Comments on proposed information reporting penalty regulations.

On behalf of Tax Executive Institute, I am pleased to submit these comments on the Internal Revenue Service's temporary and proposed regulations under sections 6721 through 6724 of the Internal Revenue Code, relating to the imposition of penalties for failure to comply with information reporting requirements. The temporary regulations (T.D. 8333) and proposed regulations (IA-119-90) were issued by the IRS on February 15, 1991, and were the subject of a public hearing on September 9, 1991. The temporary and proposed regulations were published in the Federal Register on February 15, 1991 (56 Fed. Reg. 6969 and 56 Fed Reg. 7001, respectively), and were reprinted in the March 11, 1991, issue of the Internal Revenue Bulletin (1991-10 I.R.B. 6 and 1991-10 I.R.B. 28, respectively). For simplicity's sake, the regulations are generally referred to as "the temporary regulations" and specific provisions are cited as "Temp. Reg. [section]." References to page numbers are to the temporary regulations (and preamble) as published in the Internal Revenue Bulletin.

Background

Tax Execution Institute is the principal association of corporate tax executives in North America. Our nearly 4,600 members represented more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of tax-payer and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that evinces solid tax policy, that taxpayers can comply with, and that the IRS can audit.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed information reporting penalty regulations.

Overview

The Improved Penalty Administration and Compliance Act was enacted as part of the Omnibus Budget Reconciliation Act of 1989. The 1989 Act substantially revised the civic penalty provisions of the Internal Revenue Code. With particular regard to the imposition of penalties for failure to comply with certain information reporting requirements, sections 6721 through 6724 were amended to consolidate the information reporting penalty provisions, thereby obviating the imposition of multiple penalties for failures relating to a single information reporting return.

Specifically, the penalty for failure to include correct information on information returns, which was formerly found in section 6723, was made part of section 6721's penalty for failure to timely file correct information returns. The penalty for failure to include correct information on payee statements, which was formerly found in section 6723, was incorporated into section 6722, which imposes a penalty for failure to timely furnish correct payee statements. In addition, section 6723 was amended to impose a penalty for failure to comply with specified information reporting requirements not covered by section 6721 and 6722. (The penalties relating to specified information reporting requirements were formerly contained in sections 6672 and 6676(a), (c), and (d).) Section 6724 sets forth rules for the non-imposition of penalties where a failure is due to reasonable cause and not to willful neglect.

Rules Relating to

Information Returns

1. Prop. Reg. [section] 301.6721-1T(a)(2)(ii) provides that a failure to timely file "includes a failure to file in the required manner, for example, on magnetic media or in other machine-readable form as provided under section 6011(3)." Hence, a $50 per return penalty would be imposed under the regulations if the IRS is unable to process the magnetic media transmitted by a filer. Under section 12 of Rev. Proc. 91-33, 1991-24 I.R.B. 4, however, a filer is permitted to resubmit unprocessed tapes without penalty if the filer does so within 45 days after having been returned by the IRS for format or coding errors that prevent processing. [sup.1] TEI endorses the rule contained in the revenue procedure and recommends that the regulations be revised to include a reference to administrative pronouncements that set forth remedies for resubmitting data on magnetic media without penalty.

2. Prop. Reg. [section] 301.6721-1T(a)(2)(ii) provides that a failure to include correct information encompasses "a failure to include information required by applicable information reporting statutes or by any administrative pronouncements (such as regulations, revenue rulings, revenue procedures, or information reporting forms and instructions)." [sup.2] Although the knowledge presumed by this rule does not pose a substantial problem for sophisticated filers, it may suppose a level of "tax literacy" above that of many individuals who are subjec to the Internal Revnue Code's information reporting provisions. It may seem like heresy to tax professionals (including both TEI members and individuals who work at 1111 Constitution Avenue in Washington, D.C.), but many filers have no idea what a revenue procedure or revenue ruling is, let alone have access to such documents. The point is not to excuse noncompliance, but rahter to underscore the IRS's obligation to provide the necessary guidance to filers.

   Thus, consistent with the IRS's Compliance 2000 initiative, TEI recommends that the IRS...