Penalties

The following penalties generally apply to the person required to file information returns. The penalties apply to paper filers as well as to magnetic media/electronic filers.

Failure To File Correct Information Returns by the Due Date (Section 6721)

If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The penalty applies if you fail to file timely, you fail to include all information required to be shown on a return, or you include incorrect information on a return. The penalty also applies if you file on paper when you were required to file on magnetic media, you report an incorrect TIN or fail to report a TIN, or you fail to file paper forms that are machine readable.

The amount of the penalty is based on when you file the correct information return. The penalty is:

• $15 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $75,000 per year ($25,000 for small businesses, defined below).
• $30 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $150,000 per year ($50,000 for small businesses).
• $50 per information return if you file after August 1 or you do not file required information returns; maximum penalty $250,000 per year ($100,000 for small businesses).

If you do not file corrections and you do not meet any of the exceptions to the penalty described below, the penalty is $50 per information return.

Small businesses - lower maximum penalties.   You are a small business if your average annual gross receipts for the 3 most recent tax years (or for the period you were in existence, if shorter) ending before the calendar year in which the information returns were due are $5 million or less.

Exceptions to the penalty.   The following are exceptions to the failure to file penalty:

1. The penalty will not apply to any failure that you can show was due to reasonable cause and not to willful neglect. In general, you must be able to show that your failure was due to an event beyond your control or due to significant mitigating factors. You must also be able to show that you acted in a responsible manner and took steps to avoid the failure.
2. An inconsequential error or omission is not considered a failure to include correct information. An inconsequential error or omission does not prevent or hinder the IRS from processing the return, from correlating the information required to be shown on the return with the information shown on the payee's tax return, or from otherwise putting the return to its intended use. Errors and omissions that are never inconsequential are those related to (a) a TIN, (b) a payee's surname, and (c) any money amount.
3. De minimis rule for corrections. Even though you cannot show reasonable cause, the penalty for failure to file correct information returns will not apply to a certain number of returns if you:
   1. Filed those information returns,
   2. Either failed to include all the information required on a return or included incorrect information, and
   3. Filed corrections by August 1.

If you meet all the conditions in a, b, and c above, the penalty for filing incorrect returns (but not for filing late) will not apply to the greater of 10 information returns or ½ of 1% of the total number of information returns you are required to file for the calendar year.

Intentional disregard of filing requirements.   If any failure to file a correct information return is due to intentional disregard of the filing or correct information requirements, the penalty is at least $100 per information return with no maximum penalty.

Failure To Furnish Correct Payee Statements (Section 6722)

If you fail to provide correct payee statements and you cannot show reasonable cause, you may be subject to a penalty. The penalty applies if you fail to provide the statement by January 31 (see part H on page GEN-9), you fail to include all information required to be shown on the statement, or you include incorrect information on the statement. Payee statement has the same meaning as statement to recipient as used in part H on page GEN-9.

The penalty is $50 per statement, no matter when the correct statement is furnished, with a maximum of $100,000 per year. The penalty is not reduced for furnishing a correct statement by August 1.

Exception.   An inconsequential error or omission is not considered a failure to include correct information. An inconsequential error or omission cannot reasonably be expected to prevent or hinder the payee from timely receiving correct information and reporting it on his or her income tax return or from otherwise putting the statement to its intended use. Errors and omissions that are never inconsequential are those relating to (a) a dollar amount, (b) a significant item in a payee's address, (c) the appropriate form for the information provided (i.e., whether the form is an acceptable substitute for the official IRS form), and (d) whether the statement was furnished in person or by statement mailing, when required.

Intentional disregard of payee statement requirements.   If any failure to provide a correct payee statement is due to intentional disregard of the requirements to furnish a correct payee statement, the penalty is at least $100 per payee statement with no maximum penalty.

Forms 1099-MSA, 1099-Q, 1099-R, 5498, and 5498-MSA

The penalties under sections 6721 and 6722 do not apply to:

• Forms 1099-MSA and 5498-MSA, which are filed under section 220(h).
• Form 1099-Q, filed under section 529(d).
• Form 1099-R for distributions from Coverdell ESAs, which is filed under section 530(h).
• Form 5498, which is filed under sections 408(i), 408(l), and 530(h).

