Penalties for Failures with Respect to Forms 1099 and Other Information Returns

Section 6721 of the Internal Revenue Code imposes a penalty on any person who fails to file a Form 1099 or other information return to the IRS by the required filing date, fails to include all information required to be shown on that return, or includes incorrect information on that return.[1]

Forms Subject to Penalties Under Section 6721

Information returns that are subject to this penalty include, but are not limited to:

• Form W-2, Wage and Tax Statement;
• Form W-2G, Certain Gambling Winnings;
• Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding;
• Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns;
• Form 1095-C, Employer-Provided Health Insurance Offer and Coverage;
• Form 1098, Mortgage Interest Statement;
• Form 1098-E, Student Loan Interest Statement;
• Form 1098-T, Tuition Statement;
• Form 1099-A, Acquisition or Abandonment of Secured Property;
• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions;
• Form 1099-C, Cancellation of Debt;
• Form 1099-DA, Digital Asset Proceeds from Broker Transactions;
• Form 1099-DIV, Dividends and Distributions;
• Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments;
• Form 1099-INT, Interest Income;
• Form 1099-K, Payment Card and Third Party Network Transactions;
• Form 1099-LTC, Long-Term Care and Accelerated Death Benefits;
• Form 1099-MISC, Miscellaneous Information;
• Form 1099-OID, Original Issue Discount;
• Form 1099-PATR, Taxable Distributions Received From Cooperatives;
• Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.;
• Form 1099-S, Proceeds From Real Estate Transactions;
• Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips;
• Form 8282, Donee Information Return;
• Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business;
• Form 8308, Report of a Sale or Exchange of Certain Partnership Interests;
• Form 8594, Asset Acquisition Statement;
• Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax;
• Form 8921, Applicable Insurance Contract Information Return;
• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent.[2]

Amount of Section 6721 Penalties

The amount of the penalty for any failure with respect to these information returns depends on how quickly the failure is corrected, the filer’s gross receipts, and whether the failure is due to intentional disregard.

Generally, the penalty under section 6721 is $250 for each return with respect to a failure occurs,  with the total amount of such penalties that can be imposed on a particular filer during any calendar year being capped at $3,000,000.[3] If the filer has gross receipts less than has average gross receipts over the three year period ending before the year in question of no more than $5,000,000, the total penalty cap is reduced to $1,000,000.[4]

If any failure is corrected within 30 days after the required filing date then the penalty imposed is reduced to $50 and the total such penalties that can be imposed on a filer in a calendar is capped at $500,000.[5] If the filer has gross receipts less than has average gross receipts over the three year period ending before the year in question of no more than $5,000,000, the total penalty cap is reduced to $175,000.[6]

Moreover, if the failure is corrected more than 30 days after the required filing date but on or before August 1^st of the calendar year in which the required filing date occurs, then the penalty is reduced to $100, with total amount of such penalties that can be imposed against a filed  during the taxable year being capped at $1,500,000.[7]  If the filer has gross receipts less than has average gross receipts over the three year period ending before the year in question of no more than $5,000,000, the total penalty cap is reduced to $500,000.[8]

If a failure is due to intentional disregard, however, the penalty imposed is $500 per affected return or even greater if the failure relates to certain specified information returns.[9] And, there is no cap on the total amount of such penalties that can be imposed on the filer during a calendar year.[10]

Note that all of these amounts are subject to adjustments for inflation.[11]

Defenses Against Section 6721 Penalties

No penalty under section 6721 is imposed with respect to any failure that is due to reasonable cause and not to willful neglect.[12] Reasonable cause exists if the filer establishes either that (1) there are significant mitigating factors with respect to the failure; or (2) the failure arose from events beyond the filer’s control (i.e., an “impediment”).[13] The filer also must establish that the filer acted in a responsible manner both before and after the failure occurred.[14] Finally, the regulations provide a reasonable cause safe harbor.[15]

Examples of significant mitigating factors include:

• the fact that prior to the failure, the filer was never required to file the particular type of return or furnish the particular type of statement with respect to which the failure occurred, or
• the fact that the filer has an established history of complying with the information reporting requirement with respect to which the failure occurred.[16]

Impediments that prevent a filer from complying with information return filing requirements include:

• unavailability of the relevant business records;
• undue economic hardship relating to filing on magnetic media;
• certain actions of the IRS;
• certain actions of an agent; and
• certain actions of the payee or any other person providing necessary information with respect to the return or payee statement.[17]

A filer is deemed to have acted in a “responsible manner” if the filer “exercised reasonable care, which is that standard of care that a reasonably prudent person would use under the circumstances in the course of its business in determining its filing obligations and in handling account information such as account numbers and balances” and the filer “undertook significant steps to avoid or mitigate the failure.”[18] Taking significant steps to avoid or mitigate a failure includes acting to remove the failure or impediment once it occurs or is discovered.[19]  In addition, a filer is deemed to have acted in a responsible manner only if the filer makes an initial and, if required, any additional solicitations for the payee’s TIN.[20]

The regulations also provide a safe harbor for cause reasonable cause associated with penalties assessed for a failure to provide the payee’s correct TIN on an information return “if the payee has certified, under penalties of perjury, that the TIN provided to the payor was his correct number, and the payor included such number on the information return before being notified by the Internal Revenue Service (IRS) (or a broker) that the number is incorrect.”[21]

[1] I.R.C. § 6721(a), (b).

[2] Treas. Reg. § 301.6721-1(h).

[3] I.R.C. § 6721(a).

[4] Id. § 6721(d)(1)(A), (2).

[5] Id. § 6721(b)(1).

[6] Id. § 6721(d)(1)(B), (2).

[7] Id. § 6721(b)(2).

[8] I.R.C. § 6721(d)(1)(B), (2).

[9] Id. § 6721(e)(1), (2).

[10] Id. § 6721(e)(3).

[11] Id. § 6721(f).

[12] I.R.C. § 6724(a); Treas. Reg. § 301.6724-1(a)(1).

[13] Treas. Reg. § 301.6724-1(a)(2)(i), (ii).

[14] Id. § 301.6724-1(a)(2)(iii).

[15] Id. § 301.6724-1(g).

[16] Id. § 301.6724-1(b).

[17] Id. § 301.6724-1(c).

[18] Id. § 301.6724-1(d)(1).

[19] Treas. Reg. § 301.6724-1(d)(1)(ii).

[20] Id. § 301.6724-1(d)(2), (e)(1) (f)(1).

[21] Id. § 301.6724-1(g)(2).

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