Let’s Talk About Tax Reporting Penalties
January 26, 2022
January 31 is just around the corner—have you completed all your stock plan tax reporting? With this deadline looming, I thought today might be a good time to review the penalties for late filings and possible exceptions.
What’s Due by January 31?
All participant copies of US tax forms reporting equity compensation must be furnished to recipients by January 31. This includes Form W-2, Form 1099-MISC, Form 1099-NEC, Form 3921, and Form 3922.
In addition, Form W-2 and Form 1099-NEC must be filed with the appropriate agency by January 31 (Form W-2 is filed with the SSA and Form 1099-NEC is filed with the IRS).
When Is Everything Else Due?
It depends on the form; here’s a schedule:
- February 16: Deadline to furnish copies of Form 1099-B to recipients.
- February 28: Deadline to submit paper filings of Forms 1099-MISC, 1099-B, 3921, and 3922 to the IRS.
- March 16: Deadline to file Form 1042-S (sometimes required for compensation paid to non-US directors) with the IRS and furnish a copy to the recipient.
- March 31: Deadline to submit electronic filings of Forms 1099-MISC, 1099-B, 3921, and 3922 to the IRS.
What are the Penalties for Late or Omitted Filings?
The penalty varies based on when the late filing is submitted and whether the failure is due to intentional disregard. In addition, the penalties and maximums are indexed to inflation on an annual basis, so they also vary based on the tax year the filing relates to. Here are the penalties for 2021 filings:
- $50 per form if filed within 30 days (maximum of $571,000 per year)
- $110 per form if filed by Aug 1 (max of $1,713,000)
- $280 per form thereafter (max of $3,426,000)
- At least $570 per form with no maximum for intentional disregard
The penalties apply separately to the return filed with the IRS (or SSA) and the recipient copy. If you fail to file both or file both late, the penalties and maximums stated above are doubled. This applies to the penalty for intentional disregard as well.
If you realize you are going to miss a reporting deadline, one obvious way to avoid a penalty is to obtain an extension. You can receive an automatic, no-questions-asked, 30-day extension for filing Forms 1099-B, 1099-MISC, 1042-S, 3921, and 3922 with the IRS by filing Form 8809. You must file your request for any extension by the deadline for filing the form.
You can also use form 8809 to request an extension for filing Form W-2 and Form 1099-NEC but you must provide a reason for the request, there are only five acceptable reasons to select from, the filing must be submitted in paper format, and the extension is not automatic.
Form 8809 can not be used to request an extension for furnishing the participant copies of any of the above forms. For that, you have to fax a letter to the IRS. The letter must explain the reason for the delay and the extension is not automatic. If granted, an extension is typically for a maximum of 30 days (for Form W-2, the extension is typically for only 15 days).
I don’t know anyone who has ever requested an extension for participant statements, so I don’t know how generous the IRS is about granting them. If you’ve requested an extension on furnishing participant statements, I’d love to hear your story.
If you make a mistake on a form and file/furnish the corrected form after the reporting deadline, this counts as a late filing and is subject to the penalties I describe above.
It is important to ensure that the tax identification numbers reported on the above tax forms are correct. The IRS will compare the TINs and taxpayer names reported on your forms to their own records. If they find a mismatch, i.e., if a TIN matches to a different name in the IRS’s records than the name reported on the form, the IRS sends an error notice and imposes a late filing fee.
Unfortunately, once you submit the filings, it takes the IRS a couple of years to verify the TINs. Which means that by the time you receive the notice of the error, you are at the maximum penalty amount ($280 for 2021 filings). Thus, it is a good idea to use a TIN matching service to verify that the TINs included in your filings are correct before submitting them to the IRS.
Exceptions to the Penalties
There are some exceptions to the penalties.
Inconsequential Errors: These are errors that do not prevent the IRS from processing the filing or correlating the filing to the payee's tax return (or otherwise using the filing as intended). Errors relating to TINs, surnames, and amounts are always consequential (except for de minimis errors—see below).
De Minimis Amounts: Errors of $100 or less for income amounts and $25 or less for tax withholding. It is not even necessary to file a correction unless the participant requests a corrected statement.
De Minimis Corrections: If the number of corrections you have to file is less than the greater of 10 returns or .5% (.005) of the total returns you filed, the corrections are not subject to a late filing fee. To rely on this exception, the original filings must have been filed on time and the correction must be filed by August 1.
Reasonable Cause: I know you aren’t supposed to have favorites when it comes to IRS penalty exceptions but we all know that everyone has their preferred exception and this one is mine. The penalties do not apply if you can demonstrate that your reporting failure was due to an event beyond your control or significant mitigating factors. You must also be able to show that you acted in a responsible manner and took steps to avoid the failure.
I think this exception is helpful in a number of circumstances that are beyond your control, such as employees who don’t respond to disqualifying disposition surveys and complete the surveys incorrectly, brokers who report trades late or report incorrect trade information, etc. I’m sure you can think of your own examples.
How Do You Apply for an Exception?
I have long wondered about this exact question, so I was excited to come across the article “5 Q&As About IRS Information Reporting Penalty Notice 972CG” by the accounting firm Crowe, which explains how you do this.
According to the article, the IRS will send Notice 972CG, Notice of Proposed Civil Penalty, to inform you that one or more of your filings is subject to a penalty. It will take a couple of years for the IRS to send you this notice. According to the article, in late 2021, the IRS was just sending out notices for 2019 filings.
Once you receive Notice 972CG, review it to determine why the IRS is assessing a penalty. The penalty could be due to a late filing, an error (e.g., a TIN mismatch), or some other reason. I assume that the notice will be routed to your legal team and they’ll make an initial assessment as to the validity of the IRS’s claim. But if the claim relates to stock compensation, your legal team will likely ask you about it.
If you plan on paying the penalty, you don’t need to respond, you can just go ahead and set the wheels in motion to make the payment. But if you want to request an exception, you can respond to the notice to make your case. According to the Crowe article:
The response should include the facts, including the reason for each error, and, in the case of requests for reasonable cause relief, why the filer is eligible for such relief.
The article also notes that you can find detailed rules for reasonable cause relief in Treas. Reg. §301.6724-1 and IRS Publication 1586.
Speaking of Penalties
The reporting penalties have nothing on the penalties for late deposits of tax withholding, which can range from 2% to 15% of the deposit amount. Don’t miss our upcoming webcast “How to Avoid Penalties for the IRS $100,000 Next-Day Deposit Rule” on February 16 to learn what the deposit requirements are and how you can make sure your deposits are timely.