Penalty for Failure To Include Correct Information on Returns and Payee Statements -- Final Regulations Under Section 6723

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document provides final regulations on the penalty for failure to provide correct information on information returns and payee statements. Congress enacted this penalty in section 1501 of the Tax Reform Act of 1986 (Pub. L. 99-514). The penalty was subsequently revised by section 7711 of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239). These regulations do not reflect any revisions under the 1989 Act. These regulations affect persons who are required to file information returns with the Internal Revenue Service and to furnish statements to payees.

 DATES: These regulations are effective on publication, except section 301.6723-1A is effective January 1, 1987, as applicable to information returns and payee statements the due date for which (determined without regard to extensions) is after December 31, 1986, and before January 1, 1990.

 FOR FURTHER INFORMATION CONTACT: Renay France of the Office of the Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:CORP:T) (202-377-9344, not a toll-free call).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information contained in this final regulation has been reviewed and approved by the Office of Management and Budget in accordance with the requirements of the Paperwork Reduction Act (44 U.S.C. 3504(h)) under control number 1545 - 0909. The estimated average annual burden per respondent, depending on individual circumstances, is 5 hours and 46 minutes.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents may require greater or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance Officer T:FP, Washington, D.C. 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503.

BACKGROUND

 This document contains final regulations to be added to the Employment Taxes and Collection of Income Tax at Source Regulations (26 CFR Part 31) and the Regulations on Procedure and Administration (26 CFR Part 301) under section 6723 of the Internal Revenue Code of 1986. Section 6723 was added to the Internal Revenue Code by the Tax Reform Act of 1986 (Pub. L. 99-514).

 On September 10, 1987, the Federal Register published a notice of proposed rulemaking (52 FR 34358) by cross reference to temporary regulations published the same day in the Federal Register (52 FR 34355) under section 6723 of the Internal Revenue Code. A number of public comments were received concerning the regulations. A public hearing was not requested or held. After consideration of the written comments, the proposed regulations are adopted as revised by this Treasury decision.

EXPLANATION OF PROVISIONS

 Section 6723 imposes a penalty on any person who files an information return (as defined in section 6724(d)(1) prior to its amendment by section 7711 of the Omnibus Reconciliation Act of 1989, hereafter "the 1989 Act"), or furnishes a payee statement (as defined in section 6724(d)(2) prior to its amendment by the 1989 Act), and fails to include all the required information or includes incorrect information. The amount of the penalty is $5 for each return or statement for which there is a failure to include correct information. However, the total penalty imposed on any person for all such failures during a calendar year is limited to $20,000.

 The statute provides higher penalties for failures that are due to intentional disregard of the correct information reporting requirement, and these higher penalties are not subject to the $20,000 limit. Likewise, pursuant to section 6724 (prior to its amendment by the 1989 Act), the $20,000 limit does not apply with respect to interest or dividend returns or statements.

 The final regulations provide that for purposes of the penalty for failure to include correct information, the information that is required to be included correctly on a return or statement is the information required by the applicable information reporting statute or by any administrative pronouncement issued thereunder (such as a regulation, revenue ruling, revenue procedure, or information reporting form).

 The final regulations provide an exception from the penalty for inconsequential omissions and inaccuracies. To encourage the reporting of correct information, the final regulations also provide an exception for failures that are corrected within a specified time period. Further, the final regulations set forth the procedure to be followed in seeking a waiver for reasonable cause or due diligence. The final regulations provide rules regarding the circumstances in which a failure to include correct information on an information return will be treated as due to intentional disregard. These provisions are, to the extent applicable, consistent with the temporary and proposed regulations that were published in the Federal Register for February 21, 1991. Finally, the final regulations also provide rules for coordinating the penalty for failure to include correct information with other penalties, such as the section 6676 penalty for failure to supply identifying numbers (prior to its repeal by the 1989 Act).

COMMENTS

 The Service received several written comments regarding the proposed regulations. One commentator suggested changing the date for the original filing of information returns from the present requirements to October 1. Changing the original filing date of information returns is beyond the scope of these regulations. Therefore, this comment was not adopted.

 Another commentator requested changing the March 1 date in proposed section 301.6723-1(c)(1)(iii) to October 1. This section provides that a payor who fails to include correct information on a payee statement will not be subject to a penalty if the payor corrects the failure by March 1. Because taxpayers need timely correct information in order to file income tax returns, this suggestion was not adopted.

