ACA Information Return Penalties to Increase Substantially Under Trade Act
Author: Rena Pirsos, XpertHR Legal Editor
July 9, 2015
Employer penalties relating to information returns and payee statements under the Affordable Care Act (ACA) will increase in 2016 under revenue offset provisions buried in the Trade Preferences Extension Act of 2015 (Act) signed into law by President Obama on June 29.
Under Internal Revenue Code (IRC) § 6721 an employer may be subject to penalties for failing to file information returns (e.g., federal Forms W-2, W-3 and 1099s) with the IRS on time or for filing them with incomplete or incorrect information. The IRS does not impose penalties if a return is filed on time but contains incomplete or incorrect information, so long as the employer corrects the return within a specific time period. This exception only applies to up to 10 returns, or 0.5% of the total number of returns the employer is required to file in the year, whichever is greater. If more than this small number of returns is corrected, the lowest applicable penalty applies.
An employer is not penalized at all for inconsequential or de minimis errors (e.g., errors that do not interfere with the processing of the return), if it can prove it had reasonable cause for the failure.
Under IRC § 6722, similar penalties and exceptions apply if an employer fails to provide required copies of the returns or payee statements to employees or other recipients of taxable compensation (e.g., independent contractors) by the required due date (i.e., January 31 for Forms W-2), fails to provide complete copies or fails to provide copies containing correct information.
Effective for information returns and payee statements required to be filed or provided after 2015, the Act makes the following revisions to the structure of these penalty provisions:
- The general penalty applicable to failures concerning an information return or payee statement (under both IRC §§ 6721(a) and 6722(a)) will be $250 (increased from $100) per information return or payee statement.
- The maximum penalty for all such failures in a calendar year will be $3 million (increased from $1.5 million).
- The maximum penalty for such failures that are due to intentional disregard of the law will be $500 (increased from $250) per information return or payee statement.
- For a failure corrected within 30 days after the required due date (under both IRC §§ 6721(b)(1) and 6722(b)(1)), the penalties will be $50 (increased from $30) per information return or payee statement, and the annual penalty maximum will be $500,000 ((increased from $250,000).
- If a failure is not corrected within the 30-day period but is corrected by August 1 (under both IRC §§ 6721(b)(2) and 6722(b)(2)), the penalty will be $100 (increased from $60).
- The penalty for failures corrected by August 1 that are due to intentional disregard of the law will be $500 (increased from $250); and
- The maximum penalty for all such failures during a calendar year that are corrected by August 1 will be $3 million (increased from $1.5 million).
- The lower penalty limitations for employers with gross receipts of not more than $5 million will also increase.