Taxpayers 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.
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