 The commentator also suggested deleting the 30-day requirements in proposed section 301.6723-1(c)(1)(i) and (ii) because these requirements are unnecessarily complex and encourage multiple submissions of corrected documents where errors or omissions are discovered at different times. Deleting the 30-day requirements would allow payors to submit all of their corrections on October 1. Processing efficiencies are reduced if all corrected information returns are submitted to the Service on October 1. Therefore, this suggestion was not adopted.

 A commentator requested that the Service provide objective criteria in defining "intentional disregard" to ensure uniform application by Service personnel. According to the commentator, the definitions are too general and too vague to provide useful guidance to Internal Revenue Service agents. Because the Service is addressing this concern in regulations issued under sections 6721-6724 as revised by section 7711 of the 1989 Act (sections 301.6721-1T through 301.6724-1T), the suggestion is not reflected in these regulations.

 A commentator also requested guidance on the application of the penalty for failures occurring on composite-payee statements. A composite statement is one statement containing the required information on payee statements under section 6049 (Form 1099-INT or OID), under section 6042 (Form 1099-DIV), and 6044 (Form 1099-PART). The rules for preparing a composite statement are set forth in Rev. Proc. 90-44, 1990-2 C.B. 516. The issue is whether the penalty applies to composite statements in the same manner as it would if the statements had been provided separately to the payee. The Service also addresses this issue in the regulations issued under sections 6721-6724 as revised by section 7711 of the 1989 Act.

REGULATORY ANALYSES

 The Commissioner of Internal Revenue has determined that these final regulations are not a major rule as defined in Executive Order 12291 and that a regulatory impact analysis is therefore not required because any economic or other consequences result directly from the statute. With respect to the Regulatory Flexibility Act, it is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required because these regulations merely implement the statute, which imposes a significant economic impact on a substantial number of small entities.

DRAFTING INFORMATION

 The principal author of these final regulations is Renay France of the Office of the Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations on matters of both substance and style.

LIST OF SUBJECTS

26 CFR Part 31

 Employment taxes, Fishing vessels, Gambling, Income taxes, Lotteries, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation, Withholding.

26 CFR Part 301

 Administrative practice and procedure, Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, Taxes.

26 CFR Part 602

 Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 31, 301, and 602 are amended as follows:

PART 31 -- EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Par. 1. The authority for Part 31 continues to read in part:

Authority: 26 U.S.C. 7805. * * *

Par. 2. Section 31.6051-1(i) is amended by removing the last sentence thereof and adding the following two sentences in its place: "For the penalties applicable to information returns and payee statements the due date for which (determined without regard to extensions) is after December 31, 1989, see sections 6721-6724 as amended by section 7711 of the Omnibus Budget Reconciliation Act of 1989. See section 6723 (prior to its amendment by section 7711 of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106 (1989)) and section 301.6723-1A of this Chapter (as issued thereunder) for provisions relating to the penalty for failure to include correct information on an information return or a Payee statement and for the exceptions to the penalty, particularly the exception for timely correction, with respect to information returns and payee statements the due date for which, determined without regard to extensions, is after December 31, 1986, and before January 1, 1990."

Par. 3. Section 31.6051-2(c) is amended by removing the last sentence thereof and adding the following two sentences in its place: "For the penalties applicable to information returns and payee statements the due date for which (determined without regard to extensions) is after December 31, 1989, see sections 6721-6724 as amended by section 7711 of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106 (1989)). See section 6723 (prior to its amendment by section 7711 of the Omnibus Reconciliation Act of 1989) and section 301.6723-1A of this Chapter for provisions relating to the penalty for failure to include correct information on an information return or a payee statement and for the exceptions to the penalty, particularly the exception for timely correction, with respect to information returns and payee statements the due date for which, determined without regard to extensions, is after December 31, 1986, and before January 1, 1990."

PART 301 -- PROCEDURE AND ADMINISTRATION

Par. 4. The authority for Part 301 continues to read in part:

Authority: 26 U.S.C. 7805 * * *

Par. 5. An undesignated centerheading and section 301.6723-1A are added immediately following section 301.6724-1T to read as follows:

Regulations Applicable To Information Returns And Payee Statements The Due Date For Which (Without Regard To Extensions) Is After December 31, 1986, And Before January 1, 1990

SECTION 301.6723-1A FAILURE TO INCLUDE CORRECT INFORMATION.

