The penalty for failing to e-file? Well, it depends

Never give the IRS a choice about how to calculate penalties. In email advice, the IRS explains that 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. How much you’ll pay is up to the IRS—it has several choices and the most expensive choice appears to be the optimal one. (EEC 201603031)

How the IRS thinks about penalty assessments. If you file at least 250 information returns, you must e-file. For 1099s, for example, you’re re­­quired to e-file if you’re filing 250 of any set of forms (e.g., 250 1099-MISC forms or 250 1099-R forms).

Under tax code Section 6721, the penalty is gen­­­­erally $520 per failure to e-file, or, if greater, a percentage of the aggregate amount of the items required to be correctly reported. The issue for the IRS was figuring out how to interpret the penalty’s second clause.

IRS: The tax code is silent with regard to the procedure used for computing the penalty based on the applicable percentage of the aggregate amount.

If you file 300 returns on paper, so you’re 50 returns over the 250-e-filing threshold, the IRS noted that it has several options to determine the applicable percentage of the aggregate amount:

  • It could be based on the 50 returns with the high­­est amount reported
  • It could be based on the 50 returns with the lowest amount reported
  • It could be based on 50 randomly selected returns
  • It could be based on the average amount reported on all 300 returns, multiplied by 50.

After listing those choices, the IRS concluded that the calculation resulting in the highest penalty assessment may be the appropriate one, because it reflects the fact that Congress increased the penalty multiple times over the past 10 years.