IRS penalty notices begin to arrive

IRS penalty notices begin to arriveTaxpayers filing information returns, such as Forms W-2, 1099 and 1098, should be aware that the IRS has begun its annual mailing of Letter 972CG, in which penalties are proposed for information return failures, and Notice CP-2100, which informs a payer that it may be responsible for backup withholding. The bulk of these proposed penalty notices are sent between August and October, and this year will relate to taxpayers’ 2014 information returns, in the case of Letter 972CG, or taxpayers’ 2015 information returns, in the case of Notice CP-2100.

The IRS can impose penalties under Section 6721 for a variety of failures, such as late, incorrect or incomplete filing. Incorrect filing includes mismatches of name and taxpayer identification number (TIN) or failure to file electronically when required to do so. Information return filers are usually unaware of these mismatches and the potential for a penalty until they receive a Letter 972CG. With penalties of $100 per information return for 2015, filers could face penalties totaling thousands of dollars for failures specified in Section 6721.     

The IRS’s Letter 972CG is usually routed to the filer’s payroll or accounts receivable department and may not come to the immediate attention of the tax department. Accordingly, tax departments should notify these departments to forward any communications from the IRS.

Notice CP-2100 informs large-volume filers (those who file 250 or more erroneous documents) that they may be responsible for backup withholding on payments made to certain payees. In many cases, this is because of missing or potentially incorrect payee TINs. A similar notice, CP-2100A, is sent to smaller-volume filers.

A filer receiving the CP-2100 series notice may have to send a backup withholding notice (also known as a “B notice”) and a Form W-9 to the payee with the missing or incorrect TIN, soliciting the correct name/TIN combination. The filer may also have backup withholding obligations at that point.  

Penalty abatement possible Like most IRS penalties, those under Section 6721 may be excused if the filer can establish reasonable cause for the failure. Filers generally must prove that the failure was caused by significant mitigating factors or events beyond their control. Furthermore, the filer must have acted responsibly both before and after the failure. The regulations under Section 6724 provide guidance in establishing reasonable cause.  

For filers to successfully request a nonassertion or abatement of a Section 6721 penalty, they must be specific in addressing the conditions outlined in the regulations. Responding quickly and effectively to a proposed penalty letter from the IRS is key to preventing penalty assessments. In addition, filers should consider whether they have proper procedures in place to prevent such failures.

Grant Thornton LLP professionals have had success in reducing penalties in the past. Nonetheless, abating a penalty in whole or in part sometimes requires a taxpayer to appeal. If a taxpayer has received a penalty notice, contact one of the individuals listed above for more assistance.

Penalties increase for 2016 filings Penalties under Sections 6721 and 6722, which relate to failure to file correct information returns and/or to furnish correct payee statements, have increased for those returns required to be filed after Jan. 1, 2016. Those penalties have increased and are indexed for inflation so that the penalty is $260 per return. Penalties related to 2016 filings, however, would not be issued until 2017.

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.