(a) GENERAL RULE. If any person files an information return (as defined in section 6724(d)(1)) or furnishes a payee statement (as defined in section 6724(d)(2)) the due date for which, determined without regard to extensions, is after December 31, 1986, and before January 1, 1990, and such person fails to include all of the information required to be shown on such return or statement or includes incorrect information, such person will be considered to have failed to include correct information. For this purpose, information required to be shown on a return or statement is the information required by the applicable information reporting statute or by any administrative pronouncement issued thereunder (such as a regulation, revenue ruling, revenue procedure, or information reporting form). Except as otherwise provided in this section, any person who fails to include correct information shall pay $5 for each return or statement with respect to which such failure occurs; however, the total amount imposed on any person for all such failures during any calendar year shall not exceed $20,000. See paragraph (e) of this section regarding the higher penalties for intentional disregard of the correct information reporting requirement and for interest and dividend returns and statements.

(b) EXCEPTION FOR INCONSEQUENTIAL OMISSIONS AND INACCURACIES -- (1) EXCEPTION. The penalty imposed by paragraph (a) of this section will not be assessed for any failure to include correct information on an information return if the failure does not prevent or hinder the Internal Revenue Service from processing the return or from correlating the information required to be shown on the return with the information shown on the payee's tax return. Similarly, the penalty imposed by paragraph (a) of this section will not be assessed for any failure to include correct information on a payee statement if the failure cannot reasonably be expected to prevent or hinder the payee from timely receiving correct information and reporting it on his or her tax return.

(2) EXAMPLES. The provisions of this paragraph (b) may be illustrated by the following examples:

EXAMPLE 1. A payor files a Form 1099-MISC (relating to miscellaneous income) with the Internal Revenue Service and furnishes a corresponding statement to the payee. Both the Form 1099-MISC and the payee statement are complete and correct, except that the word "Street" is misspelled in the payee's address. The error does not prevent or hinder the Internal Revenue Service from processing the return or from correlating the information required to be shown on the return with the information shown on the payee's tax return. In addition, the error cannot reasonably be expected to prevent or hinder the payee from timely receiving correct information and reporting it on his or her tax return. Therefore, the penalty imposed by paragraph (a) of this section will not be assessed.

EXAMPLE 2. Assume the same facts as in Example 1, except that the only error on the Form 1099-MISC and the payee statement is that the payee's first name, "William," is misspelled as "Willaim." The penalty imposed by paragraph (a) of this section will not be assessed, for the reasons set forth in Example 1.

EXAMPLE 3. Assume the same facts as in Example 1, except that the only error on the Form 1099-MISC and the payee statement is that the payee's street address, 4821 Main Street, is incorrectly reported as 8421 Main Street. The penalty imposed by paragraph (a) of this section will not be assessed with respect to the Form 1099-MISC if the error does not prevent or hinder the Internal Revenue Service from processing the return or from correlating the information required to be shown on the return with the information shown on the payee's tax return. However, the penalty will be assessed with respect to the payee statement because the error can reasonably be expected to prevent or hinder the payee from timely receiving correct information and reporting it on his or her tax return. See paragraph (d) of this section regarding waiver of the penalty for reasonable cause or due diligence.

(c) EXCEPTION FOR CORRECTED OMISSIONS AND INACCURACIES -- (1) EXEMPTION. The penalty imposed by paragraph (a) of this section generally will not be assessed for a failure to include correct information on an information return or payee statement if the person who filed the return or furnished the statement corrects the failure by the earliest of --

(i) The date that is 30 days after the date that the person discovers the failure; or

(ii) The date that is 30 days after the date of a written request, from the Internal Revenue Service to the person, for corrected information; or

(iii) October 1 (March 1 for payee statements) of the calendar year in which the return or statement is due.

(2) LIMITATIONS ON EXCEPTION. Notwithstanding paragraph (c)(1) of this section, timely correction of a failure to include correct information on a return or statement will not prevent assessment of the penalty for any failure that is part of a pattern of conduct, by the person who filed the return or furnished the statement, of repeatedly failing to include correct information. Further, correction of a failure to include correct information will not prevent assessment of the penalty for intentional disregard of the correct information reporting requirement. See paragraph (e)(1) of this section with respect to intentional disregard.

