Background
The Internal Revenue Service (IRS) considers information return penalties an important tool to collect, at the least cost, the proper amount of tax revenue. Penalties help the IRS achieve this goal because the threat of a penalty generally enhances voluntary compliance.
Penalties for not filing or furnishing the required information returns, such as Forms 1095, 1098, 1099 and W-2, have risen significantly over the years. In 1990, the penalty for not timely filing or furnishing the payee a required information return was a maximum of $50 per form. For the 2022 reporting period, this has risen to a maximum of $280 per form. Moreover, failing to both timely file and to timely furnish can result in a penalty of $560 per form.
General Filing and Furnishing Requirements for the 2022 Reporting Period
Most of the common information return forms must be filed by February 28, 2023 if filed by paper. Electronic returns, which are mandatory for large information return filers, must be filed by March 31, 2023. Depending on the form series and number, payees must have furnished their copy by either January 31, 2023 or February 15, 2023.
Penalty Criteria
The IRS, per Section 6721 of the tax code, can impose a penalty for each of the
following failures related to information returns:
- Failure to file
- Filed with a missing/incorrect taxpayer identification number (TIN) (or other missing or incorrect information)
- Filed untimely
- Filed on paper when electronic filing was required (incorrect media)
- Filed in an incorrect format (not processable)
- Any combination of the above
Also, failure to furnish correct payee statements may be imposed in addition to the Section 6721 penalty if, for example, a return was filed late and the payee statement was furnished late.
IRS Information Return Penalty Notices
The most common IRS penalty notice is Notice 972CG, Notice of Proposed Civil Penalty. Notice 972CG proposes a penalty for information returns that were filed late, filed on incorrect media, filed with a missing or incorrect TIN or a combination of these failures. This notice accounts for over 75 percent of information return penalty cases.
Disputing a Notice 972CG Penalty
The most common way to dispute a penalty proposed in Notice 972CG is to make a reasonable cause argument. In a reasonable cause argument, the information return filer sets forth all the facts to show that the filer acted in a responsible manner.
The IRS internal guidance to its employees in deciding these cases states that reasonable cause for information return penalties generally exists when the filer acted in a responsible manner, both before and after the failure occurred, and there are significant mitigating factors, or the failure was the result of circumstances beyond the filer’s control.
Events generally considered by IRS to be significant mitigating factors include a first-time filer who had not previously been required to file information returns or a filer with a history of complying with the information return reporting requirements
According to the IRS, acting in a responsible manner generally includes exercising the same degree of care that a reasonably prudent person (or organization) would use in the course of business in determining filing obligations and in handling account information.
We’re Here to Help
Bennett Thrasher’s Tax Controversy team has vast experience in navigating how best to respond to IRS information return penalty notices. For more information on our Tax Controversy services, please contact James Pickett, Director of our practice, by calling 770.396.2200.
