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IRS goes all in on failure-to-file penalties

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in Office Management,Payroll Management

If you intentionally fail to e-file information returns when you’re required to do so, you will be socked with a failure-to-file penalty. The IRS has had some difficulty in deciding how that penalty is calculated, but the issue is now settled.

It has opted for the calculation that will result in the most expensive assessment. (SBSE-20-0816-0024)

Five steps to infamy. If you intentionally fail to e-file W-2s or 1099s, the penalty is $530 per failure to e-file, or, if greater, 10% of the aggregate amount of the items required to be correctly reported. The issue for the IRS was how to interpret the penalty’s aggregate amount clause. IRS: The penalty is based on the average reported on all returns.

This is a five-step process:

1. Take the average of all amounts reported on all returns that were incorrectly filed on paper.

2. Multiply that average by the number of returns that were incorrectly filed on paper.

3. Multiply the Step 2 result by 10% (the applicable percentage).

4. Multiply the number of returns incorrectly filed on paper by $530.

5. Compare the result and assess the greater amount.

Example. You file 300 Forms 1099-MISC on paper, so you’re 50 returns over the 250-e-filing threshold. The aggregate amount required to be reported on those 300 forms is $6 million.

1. $6 million ÷ 300 returns = $20,000 average amount on all returns.

2. $20,000 × 50 (number of returns incorrectly filed on paper) = $1 million

3. $1 million × 10% (the aggregate amount) = $100,000.

4. 50 returns × $530 = $26,500.

5. Compare $100,000 and $26,500. The penalty is $100,000.

PAYROLL PRACTICE TIP: Forms 1099-MISC on which you’re reporting payments to independent contractors in Box 7 are due to the IRS by the end of the month. If you can’t e-file, file Form 8809 right now with the IRS for one 30-day automatic filing extension.


A step-by-step payroll compliance guide to each pay period, month and calendar quarter of the year is now available. Download it free here.

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