(3) EXAMPLES. The provisions of this paragraph (c) may be illustrated by the following examples:

EXAMPLE 1. In January 1987, Bank M prepares Forms 1099-INT (relating to interest income) with respect to interest income earned by its depositors in calendar year 1986. M timely files the forms with the Internal Revenue Service and timely furnishes copies to its depositors. On March 16, 1987, M discovers that the amount of backup withholding tax (Federal income tax withheld) was inadvertently omitted from several of the forms and payee copies. Several days later M files corrected forms with the Service and furnishes corrected copies to the affected payees. The penalty for failure to include correct information will not be due with respect to the incomplete Forms 1099-INT filed with the Internal Revenue Service, since they were corrected within 30 days after M discovered the omission and before October 1, 1987. However, the penalty will be due with respect to the incomplete copies furnished to the payees, since they were not corrected by March 1, 1987.

EXAMPLE 2. In January 1987, Corporation N files Forms 1099-DIV (relating to dividends and distributions) for calendar year 1986 and furnishes copies to its shareholders. A significant number of the forms and payee copies do not include the amount of backup withholding tax. On December 1, 1987, the Internal Revenue Service provides N with a written request for corrected information. On December 15, 1987, N files corrected forms with the Service and furnishes corrected copies to the payees. The penalty for failure to include correct information will be due with respect to the incomplete forms, since they were not corrected by October 1, 1987. In addition, the penalty will be due with respect to the incomplete copies furnished to the payees, since they were not corrected by March 1, 1987. However, N's correction of the forms is a fact to be considered, along with other facts, in determining whether the higher penalty for intentional failures will be imposed; see paragraph (e)(1)(ii)(B) of this section.

EXAMPLE 3. In January 1987, Corporation O files Forms 1099-DIV for calendar year 1986 and furnishes copies to its shareholders. O intentionally does not include the amount of backup withholding tax for any shareholder. Since the omissions represent an intentional disregard of the correct information reporting requirement, correction of the omissions will not prevent assessment of the penalty for intentional failure to include correct information.

(d) WAIVER FOR REASONABLE CAUSE OR DUE DILIGENCE -- (1) REASONABLE CAUSE. Except as provided in paragraph (d)(2) of this section (relating to interest or dividend returns or statements), the penalty imposed by paragraph (a) of this section will be waived for any failure to include correct information if it is established to the satisfaction of the district director or the director of the internal revenue service center that such failure was due to reasonable cause and not to willful neglect.

(2) DUE DILIGENCE. Paragraph (d)(1) of this section will not apply in the case of any interest or dividend return or statement (as defined in section 6724(c)(5). However, in such a case, the penalty imposed by paragraph (a) of this section will be waived for any failure to include correct information if it is established to the satisfaction of the district director or the director of the internal revenue service center that the person otherwise liable for such penalty exercised due diligence in attempting to include such information. The requirement to exercise due diligence imposes a higher standard of conduct than required under the reasonable cause defense.

(3) PROCEDURE FOR SEEKING WAIVER. Reasonable cause (or due diligence) may be established only by submitting a written statement that sets forth all the facts alleged as reasonable cause (or due diligence) and makes an affirmative showing of reasonable cause (or due diligence). The statement must be signed by the person required to file the information return or furnish the payee statement to which the penalty imposed by paragraph (a) of this section relates, and must contain a declaration that it is made under the penalties of perjury. See S 301.6061-1 for rules on the signing of returns.

(e) HIGHER PENALTIES IN CERTAIN CASES -- (1) INTENTIONAL DISREGARD OF THE CORRECT INFORMATION REPORTING REQUIREMENT -- (I) APPLICATION OF SECTION 6723(b). If a person fails to include correct information on an information return and such failure is due to intentional disregard of the correct information reporting requirement, the penalty imposed by paragraph (a) of this section with respect to such return will be determined under section 6723(b). The penalty prescribed by section 6723(b) for such a return is $100 or, if greater, the amount equal to 10 percent (or, in some cases, 5 percent) of the aggregate amount of the items required to be reported correctly on the return. In the case of any penalty determined under section 6723(b), the $20,000 limitation of paragraph (a) of this section will not apply. In addition, such penalty will not be taken into account in applying the $20,000 limitation to penalties not determined under section 6723(b).

(ii) MEANING OF INTENTIONAL DISREGARD. A failure to include correct information on an information return will be treated as due to intentional disregard of the correct information reporting requirement if the person who filed the return knowingly or willfully failed to include correct information at the time the return was filed. Whether a person knowingly or willfully failed to include correct information will be determined on the basis of all of the facts and circumstances in the particular case. Facts and circumstances to be considered for this purpose include, but are not limited to, the following --

(A) Whether the failure to include correct information is part of a pattern of conduct, by the person who filed the return, of repeatedly failing to include correct information on information returns;

(B) Whether the person who filed the return corrects the failure within 30 days after the date of any written request from the Internal Revenue Service for corrected information; and

(C) Whether the person who filed the return can reasonably be expected to have discovered the failure during the calendar year the return was due and, if so, whether timely correction was made.