The penalty for failure to timely file Form 1099-MSA, 5498-MSA, 1099-Q, 1099-R (for Coverdell ESAs only), or 5498 is $50 per return with no maximum, unless the failure is due to reasonable cause. See section 6693.

Civil Damages for Fraudulent Filing of Information Returns

If you willfully file a fraudulent information return for payments you claim you made to another person, that person may be able to sue you for damages. You may have to pay $5,000 or more.

Magnetic Media/Electronic Reporting

Magnetic media reporting may be required for filing all information returns discussed in this publication (see Who must file on magnetic media on page GEN-5). Acceptable forms of magnetic media are IBM 3480, 3490, or AS400 compatible tape cartridges (including 8mm); and 31/2-inch diskettes.

If you are required to file on magnetic media, you may choose to file electronically instead. You may choose magnetic media or electronic filing even if you are not required to file on magnetic media.

Pub. 1220, Specifications for Filing Forms 1098, 1099, 5498, and W-2G Magnetically or Electronically, is the revenue procedure for magnetic media and electronic reporting. Different types of payments, such as interest, dividends, and rents, may be reported on the same tape or other submission.

Electronic submissions are filed using the Filing Information Returns Electronically System (FIRE System). The FIRE System operates 24 hours a day, 7 days a week, and is accessed using your personal computer and modem. You may dial the FIRE System at 304-262-2400. For more information, see Pub. 1220 or go to www.irs.gov/efile and click on the link for the FIRE System.

Due dates.   File Forms 1098, 1099, or W-2G on magnetic media by February 28, 2003. If you file electronically, you may file by March 31, 2003. File Form 5498 or 5498-MSA by June 2, 2003. See part H on page GEN-9 about providing Forms 1098, 1099, 5498, and W-2G or statements to recipients.

Extension of time to file.   For information about requesting an extension of time to file, see Extension on page GEN-7.

If you file on magnetic media or electronically, do not file the same returns on paper.

 

Who must file on magnetic media.   If you are required to file 250 or more information returns, you must file on magnetic media. The 250-or-more requirement applies separately to each type of form. For example, if you must file 500 Forms 1098 and 100 Forms 1099-A, you must file Forms 1098 on magnetic media, but you are not required to file Forms 1099-A on magnetic media.

The magnetic media filing requirement does not apply if you apply for and receive a hardship waiver. See How to request a waiver from filing on magnetic media below.

The IRS encourages you to file on magnetic media or electronically even though you are filing fewer than 250 returns.

Filing requirement applies separately to originals and corrections.   The magnetic media filing requirements apply separately to original returns and corrected returns. Originals and corrections are not aggregated to determine whether you are required to file on magnetic media. For example, if you file 400 Forms 1098 on magnetic media and you are making 75 corrections, your corrections can be filed on paper because the number of corrections for Form 1098 is less than the 250 filing requirement. However, if you were filing 250 or more Form 1098 corrections, they would have to be filed on magnetic media.

How to get approval to file on magnetic media.   File Form 4419, Application for Filing Information Returns Magnetically/Electronically, at least 30 days before the due date of the returns. File only one Form 4419 for all types of returns that will be filed on magnetic media. Once you have received approval, you need not reapply each year. The IRS will provide a written reply to the applicant and further instructions at the time of approval, usually within 30 days. A magnetic media reporting package, which includes all the necessary transmittals and instructions, will be mailed to all approved filers.

How to request a waiver from filing on magnetic media.   To receive a waiver from the required filing of information returns on magnetic media, submit Form 8508, Request for Waiver From Filing Information Returns on Magnetic Media, at least 45 days before the due date of the returns. You cannot apply for a waiver for more than 1 tax year at a time. If you need a waiver for more than 1 tax year, you must reapply at the appropriate time each year.

If a waiver for original returns is approved, any corrections for the same types of returns will be covered under the waiver. However, if you submit original returns on magnetic media but you want to submit your corrections on paper, a waiver must be approved for the corrections if you must file 250 or more corrections.

