“It’s really American to avoid paying taxes, legally” – Lindsey Graham
Let’s face it, penalties can be painful. However, they can serve a valuable purpose in motivating people to do the right thing. Whether we’re discussing filing accurate returns, making the proper payments or simply watching the calendar for due dates, full compliance with tax laws is the best way to avoid pain.
Though penalties have been used to enforce tax collection for over a century, the last 60 years have seen more frequent use. Since 1955, the number of penalties one can incur has grown by more than a multiple of 10. Even now, new and expanded penalties seem to follow new legislation or redefined tax codes. The IRS is anticipating $136 million in additional income from new and modified penalties that will be paid over the next decade. To avoid these agonizing costs, let’s look at recent changes where we need to pay attention.
- The Protecting Americans from Tax Hikes (PATH) Act of 2015
The PATH Act came into effect on December 18, 2015. For the tax preparer, there is a bit more work to do and a lot more scrutiny. PATH addresses 15 areas with new or revised penalties. Yes, the IRS is getting tougher on a few things so you might want to read the details.
A newly revised checklist (Form 8867) is a must for returns claiming the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC) and/or the American Opportunity Tax Credit (AOTC). Tax preparers are required to submit this list as a part of the due diligence process. It is meant to substantiate a client’s eligibility for these claims to reduce fraud and erroneous refunds. The fine is at least $500 for each credit on a return that does not satisfy the due diligence condition. And, don’t forget the simple things like signing a return, furnishing and keeping copies, and accurate information or it will cost you from $50 to $25,500 for each year. Ouch!
- The Consolidated Appropriations Act of 2016 – updates to the PATH Act
The new deadline for filing a US Return of Partnership Income (Form 1065) is now a bit earlier, March 15. Failure to file on time will cost each partner approximately $200/month. In addition, as of 2016, all W-2, W-3 (SSA) and 1099-Misc forms must be filed with the IRS by January 31. This has been added to emphasize the importance of accurate reporting, giving the IRS a chance to verify more information. The good news is the penalties are flexible. How quickly returns are amended can save you some cash. The base penalty is $100-$250/return with a maximum of $3million in aggregate. My advice, double check your information and update your calendars today.
- The Trade Preference Extension Action of 2015
While this action was primarily an extension of the 1974 trade act between the US and the African Growth and Opportunity Act, leave it to legislators to slip a clause in at the bottom. As of June 2015, failing to file accurate information on returns or to furnish the correct payee statements (under Section 6722) is cause for penalties, which on average have doubled.
- The Trade Facilitation and Trade Enforcement Act of 2015
This act increased the penalties found In Sec 6651(a). The failure to file penalty is 5% of the tax due on the return per month past due, or part thereof, up to a maximum of 25% in aggregate. Returns more than 60 days late deemed due to neglect will find an additional penalty of the lesser of $205 or 100% of the tax due. Failure to pay will cost .5% of the tax due per month. We recommend you heartily suggest clients both file and pay promptly. If payment is not possible, file, file, file anyway.
- The Tax Increase Prevention Act of 2014
Embedded in this act is another action called the Achieving a Better Life Experience (ABLE) Act. It allows the penalties under Sections 6651, 6652c, 6695, 6698, 6699, 6721 and 6722 to be adjusted for inflation for all returns due after 2014. Some leniency may apply under certain circumstances.
DON’T FORGET there are very few exceptions to the Affordable Care Act’s penalties. Information returns for the first year of Obamacare have also had penalties adjusted. The IRS can offer some relief if they feel a diligent effort was made to comply and will consider waiving the penalties under Sec 6724’s definition of reasonable cause.
In summary, having additional knowledge is only beneficial if you use it. Take the time to create organizational checklists to ensure all the correct information and forms are filed. Keep yourself, your employees and your clients up to date on new or modified tax regulations. If all else fails, reach out to the IRS for help. Any effort toward honesty is usually well received by our friends at the IRS.