IRC 6721: Penalties for Failing to File Correct Information Returns

Businesses and individuals responsible for filing information returns must ensure accuracy and timeliness to avoid penalties under Internal Revenue Code (IRC) Section 6721. This section imposes fines for late, incorrect, or missing filings, which can add up quickly. Compliance is essential to avoid unnecessary costs.

Understanding these penalties, how they are calculated, and the distinction between late filings and inaccurate reporting is key to minimizing risk. Non-filers face not only financial penalties but also enforcement measures like backup withholding and potential legal action.

Information Returns Subject to Penalty

Various IRS forms fall under IRC Section 6721, requiring businesses and organizations to file correctly to avoid penalties. These forms report different types of payments and wages to both the IRS and recipients. Filing late or submitting incorrect versions can result in financial consequences.

Form 1099 Series

The 1099 series includes multiple forms used to report non-wage income. Form 1099-NEC is issued to independent contractors paid $600 or more in a tax year. Form 1099-MISC covers other payments, such as rent, medical payments, and royalties. Investment income is reported on Forms 1099-DIV and 1099-INT, which detail dividend and interest earnings.

Entities issuing these forms must ensure the recipient’s Taxpayer Identification Number (TIN) is correct, as errors can trigger penalties. The IRS offers a TIN Matching Program to verify accuracy before submission. Businesses filing 250 or more of the same type of 1099 must do so electronically under Treasury regulations, with noncompliance leading to additional fines.

Form W-2

Employers must provide Form W-2 to employees and file copies with the Social Security Administration (SSA) to report wages, tips, and withheld taxes. Accuracy is essential, as errors can affect employees’ Social Security benefit calculations.

The January 31 deadline applies to both furnishing copies to employees and submitting them to the SSA. Employers filing 10 or more W-2s must do so electronically under updated IRS regulations.

Mistakes on W-2s, such as incorrect names or Social Security numbers, can be corrected using Form W-2c. The SSA’s Business Services Online (BSO) portal allows verification of SSNs before filing to reduce errors.

Other Returns Under This Section

Several other forms fall under IRC Section 6721’s penalty provisions. Form 1042-S reports payments to foreign persons subject to U.S. withholding tax. Errors on this form can lead to additional tax liabilities.

Form 3921 is used when corporations transfer stock to employees under an Incentive Stock Option (ISO) plan, while Form 3922 reports stock acquired through an Employee Stock Purchase Plan (ESPP). These forms help track equity compensation, affecting future capital gains tax calculations.

For financial institutions, Form 5498 reports contributions to Individual Retirement Accounts (IRAs), including rollovers and required minimum distributions (RMDs). Errors can create tax complications for account holders, especially if contribution limits are exceeded.

Failing to file these forms or submitting incorrect information can result in penalties. Businesses should implement verification procedures, use electronic submission when required, and stay updated on regulatory changes.

Calculation of Penalties

Penalties under IRC Section 6721 depend on how late a filing occurs and whether the failure was intentional. The IRS follows a tiered structure, with fines increasing the longer a return remains unfiled or incorrect.

If a correction is made within 30 days, the penalty is $60 per return, capped at $630,500 per year for businesses. If filed after 30 days but before August 1, the fine increases to $120 per return, with a maximum of $1,891,500 annually. If the correction is made after August 1 or not at all, the penalty rises to $310 per return, with a ceiling of $3,783,000 per year. Businesses with gross receipts of $5 million or less face reduced limits.

Intentional disregard of filing requirements results in significantly higher fines. In these cases, the penalty is at least $630 per return, with no maximum limit. The IRS determines intent based on patterns of noncompliance, failure to act after receiving notices, or knowingly submitting false information.

Small errors may qualify for de minimis relief, which applies if incorrect information is off by $100 or less for income amounts or $25 or less for withheld tax. These errors do not require correction unless the recipient requests one. However, missing TINs do not qualify for this relief and remain subject to full penalties.

Late Filing vs Inaccurate Reporting

Timeliness and accuracy are both required, but the consequences for each differ. Late filing penalties depend on when the form is submitted, while inaccuracies can result in repeated penalties if left uncorrected.

Errors can stem from miscalculations, incorrect payment classifications, or transposed identification numbers. Unlike late filings, inaccuracies can lead to further scrutiny if discrepancies exist between taxpayer records and IRS data.

Certain inaccuracies carry more risk. Misstating amounts subject to withholding can cause tax underpayments, leading to additional interest and penalties. Incorrect reporting of foreign income transactions may also trigger penalties under the Foreign Account Tax Compliance Act (FATCA) or IRC provisions for failing to disclose offshore assets.

Non-Filer Enforcement

The IRS employs multiple enforcement measures to identify and penalize non-filers. One method is data reconciliation, where the agency cross-references filings from third parties, such as banks, employers, and payment processors, against taxpayer records. When an expected return is missing, the IRS may issue a Notice CP215, informing the filer of the failure and the associated penalty assessment. Ignoring this notice can escalate the situation, leading to enforced collection actions.

Automated Underreporter (AUR) programs flag discrepancies when income is reported by one source but not by the recipient. If a business fails to file a required Form 1099 or W-2, the IRS may still receive income data from another entity, such as a financial institution or employer. This can result in backup withholding enforcement, where payers must withhold 24% of future payments to the non-compliant party under IRS regulations.

For persistent non-filers, penalties can extend beyond monetary fines. Repeated noncompliance or large-scale violations may lead to civil injunctions, compelling future compliance. In extreme cases, willful failure to file can result in criminal prosecution, carrying fines of up to $25,000 per violation and imprisonment of up to one year.