(2) INTEREST AND DIVIDED RETURNS AND STATEMENTS. In the case of any interest or dividend return or statement (as defined in section 6724(c)(5)), the $20,000 limitation of paragraph (a) of this section will not apply. In addition, any penalty imposed by paragraph (a) of this section with respect to such a return or statement --

(i) will not be taken into account in applying the $20,000 limitation of paragraph (a) of this section with respect to other returns or statements, and

(ii) Will not be taken into account in applying the $100,000 limitations of sections 6721(a) and 6722(a) with respect to any return or statement.

(f) MANNER OF PAYMENT -- (1) IN GENERAL. Except as provided in paragraph (f)(2) of this section (relating to interest and dividend returns and statements), any penalty imposed by paragraph (a) of this section shall be paid on notice and demand by the Internal Revenue Service and in the same manner as a tax liability is paid.

(2) SELF-ASSESSMENT FOR INTEREST AND DIVIDEND RETURNS AND STATEMENTS. Any penalty imposed by paragraph (a) of this section with respect to an interest or dividend return or statement will be assessed and collected in the same manner as an excise tax imposed by subtitle D of the Internal Revenue Code, and the deficiency procedures of subchapter B of chapter 63 of the Code will not apply. In such a case, the penalty must be self-assessed and will be due and payable on April 1 of the calendar year following the calendar year for which the return or statement is required. The penalty should & remitted with a properly executed Form 8210 (Self-Assessed Penalties Return).

(g) COORDINATION WITH OTHER PENALTIES -- (1) PENALTY FOR FAILURE TO SUPPLY IDENTIFYING NUMBERS. Pursuant to section 6723(c), no penalty shall be imposed under paragraph (a) of this section with respect to any return or statement if a penalty is imposed under section 6676 (relating to the failure to supply identifying numbers) with respect to such return or statement.

(2) PENALTY FOR FAILURE TO FILE INFORMATION RETURNS OR FURNISH PAYEE STATEMENTS. No penalty shall be imposed under paragraph (a) of this section with respect to any return or statement if a penalty is imposed under section 6721 (relating to the failure to file certain information returns) or section 6722 (relating to the failure to furnish certain payee statements) with respect to such return or statement.

(3) EXAMPLES. The provisions of this paragraph (g) may be illustrated by the following examples:

EXAMPLE 1. Corporation P timely files Forms 1099-DIV (relating to dividends and distributions) for a calendar year and furnishes copies to its shareholders. Several of these forms and shareholder copies do not include correct taxpayer identification numbers (TINs), and Corporation P does not show that it exercised due diligence in attempting to include correct TINs; therefore, a penalty is imposed under section 6676(b) with respect to these several forms and shareholder copies. Since a penalty is imposed under section 6676, no penalty is imposed under paragraph (a) of this section with respect to the same several forms and shareholder copies.

EXAMPLE 2. Corporation Q, a bank, fails to file certain required Forms 1099-INT (relating to interest income of its depositors) in a timely fashion. Corporation Q claims that it exercised due diligence in attempting to file the forms on time and that therefore no penalty under section 6721 or 6723 should apply. If the Internal Revenue Service finds that Corporation Q did not exercise due diligence and imposes the failure-to-file penalty under section 6721 with respect to the forms, no penalty will be imposed under paragraph (a) of this section.

EXAMPLE 3. Corporation R files with the Internal Revenue Service a document purporting to be an information return. The document contains so many omissions and inaccuracies that its utility as an information return is minimized or eliminated. The Service imposes the failure-to-file penalty under section 6721 with respect to the document. Since the failure-to-file penalty is imposed, no penalty will be imposed under paragraph (a) of this section.

(h) EFFECTIVE DATE. The rules contained in this section are effective January 1, 1987, as applicable to information returns and payee statements the due date for which, determined without regard to extensions, is after December 31, 1986, and before January 1, 1990. See section 7711 of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106 (1989)) for the applicable penalty for certain failures related to information returns and payee statements the due date for which, without regard to extensions, is after December 31, 1989.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 6. The authority for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 7. Section 602.101(c) is amended by removing the number "section 301.6723-1T(d)" from the first column of the table and adding in its place the number "section 301.6723-1A(d)".