’s contribution of such property) are subject to a penalty of 5% of the amount required to be reported.  Returns required to be filed under Section 6041A(b) (Form 1099-MISC, Box 9), Section 6050H (Form 1098), and Section 6050J (Form 1099-A) are subject only to the flat $500 per return penalty.  Information returns required under other sections are subject to a penalty of 10% of the amount required to be reported.  (Different penalties apply for failures to file correct Forms 8300, but such forms are not subject to the mandatory electronic filing requirements of Section 6011.)

According to the IRS, the amount of the penalty for intentional disregard with respect to a failure to file electronically is determined by calculating the simple average reported on all such returns, multiplying by the number of returns in excess of 250, and then multiplying by the applicable percentage penalty.  For example, if a filer was required to file 1,000 Forms 1099-INT reporting total payments of $5,000,000, the penalty would be calculated by determining the average amount reported on each form $5,000,000 / 1,000 = $5,000), multiplying by the number of returns in excess of 250 ($5,000 x 750 = $3,750,000), and multiplying by the applicable percentage ($3,750,000 x 10% = $375,000).

As the example shows, the penalty for intentional disregard can be harsh.  Fortunately, intentional disregard penalties can often be avoided as the standard is high and it is difficult for the government to meet its burden of proof.  It is far more common for filers to fail to comply with information reporting requirements due to error or mistake.  If the IRS proposes intentional disregard penalties, filers should seek assistance from experienced counsel not only because the penalties can be large but because the imposition of intentional disregard penalties can make it more difficult to obtain relief from other penalties in the future.  One step in seeking penalty relief is to show that the taxpayer has a history of compliance.  The past assessment of intentional disregard penalties can make this more difficult.

Photo of Michael M. Lloyd Michael M. Lloyd

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits…

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits, cross-border compensation, domestic information reporting (e.g., Forms W-2, 1099, 1095 series returns), penalty abatement, and general tax planning and controversy matters. Mr. Lloyd advises large U.S. and foreign multinationals regarding compliance with information reporting and withholding issues, as well as a range of other federal and state tax issues.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.