Tag Archives: tax law

The Deadline for Employers and Other Payors for Sending Forms W-2, 1099-NEC and 1099 MISC is Approaching Fast! Penalties for Failure to Meet the January 31, 2022 Deadline Without Reasonable Cause Are Drastic!

By:  Coleman Jackson, Attorney & Certified Public Accountant
January 7, 2022

The Deadline for Employers and Other Payors for Sending Forms W-2, 1099-NEC and 1099 MISC is Approaching Fast!

 The Law:  Treasury Regulation Section 1.6041(a):

The federal income tax regulations require that anyone engaged in a trade or business must report compensation paid on Form 1096, Annual Summary and Transmittal of U.S. Information Returns and Form 1099 for non-employee compensation over $ 600 and on Form W-2 for employee compensation.  Form 1099 has been divided into a series of forms over the years.  The main ones are Form 1099-Misc which is used for reporting all kinds of payments to third parties and Form 1099-NEC which is used to report compensation paid to non-employees.  See Internal Revenue Code Section 6041.

 

The Deadline for Information Returns and Where: Internal Revenue Code Section 6071 

The Deadline for Information Returns and Where:  Internal Revenue Code Section 6071:

The deadline for sending employees Form W-2 and filing it with the Social Security Administration is January 31, 2022 for compensation paid in 2021.  The deadline for sending non-employees Form 1099-NEC and filing it with the Internal Revenue Service is January 31, 2022 for compensation for services incurred in 2021.  Since 2020 compensation of $600 or more paid to non-employees, including attorneys are to be reported on Form 1099-NEC; except for non-employee payments made to corporations.  Payments to corporations of attorneys are to be reported on Form 1099-MISC. For non-employee payments made during the course of conducting a trade or business, the deadline for filing Form 1099-MISC is also January 31, 2022.  January 31, 2022 is right around the corner; certain extensions are available if requested prior to January 31, 2022.

 

The Potential Legal Exposure to Employers and Other Payors of Compensation for Services

The Potential Legal Exposure to Employers and Other Payors of Compensation for Services:

An employer or payor of compensation for services who fails to supply accurate information forms, such as, Form W-2 to employees and Forms 1099-NEC to non-employees or Form 1099-Misc to non-employees can be assessed a penalty under Internal Revenue Code Section 6721 for the following violations of U.S. tax law:

  1. Failure to timely provide a correct Form W-2 to an employee;
  2. Failure to timely file a correct Form W-2 and related Form W-3 and Form 1096 to the Social Security Administration;
  3. Failure to timely provide a correct Form 1099-NEC to a non-employee;
  4. Failure to timely file a correct Form 1099-NEC with the Internal Revenue Service;
  5. Failure to timely provide a correct Form 1099-Misc to a payee when required;
  6. Failure to timely file a correct Form 1099-Misc with the Internal Revenue Service; and
  7. Note: the key point here is the timeliness of providing the proper form to the payee and timely filing the correct information to the proper governmental agencies.  For example, the employer does not file Form W-2 with the Internal Revenue Service.  Employers and other payors can incur penalties for failing report correct Social Security Numbers or valid ITINs or filing incomplete forms or illegible documents with the government.  Employers must ensure employees accurately complete Form I-9 at the time of their hire.  Moreover, all payors of compensation to non-employees must verify with the IRS that the tax identification numbers received by workers are properly issued to them.  Otherwise, payors of compensation can be subjected to substantial penalties. 

