Ways and Means Committee penalty reform package - very good, but could be better.

• Author: Rau, Charles W.

Ways and Means Committee Penalty Reform Package -- Very Good, But Could Be Better

Chairman J.J. Pickle of Texas and his colleagues on the Oversight Subcommittee have fashioned a penalty reform bill that will significantly improve our existing civil tax penalty structure. The bill, however, does contain some negatives for the corporate taxpaying community. For example, the bill does not deal with the problem faced by "large corporations" in making their estimated income tax payments. In addition, there is a need for the committee report on the bill to expressly address some situations to ensure that the legislation achieves its intended results. This article reviews the provisions that should be of most interest to business taxpayers.

Information Returns and Payee Statements

The bill would introduce a time sensitivity factor with respect to the penalties to be levied on most delinquent information returns filed with the government. If such returns are filed late, but within 30 days of the due date, the penalty is to be $15 per return -- up to a maximum of $75,000 for the year. (1) If the returns are filed more than 30 days after their due date but prior to August 1, the penalty will be $30 per return -- subject to an annual cap of $150,000. (2) Information returns filed after August 1 would be subject to the $50 per return penalty -- with a maximum payment of $250,000 in a given year. (3)

In addition, the bill includes a de minimis rule that would allow the correction or completion of previously filed incorrect or incomplete information returns by August 1. Such corrections or completions will not give rise to a penalty assertion to the extent the number of returns do not exceed the greater of (i) 10 or (ii) one-half of one percent of the total of such returns filed by the taxpayer. Since as an estimated 84 percent of payers file 10 or fewer returns, the de minimis exception offers substantial relief to small businesses.

As to certain specified information returns, the $50 per delinquent return (to a maximum of $100,000) remains in effect.

If non-filing is due to intentional disregard, the existing higher penalties will continue to apply.

The bill would substantially increase the penalty attributable to untimely filed payee statements -- those given to the recipients of payments -- from $5 to $50 per return and would impose a $100,000 (rather than $20,000) annual cap on such penalties.

Significantly, the bill contains a general waiver provision in respect of penalties relating to information returns and payee statements. These penalties will be waived if the failure is due to reasonable cause and not to willful neglect. Unfortunately, the explanation submitted to the Budget Committee by the Ways and Means Committee Report does not include a helpful, TEI-provided example of what constitutes "reasonable cause." TEI recommended that the...