Publication 1586, IRS’s Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs. Click here for the text of IRS’s “Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs.”
IRS has updated Publication 1586, “Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs.” It provides taxpayers with the information needed to avoid penalties for information returns filed with missing or incorrect taxpayer identification numbers (TINs), describes how to request a TIN, and explains the requirements for establishing reasonable cause.
Background. Code Sec. 6721 imposes a penalty for filing an information return with a missing or incorrect TIN, on incorrect media, or in an incorrect format, or failing to file by the required filing date. However, the penalty may be waived by showing that the errors were due to reasonable cause and not willful neglect.
The filer is notified of any proposed Code Sec. 6721 penalties in Notice 972CG, Notice of Proposed Civil Penalty, which contains a list of the information returns filed with missing or incorrect name/TIN combinations. Payors should compare the listing in the notice with their records to determine whether they took appropriate action to establish reasonable cause or whether an annual solicitation (i.e., a request for the payee’s name and TIN) should be made in the current year to avoid future penalties.
Notice 972-CG includes an explanation of the proposed penalty, how to respond, a record of each submission considered in the penalty, a summary of the proposed penalty and maximum amount that can be assessed, and a response page. The notice must be answered, or an extension must be requested, within 45 days from the notice date (60 days for foreign payors). Failure to timely respond will result in assessment of the full amount.
To establish reasonable cause, filers must show that they acted responsibly both before and after the failure occurred, by soliciting the payee’s name and TIN (see below), and that there were either significant mitigating factors or the failure was due to events beyond the filer’s control. Pub 1586 emphasizes that the most important factor in determining whether reasonable cause existed is the payor’s efforts to solicit the proper information.
Increased penalty amounts. For information returns due on or after Jan. 1, 2011, the Small Business Jobs Act of 2010 (P.L. 111-240, SBJA) increased the Code Sec. 6721(a) penalty for failure to timely file accurate information returns from $50 to $100. The calendar year maximum for those penalties was increased to $1.5 million.
The SBJA also increased the Code Sec. 6722(a) penalties for failure to timely furnish accurate payee statements from $50 to $100, subject to a $1.5 million calendar year maximum.
The penalty can be reduced if the error or omission is timely corrected. Pub 1586 provides detailed tables setting out the Code Sec. 6721 and Code Sec. 6722 penalty increases for large businesses (with gross receipts of more than $5 million) and small businesses (with gross receipts of $5 million or less).
The penalty is not imposed for a de minimis number of failures, defined as the greater of ten returns or 0.5% of the total number of all information returns required to be filed during the year, provided that the returns are corrected on or before Aug. 1 of the filing year.
Solicitations. As Pub 1586 explains, if a payee fails to provide a TIN or provides one that is obviously incorrect (i.e., lacks nine numerical digits or contains letters), the payor should complete an initial solicitation when the “account” (meaning accounts, relationships, or other transactions) is opened. In general, a first annual solicitation should be made if the TIN isn’t received in the initial solicitation, and a second should be made if it isn’t received in the first. Backup withholding on reportable payments may apply, and special rules apply to payments of designated distributions reported on Forms 1099-R.
Employers are required to make an initial solicitation for the employee’s SSN and ask for a Form W-4, Employee’s Withholding Allowance Certificate, when the employee begins work. The employer can rely in good faith on the number provided and use it in filling out the employee’s Form W-2, Wage and Tax Statement. Special procedures apply to establish reasonable cause for failing to provide an employee’s SSN or providing an incorrect number. Pub 1586 notes that, although not required, employers may use the Social Security Administration’s (SSA’s) Social Security Number Verification Service (SSNVS) and the Employee Verification System (EVS) to verify its employees’ names and SSNs. This can help the employer to identify and resolve potential discrepancies before receiving penalty notices.
New information reporting documents. Pub 1586 notes that the following are also subject to the information reporting rules and penalties:
- Form 1042S, Foreign Person’s U.S. Source Income Subject to Withholding;
- Form 3921, Exercise of an Incentive Stock Option Under Section 422(b);
- Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c); and
- Form 1099 K, Merchant Card and Third-Party Payments.