 Table of Potential Penalties for Untimely or Inaccurate Information Returns

Table of Potential Penalties for Untimely or Inaccurate Information Returns:

Internal Revenue Code Section 6721 and the implementation regulations permits the Internal Revenue Service to exercise discretion when charging penalties for failing to comply with U.S. tax law pertaining to information returns.  The Internal Revenue Service routinely charge separate penalties for failing to file a correct information return on time and failure to provide correct payee statements on time.  So, keep in mind when reviewing the penalty table below that there could be doubling of penalties:  one for untimely or failure to file the return with the appropriate governmental agency and two for untimely or failure to provide correct statements to employees or non-employee payees.  The following penalties in time can be very substantial and the maximum penalty allowed under the law for negligent violations differ depending on the size of the employer.  Intentional violators of these information return laws are subject to a wide range of civil penalties under U.S. tax law, criminal sanctions are also a real possibility for tax fraud.  See Internal Revenue Code Section 7204, Tax Crimes, Other Offenses and Forfeitures.  Moreover, whenever a taxpayer violates tax laws with intent, willfully or with reckless abandonment they expose themselves and their organizations to legal exposures under other laws pertaining to defrauding the U.S. government. In this blog we will limit our analysis and discussion to civil actions.  Interested readers should follow our blog site where we routinely write about taxation, government contracts, contract litigation and immigration law matters; which are, areas of law that we practice at Coleman Jackson, P.C.

Potential Civil Charges for Each Information Return or Payee Statement:

Tax Year Up to 30 Days Late 31 Days Late Through August 1 After August 1 or Not Filed Intentional Disregard
2023 $50 $110 $290 $580
2022 $50 $110 $280 $570
2021 $50 $110 $280 $560
2020 $50 $110 $270 $550
2019 $50 $100 $270 $540
2018 $50 $100 $260 $530
2017 $50 $100 $260 $520
2016 $50 $100 $260 $520
2015 – 2011 $30 $60 $100 $250

 

I should point out here that although we label the following table in this blog using the term, ‘potential charges’; there is nothing uncertain about these penalty assessments.  I do not want you to think that there is some doubt as whether the IRS will enforce the law against violators of the information return reporting laws.  These penalties are routinely assessed practically automatically when an IRS agent or examiner audits the taxpayer or the IRS otherwise discovers the problem through informants, disgruntled workers, payees, conflicting information in Form 941, Form 940 and Form 1096, incongruent tax positions taken by the taxpayer, such as 1099A positions or otherwise. In recent years, the IRS Civil and Criminal Divisions seemed to have focused on payroll tax compliance issues.   Penalties for failure to timely provide and file information returns are subject to interest just like other penalties under other provisions of the Internal Revenue Code.  Criminal provisions in U.S. tax law also exposes violators to potential prosecution.

 

What Can an Employer Do if Potential Compliance Issues Lurk in the Dark at their Establishments?

What Can an Employer Do if Potential Compliance Issues Lurk in the Dark at their Establishments?

Establishments engaged in a trade or business should first of all consider reviewing their 2021 expenses prior to the January 31, 2022 information return filing deadline and make sure that they timely provide employees and non-employees correct statements.  Moreover, they should consider filing the correct reports with the correct governmental agency.

In the event an establishment engaged in a trade or business conducts a review of its expenses and determines that they have filed incorrect information reports in the past, they should consider providing corrected statements to their workers or other non-employee payees.  This is especially true if they timely files the corrected forms with the appropriate governmental officials.  Information returns, if timely corrected may not be subjected to these penalties.  There is however a very short window to amend and file corrected information reports.  These information reports must be corrected within approximately six months of their respective due date(s).

Now, in the event the returns cannot be corrected by amendment; taxpayers who can show that the information return violations were due to reasonable cause or that their failure to comply with federal tax laws were not due to any fault of their own or that the violations of law were due to causes beyond their powers or controls could potentially successfully get the penalties abated in part or in total. An abatement of penalty request is simply a way the taxpayer can seek forgiveness.  The request is based in fundamental fairness and justice and requires good faith and a genuine basis in fact and law.  The traditional penalty abatement procedures and rules apply to abatement of penalty request associated with violations of the federal information return tax laws. The decision to ask for an abatement of penalties should not be filed lightly since frivolous refund requests applies to abatement requests.  Frivolous or groundless requests are subject to a 20% penalty under U.S. tax law.  These requests need to be based in law with the marshalling of documentary evidence, witness testimony and other credible substantiating evidence.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

