On June 29th, an update was passed to the Trade Preferences Extension Act. These changes greatly enhance the penalties ALL 1099 filers will be subject to for incorrectly reporting tax information.

H.R. 1295, (now PL 114-27), doubles the annual maximum penalty cap from $1.5M to $3M for all 1099’s, and more than doubles the penalty per record from $100/record to $250/record for failure to file properly. The new penalties are effective for information returns required to be filed after Dec. 31, 2015, which means you need to be ready come this tax season!

Where Did The Increased Penalties Come From?

Originally, this legislation focused on removing the $10 reporting minimum threshold for 1099 INTs requiring all interest and non-interest bearing accounts be reported. This created an uproar in the banking world as it passed the senate. However, this language has since been removed.

Instead, Section 806 in the “Offsets” portion of the Act implements penalty increases across the board for 1099 non-compliance. This includes penalties that relate to errors, deadlines to correct said errors and other important implications regarding tax filing requirements, including how this impacts B and P notices.

Affordable Care Act Reporting Implications

Additionally, this penalty update encompasses the new 1094/1095 Health Care ACA forms, even though sections 6721 and 6722 of the IRS code traditionally relate only to 1099 & W-2 information returns. Sections 6055 and 6056 of the IRS code, which govern minimum essential healthcare coverage reporting requirements, refer back to 6721 and 6722 for penalty enforcement.

Please note, although 1094/1095 forms still cannot be TIN-checked, the IRS will enforce these new penalties unless entities can show they made a good faith effort to provide all necessary reporting information accurately. A good faith effort does not include late filings or failing to file for an information return or statement.

What Does This Mean For 1099 and 1095 Filers?

This latest update adds another layer of taxpayer confusion to an ever-fluctuating landscape of changes and requirements. These legislative changes will likely also result in increased penalty exposure, greater operational complexity and higher risk for audits.

PL 114-27 will substantially increase organizations’ tax information reporting liability for non-compliance. Most businesses do not budget for these penalties, so now that the penalties and penalty caps are at least doubled for most infractions, accurate reporting is even more important in order to avoid costly unbudgeted mistakes. Since these penalties apply to the upcoming 2015 filing year, there is also limited time to implement changes that will help businesses in every industry avoid filing mistakes triggering these new penalty amounts.

Result: To limit the increased exposure, companies must ensure that new and existing vendors and employees have been properly validated before filing 1099 information and ACA forms this year. Clean data is paramount and being extra-careful about reporting is crucial towards avoiding these increased tax penalties.

Moving Forward: This legislation is far-reaching and these costly penalties can be avoided if employers have the right tools to file their forms correctly with the IRS. Sovos Compliance offers a fully integrated set of highly customizable products and services for 1099 filing and also for ACA reporting that can help every type of business avoid costly mistakes as well as save time and expense when it comes to complying with all reporting requirements and changes. Sovos Compliance is the number one US filer of 10 series forms with nearly 30 years dedicated to tax information reporting processes that help businesses continue to focus on their business goals as opposed to spending valuable time and resources chasing the complexities of the IRS.

To learn more about these changes and their impact on your business, please join our FREE webinar Increased New Penalty Updates and Best Practices for B & P Notices on Wednesday, July 29 at 1:00 pm CT. This webinar is CPE eligible.

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