FSLG will only assess penalties during examinations. If delinquent returns are secured during a customer assistance contact or a compliance check, then the Specialist may assist the customer by explaining reasonable cause criteria and assisting with the preparation of explanation for filing a late return.

Reasonable cause must be considered and developed when issues arise during the examination concerning the assessment of penalties. Reasonable cause has replaced due diligence as the standard for abatement of a penalty. Reasonable cause is discussed in depth in IRM 20.1.1.

If the taxpayer provides a valid reasonable cause argument, the Specialist must document his or her position and should not proceed with assessment of the penalty.

If the Specialist determines that reasonable cause does not exist, then he or she should assess the applicable penalties. The Specialist’s consideration of reasonable cause must be fully documented in the case file and a penalty package must be prepared for closure.

The Specialist should also focus on educating the entity about the errors and on gaining future compliance. FSLG maintains an ongoing effort to develop, monitor, and revise programs designed to assist taxpayers in complying with legal requirements, and thus avoid penalties.

IRC Section 6721 provides for a penalty when an information return or statement is not correctly filed by the due date of the return. Penalties assessed under this section for returns due after 1989 are based on a time-sensitive penalty rate, as follows:

IRC section 6722 provides for a penalty of $50 for each failure, not to exceed $100,000, to timely and correctly furnish payee statements. If the failure is due to intentional disregard, the penalty may be increased to $100 or greater for each failure.

IRC section 6723 provides for a penalty of $50 for each failure, not to exceed $100,000, to comply with other specified information reporting requirements.

IRC section 6724 addresses waiver/definitions and special rules. This section provides that penalties will not be assessed if the taxpayer has "reasonable cause" for failing to comply.

In addition to the information contained in the Penalty Handbook, IRM 4.23.9, Employment Tax Penalty and Fraud Procedures, provides a good explanation of penalties that apply to employment taxes. IRM 4.23.9.12 specifically discusses Information Return Penalties.

See the discussion in IRM 4.23.14 regarding statutes on Information Return Penalties.

The trust fund recovery penalty may apply when income, social security and Medicare taxes that should have been withheld were not withheld, or were withheld but were not paid over to the IRS. Under this penalty, certain officers or employees of an organization may be held personally liable for the unpaid trust fund taxes (one-half of the social security and Medicare taxes and all the Federal income tax) and are assessed an amount equal to the unpaid taxes. This penalty may be applicable when these unpaid taxes cannot be immediately collected from the organization. The trust fund recovery penalty may be imposed on all persons who are determined to be responsible for collecting, accounting for and paying over these taxes, and who acted willfully in not doing so.

IRM 4.23.9 provides additional information about the trust fund recovery penalty and procedures that the Specialist should follow to make a referral to the Small Business and Self-Employed (SB/SE) operating division collection function when this penalty is applicable.

The return preparer penalty provisions were amended by the Small Business and Work Opportunity Act of 2007. The new law amended several provisions of the Internal Revenue Code to extend the return preparer penalties under IRC 6694 to preparers of all tax returns, including employment tax returns. See Notice 2007-54 for transitional penalty relief provided to employment tax return preparers. See IRM 20.1.6 for information about preparer penalties, preparer penalty cases, and referrals to the Office of Professional Responsibility (OPR).

Procedures related to return preparer/promoter penalties are currently being developed.

Per Section 6051(a) (Receipts for Employees) of the Code and Section 31.6051-1(a) and (b) of the Employment Tax Regulations, employers must furnish the tax return copy and the employee’s copy of Form W-2, Wage and Tax Statement, to employees for remuneration paid during the calendar year. The Form W-2 must show, among other information, the total amount of wages paid subject to withholding of income tax, the total amount of wages paid subject to FICA tax, and the total amounts of income tax and FICA tax deducted and withheld. The deadline for furnishing the forms to each employee, in most cases, is on or before January 31 of the succeeding year. Refer to IRM 4.23.9.12.

In addition, the employer must file a copy of each form, along with the transmittal Form W-3, with the Social Security Administration. Generally, the deadline for this filing is on or before the last day of February following the calendar year for which the payments are made. Refer to IRM 4.23.9.12.

The correct and timely reporting of employment taxes is the key to our voluntary compliance system as well as the cornerstone of the Social Security system. "Employment taxes" include income tax withholding, social security and Medicare taxes under the Federal Insurance Contribution Act, and unemployment taxes under the Federal Unemployment Tax Act (FUTA). Studies also show that the issuance of a Form W-2 greatly increases the likelihood that the income will be reported. Significant benefits can be gained from working with Federal, state, local and quasi-governmental agencies to understand problems and practices unique to governments. Voluntary compliance will usually improve once the customer understands his or her tax obligations.

Studies conducted by the Internal Revenue Service indicate there is widespread non-compliance by governmental entities that are required to file information returns. Studies also show that the issuance of a Form 1099 greatly increases the likelihood that the income will be reported. In 1996 legislation was passed that required Federal agencies to issue Form 1099-MISC to corporations for services.

When Form 1099 is issued, it is included in the Information Reporting Program (IRP) matching process, thus facilitating verification that the income was reported and identifying taxpayers that fail to file Forms 1040. Information returns are an integral part of ensuring voluntary compliance.

To compute the appropriate information return penalty as it relates to IRC section 6721, 6722 or 6723, multiply the number of violations in each penalty category by the dollar amount associated with the appropriate category:

During an employment tax return examination, as soon as a Specialist determines that information return penalties should be applied, the Specialist must prepare an Information Return Penalty Package. The Specialist will complete the ESTABLISH steps to establish a new activity on TREES using activity code 520 and source code 45 and submit to manager for approval. In addition, the Specialist will prepare Form 5597 to establish the information return penalty case controls on EOIC using source code 45, MFT 99 and activity code 520. It is not controlled on AIMS, only on TREES and EOIC.

The information return penalty case will be entered on ETS using activity code 520. The time spent reviewing books and records to determine whether taxpayers are in compliance with various filing requirements should be charged to the key case. Time spent calculating and preparing the penalty case will be charged to the penalty case.

Instructions on completing and assembling an information return penalty case can be found in IRM 4.23.8.11.

The information return penalty case will be maintained in a separate case file from the related employment tax case file. It will generally be closed concurrently with the employment tax case. The Field Manager (or MA) will close the information return penalty case on the EOIC using disposal code 03 if the penalty is paid and 99 if the penalty has not been paid. On TREES the case be closed using disposal 303 if paid and 801 if the penalty is not paid.

The information return penalty case file will be closed out of the group and submitted to CPM via TREES and an EOIC generated Form 3210, Document Transmittal. CPM will then forward the case to TE/GE closing unit for closure as needed. Information return penalty cases in which no penalties are assessed will be maintained by CPM according to record retention standards.

If there is more than one type of information return, prepare separate transmittals for each type of information return.

Payments of information return penalties that are secured will be processed in the same way as other advance payments. See IRM 4.90.12.11.4. The original Form 3244-A with the payment should be forwarded via a separate Form 3210 for processing. A copy of the Form 3244-A should be included in the case file.

The statute of limitations related to information returns normally ends February 28 rather than April 15. See IRM 4.23.14 and IRM 25.6.10 for discussions regarding statutes on information return penalties.