Podcast – Exclusion from Gross Income | LEGAL THOUGHTS

Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published October 7, 2020

Exclusion from Gross Income

Legal Thoughts is a podcast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Mayra Torres, the Public Relations Associate of Coleman Jackson, P.C.   The topic of discussion is “Income from Discharge of Indebtedness.” You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

TRANSCRIPT:

ATTORNEY:  Coleman Jackson
LEGAL THOUGHTS
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY:  Coleman Jackson

Welcome to Tax Thoughts

  • My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas
  • Our topic for today is: “Income from Discharge of Indebtedness.”
  • Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
  • On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: ““Income from Discharge of Indebtedness.”

Interviewer:  Mayra Torres, Public Relations Associate

  • Good morning everyone. It is a pretty chilly Autumn morning today! My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C. We are a taxation, litigation and immigration law firm based right here in Dallas, Texas.
  • Question 1:  Attorney:  Is all income taxable in the United States?

Attorney Answers Question 1:

  • Good morning Mayra. Wow that is a broad question this morning! Let me begin with Internal Revenue Code Section 61 where gross income is defined in U.S. Tax Law. That is where we must begin our discussion of taxable income in U.S. tax law. Gross income is defined in Internal Revenue Code Section 61 as all income from whatever source derived.
  • The Internal Revenue Code contains a laundry list of types of income that are taxable, but IRC Section 61 specifically states that the list is not intended to be exhaustive or complete. The types of income specifically included on the gross income laundry list are:
    1. Compensation for services, including fees, commissions, fringe benefits, and similar items;
    2. Gross income derived from business;
    3. Gains derived from dealings in property;
    4. Interest;
    5. Rents;
    6. Royalties;
    7. Dividends
    8. Alimony and separate maintenance payments;
    9. Annuities;
    10. Income from life insurance and endowment contracts;
    11. Pensions;
    12. Income from discharge of indebtedness;
    13. Distributive share of partnership gross income;
    14. Income in respect of a decedent; and
    15. Income from an interest in an estate or trust
  • Repeat: This list of taxable gross income is not exhaustive. Gross income under U.S. Tax Law is extremely broad and envision taxation of increments of wealth constituted in whatever shape or form.

Interviewer:  Mayra Torres, Public Relations Associate

  • Attorney that is a lot. Let me see whether we can narrow down our discussion to this!
  • QUESTION 2: Is any income excluded from gross income for U.S. tax purposes?

Attorney Answers Question 2:

  • Mayra, that indeed is a good strategy because as I have said the concept of gross income in U.S. tax law is a global concept. Gross income includes income derived from whatever source derived.
  • As for income that is excluded from gross income for tax purposes. Let me just limit our discussions to income from discharge of indebtedness since this could potentially be a looming problem as the economic impact of Covid-19 continues to hammer many families in their pocketbooks. Internal Revenue Code Section 108(a) states that gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge of indebtedness of the taxpayer if
    1. The discharge occurs in a title 11 bankruptcy case;
    2. The discharge occurs when the taxpayer is insolvent;
    3. The indebtedness discharged is qualified farm indebtedness;
    4. In the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness; or
    5. The indebtedness discharged is qualified principal residence indebtedness which is discharged-
      • Before January 1, 2021 , or
      • Subject to an arrangement that is entered into and evidenced in writing before January 1,2021.

Interviewer:  Mayra Torres, Public Relations Associate

  • Okay, you have listed about five categories there. Right now, could you please explain the last one you mentioned in the list in more detail.
  • Question 3: Explain what qualified principal residence indebtedness is and how it works and all?