If you receive an approved waiver, do not send a copy of it to the service center where you file your paper returns. Keep the waiver for your records only.

Single application.   Submit both Forms 4419 and 8508 to apply for approval for filing returns on magnetic media, and if the approval is not granted, to apply for a waiver from the magnetic media requirement.

Penalty.   If you are required to file on magnetic media but fail to do so, and you do not have an approved waiver, you may be subject to a penalty of $50 per return for failure to file on magnetic media unless you establish reasonable cause. However, you can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file on magnetic media.

The penalty applies separately to original returns and corrected returns. See Filing requirement applies separately to originals and corrections above.

Paper Document Reporting

If you are required to file 250 or more information returns, see Magnetic Media/Electronic Reporting on page GEN-4.

Common errors.   Be sure to check your returns to prevent the following common errors:

1. Duplicate filing. Do not send the same information to the IRS more than once.
2. Filer's name, address, and TIN are not the same on Form 1096 and the attached Forms 1099, 1098, 5498, or W-2G.
3. Decimal point to show dollars and cents omitted. For example, 1230.00 is correct, not 1230.
4. Two or more types of returns submitted with one Form 1096 (e.g., Forms 1099-INT and 1099-MISC with one Form 1096). You must submit a separate Form 1096 with each type of return.

Required format.   Because paper forms are read by machine (optical character recognition equipment), all Forms 1096 and Copies A of Forms 1098, 1099, and 5498 must be prepared in accordance with the following instructions. If these instructions are not followed, you may be subject to a penalty of $50 for each incorrectly filed document.

1. Do not cut or separate Copies A of the forms that are printed two or three to a sheet (except Form W-2G). Forms 1098, 1099, and 5498 are printed two or three to an 8 x 11 inch sheet. Form 1096 is printed one to an 8 x 11 inch sheet. These forms must be submitted to the IRS on the 8 x 11 inch sheet. If at least one form on the page is correctly completed, you must submit the entire page. Forms W-2G may be separated and submitted as single forms. Send the forms to the IRS in a flat mailing (not folded).
2. No photocopies of any forms are acceptable. See How To Get Forms and Publications on page GEN-3.
3. Do not staple, tear, or tape any of these forms. It will interfere with the IRS's ability to scan the documents.
4. Pinfeed holes on the form are not acceptable. Pinfeed strips outside the 8 x 11 inch area must be removed before submission, without tearing or ripping the form. Substitute forms prepared in continuous or strip form must be burst and stripped to conform to the size specified for a single sheet (8 x 11 inches) before they are filed with the IRS.
5. Do not change the title of any box on any form. Do not use a form to report information that is not properly reportable on that form. If you are unsure of where to report the data, call the information reporting call site at 1-866-455-7438 (toll free).
6. Report information only in the appropriate boxes provided on the forms. Make only one entry in each box unless otherwise indicated in the form's specific instructions.
7. Do not submit any copy other than Copy A to the IRS.
8. Do not use prior year forms unless you are reporting prior year information; do not use subsequent year forms for the current year. Because forms are read by machine, you must use the current year form to report current year information.
9. Use the official forms or substitute forms that meet the specifications in the 2002 Pub. 1179. If you submit substitute forms that do not meet the current specifications and that are not machine scannable, you may be subject to a penalty of $50 for each return for improper format.
10. Do not use dollar signs ($) (they are preprinted on the forms), ampersands (&), asterisks (*), commas (,), or other special characters in money amount boxes.

Suggested format.   Below are suggestions that will allow the IRS to process the submitted forms in the most economical manner:

1. Although handwritten forms are acceptable, the IRS prefers that you type or machine print data entries using 10 pitch (pica) or 12 pitch (elite) black type. Use block print, not script characters. Insert data in the middle of the blocks well separated from other printing and guidelines, and take other measures to guarantee a dark black, clear, sharp image.
2. Do not enter 0 (zero) or None in money amount boxes when no entry is required. Leave the boxes blank unless the instructions specifically require that you enter a 0 (zero). For example, in some cases, you must enter 0 (zero) to make corrections. See Corrected Returns on page GEN-11.
3. Do not enter number signs (#); for example, enter RT 2, not Rt. #2.

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