GainsKeeper Blog

New Law Significantly Increases Tax Penalties Affecting Cost Basis 1099’s and Transfer Statements

WALTHAM, Mass. – Oct. 08, 2010 – On September 27, 2010, the Small Business Jobs Act of 2010 (P.L. No. 111-240, the Act) became law. The Act significantly increases penalties relating to Form 1099-Bs, transfer statements and issuer corporate action statements that must be provided under the new cost basis reporting law. These increased penalties result in greater risks to financial service firms responsible for cost basis reporting if they fail to timely provide these forms and statements or they fail to calculate cost basis correctly.

The Act substantially increases the maximum penalties that apply for failing to file or filing incorrect information returns with the IRS and for failing to provide taxpayers with or providing them with incorrect information returns under Internal Revenue Code Sections 6721 and 6722. One set of penalties (under Sec. 6721) applies for failing to file or providing incorrect information on an “information return” filed with the IRS and another set (under Sec. 6722) applies for failing to provide or providing incorrect information on a “payee statement”

Among the information returns affected by these new penalties are Form 1099-B (required under Sec. 6045, which are both information returns and payee statements), transfer statements (required under Sec. 6045A, which are defined as payee statements under Sec. 6724(d)(2)(I)) and issuer corporate action returns (required under Sec. 6045B, which are defined as information returns under Sec. 6724(d)(1)(B)(iv) and payee statements under Sec. 6724(d)(2)(J)).

Under old law, the generally applicable maximum penalty (Sec. 6721) for each information return that was not filed or was incorrect was $50 per return, with an aggregate maximum penalty to a taxpayer for a single year relating to all information returns of $250,000. Under the Act, effective for information returns filed on or after January 1, 2011, the generally maximum penalty per information return is doubled to $100 and the aggregate maximum penalty for a single year is substantially increased to $1,500,000. The old law also provided a per information return minimum penalty of $100 if the failure to file or provide correct information was due to intentional disregard. The Act increases that minimum penalty to $250 per return effective for returns filed on or after January 1, 2011.

Under old law, the generally applicable maximum penalty (Sec. 6722) for each payee statement that was not provided to recipients or was incorrect was $50 per return, with an aggregate maximum penalty to a taxpayer for a single year relating to all payee statements of $100,000. Under the Act, effective for payee statements filed on or after January 1, 2011, the generally maximum penalty per information return is doubled to $100 and the aggregate maximum penalty for a single year is drastically increased to $1,500,000. The old law also provided a per payee statement minimum penalty of $100 if the failure to file or provide correct information was due to intentional disregard. The Act increases that minimum penalty to $250 per return effective for returns filed on or after January 1, 2011.

Note that under old law and under the Act, there is no maximum aggregate limit for penalties due to intentional disregard for either information returns or payee statements and in the case of Form 1099-B related penalties, the maximum per return penalties for intentional disregard can be 10 percent (five percent for information returns to the IRS plus an additional five percent for payee statements) of the amount that should have been reported on the forms.

The Act also provides that every five years, penalties will be increased to account for inflation.

SUMMARY OF PENALTY CHANGES	Returns to IRS	Statements to Recipients
Old Per Return or Statement Maximum Penalty	$50/Return	$50/Statement
New Per Return or Statement Maximum Penalty	$100/Return	$100/Statement
Old Aggregate Maximum Penalty	$250K	$100K
New Aggregate Maximum Penalty	$1.5 Million	$1.5 Million
Old Minimum Intentional Disregard Penalty	$100/Return	$100/Statement
New Minimum Intentional Disregard Penalty	$250/Return	$250/Statement

Stevie

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