Attorney Answers Question 3:

  • Mayra, the term principal residence indebtedness means the debt financing the taxpayer’s principal residence or place where the taxpayer resides most of the time. This is the main residence of the taxpayer.
  • The mortgage on the taxpayer’s main residence must meet both of these prongs or conditions:
    1. the mortgage must have been taking out to purchase, build, or substantially improve the taxpayer main home; and
    2. the mortgage must secure the taxpayer’s main home
    3. Let me just add that the taxpayer cannot have but one main residence which turns on all the facts and circumstances. The debt can be a second mortgage obligation if it meets requirements one and two.

Interviewer:  Mayra Torres, Public Relations Associate

  • Question 4:
  • Attorney how much of this qualified principal residence indebtedness is eligible for exclusion from the gross income of the taxpayer?

Attorney Answers Question 4:

  • Well, first of all let me say, the list of exclusions have a pecking order that taxpayers must be aware of; for example, the discharge of debt in a Chapter 11 Bankruptcy proceeding preempts all other exclusions under Code Section 108. And the insolvency exclusion that I mentioned awhile ago takes precedence over the farm debt exclusion and the qualified real property exclusion; and the principal residence indebtedness exclusion takes precedence over the insolvency exclusion unless the taxpayer makes the proper elections.
  • Now, let’s go back to your original question Mayra; please repeat your question again so that we can be clear on this.

Interviewer:  Mayra Torres, Public Relations Associate

  • Sure, no problem, Attorney! Thanks for pointing out the pecking order of the various exclusions.My original question was…
  • Question 5: How much of the qualified principal residence indebtedness that is forgiven by the lender is excluded from the gross income of the taxpayer?

Attorney Answers Question 5:

  • Okay, let me make four very important points as it relates to the amount of the exclusion of cancellation of debt income of certain qualified principal residence indebtedness:
    • Number 1: the exclusion of residence indebtedness only applies, for the most part, to debt discharged after 2006 and before 2021 or at least the taxpayer needs to have a written discharge agreement in place by December 31, 2020
    • Number 2: the maximum amount of forgiven debt that the taxpayer can treat as qualified principal residence indebtedness is $2 million dollars or $1 million if filing married filing separate; and
    • Number 3: The discharged debt must be directly related to decline in the market value of the taxpayer’s main home or directly due to the taxpayer’s disrupted or poor financial condition.
    • Number 4: The exclusion amount is limited to the part of the discharged loan that is qualified principal residence indebtedness. That simply means that the exclusion is limited to the portion of the discharged debt that meets the definition of qualified principal residence indebtedness that I discussed at the beginning of this discussion.

Interviewer:  Mayra Torres, Public Relations Associate

  • Question No. 6: Attorney, how does a taxpayer actually take the qualified principal residence debt exclusion? I mean is this on the tax return they file or what?

Attorney Answers Question 6:

  • Yes, the taxpayer must attach tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to their annual income tax return filed with the IRS and comply with appropriate instructions explaining their tax position.
  • Mayra, do you have any further questions with respect to types of income excluded from gross income? So far, we mostly have talked about qualified principal residence debt exclusion. And there are many aspects of this topic that we have not explored. I mean we could talk more about debt extinguished through repossessions and foreclosures. Any specific additional questions at this time on this debt cancellation topic?

Mayra’s Concluding Remarks

  • Attorney,Attorney thank you for answering my questions. I do have more questions involving the exclusion of canceled debt from U.S. taxation, but I can put them off to some other time.
  • Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever they listen to our podcast. Everybody take care!  And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is located right here in Dallas, Texas at 6060 North Central Expressway, Dallas, Texas 75206.
  • English callers: 214-599-0431 and Spanish callers:  214-599-0432.

 Coleman Jackson, Attorney’s concluding remarks:

 THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

  • Thanks for giving us the opportunity to inform you the exclusions of cancellation of debt income from U.S. taxes. If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Stay tune!  Watch for a new Legal Thoughts podcast in about two weeks.  We are here in Dallas, Texas and want to inform, educate, and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.