In July 2015, President Obama signed into law the Trade Preferences Extension Act of 2015. Included on the bill was an important provision that affects non-profit organizations as well as for-profit businesses and individuals.The Act included a substantial increase to filing penalties for information returns 1099 and 1096 filed after December 31, 2015, effectively doubling the amounts.
Sections 6721 and 6722 of the Internal Revenue Code impose penalties associated with failure to file information returns and statements. Section 6721 applies to the returns required to be filed with the IRS and Section 6722 applies to statements required to be provided to employees and other recipients of certain taxable compensation.
The Act significantly increases the penalty amounts under Section 6721 and 6722. A failure includes failing to file or furnish information returns or statements by the due date, failing to provide all required information, as well as failing to provide correct information. The law increases the penalty for general failures from $100 to $250 per return and increases the annual cap on penalties from $1,500,000 to $3,000,000. For intentional disregard of filing requirements, the penalties are increased from $250 to $500 per return with no annual cap on penalties.
Because the increased penalties apply to both the copy of the form filed with the IRS and the copy filed with the payee, the penalties are essentially $500 per form with an annual cap of $6,000,000 for general failures. For intentional failures, combined penalties will be $1,000 per form with no cap.
The due date for sending Form 1099 to recipients is January 31. The deadline for sending Form 1096 to the IRS is February 28 (or February 29 since 2016 is a leap year). Late forms filed within 30 days of the original due date will be subject to a reduced penalty of $50 per return. For late forms filed on or before August 1st of the calendar year in which the filing is due, the penalty is decreased to $100 per return.
Taxpayers with less than $5 million in average gross receipts over the three most recent taxable years are subject to a reduced maximum penalty. While still doubling the penalties assessed prior to the act, small taxpayers are limited to a $1 million maximum for failure to file, $175,000 for correction within 30 days, and $500,000 for correction by August 1st.
All entities engaged in a trade or business are required to file 1099s if certain thresholds are met. Payments made for services, non-employee compensation, rent, real estate sales and prizes of $600 or more require the filing of Form 1099. Nonprofit organizations are considered to be engaged in a trade or business and are subject to the reporting requirements. Payments of interest, dividends or royalties of $10 or more also require Form 1099.
Previously, some small organizations took the position that the cost of complying with informational return reporting was greater than the potential penalties and opted not to file 1099s. With the increased fees and no maximum for intentional disregard of filing requirements, this is no longer the case.
Best Practice Tip: Ask all new vendors/contractors for a W-9 prior to issuing any payments and keep it on file. Form W-9 is an informational form that is issued between business parties, not to/from the IRS. The form provides all of the applicable information you need to make the filing. Securing the information prior to issuing any payments will ensure you’re not scrambling for the necessary information with the deadline looming.
By Janet Berry-Johnson, CPA