The Trade Preferences Extension Act of 2015, signed into law by President Obama in June, mainly focuses on the United States' foreign trading policies. Yet, one provision of this act (Sec. 806) also increases penalties for businesses that fail to file, or that incorrectly file, required information returns.
Responsibility to File Information Returns
Most businesses understand their responsibility to file Forms W-2 for employees and have a process in place to assure the task is completed. However, businesses must also file Forms 1099 if they take part in what the IRS deems a reportable transaction during the tax year. The newly increased penalties for failure to file or incorrectly filing W-2s and 1099s serve as yet another reminder that accurate tax reporting is essential. Payroll and accounting records must be properly maintained and verified prior to the completion of year-end filings.
Impact of Trade Preferences Extension Act for Small Businesses
According to the Trade Preferences Extension Act, tax reporting penalties are assessed for several reasons. The first case is for informational returns filed on time, but with incorrect information. Corrected filings receive lower penalties, but a penalty is still assessed. In the second case, companies that fail to file required informational returns, or companies filing these returns after the stated deadline are also subject to penalties.
The amount charged also depends on how quickly the corrected or missing return is filed. For example, an incorrect W-2 which has not been corrected by August 1 of the following tax year will be subject to the maximum penalty. This maximum is increasing from $100 per incorrect return to $250 per return, up to a new maximum penalty amount of $3,000,000. These increases will be effective for all required information returns filed after December 31, 2015.
Review Current Accounting and Tax Procedures
To mitigate the risk of incorrect filings, companies should review current tax reporting policies to ensure information is properly reported to the IRS on a timely basis. Consult tax professionals as needed for best practices. For small businesses handling, payroll, tax, and accounting procedures in-house, consider the best ways to integrate these processes for greater efficiency and accuracy.
Leverage Technology: Use an Online Accounting System
Online accounting systems may help improve tax reporting in a variety of ways. Newer cloud-based systems may provide a daily backup of accounting data to guarantee that required tax information will never be lost. Online accounting systems are often compatible with payroll and banking systems, which streamlines the compilation of tax reporting. Also, the expense reporting features of an online accounting system often allow the ability to track payments by line item in order to assist with preparation of individual information returns. Finally, cloud based accounting systems give companies the ability to grant access to external accountants for more efficient and effective financial and tax reporting.
Tax reporting is often complex, and from time to time errors in reporting may arise. To limit exposure to filing penalties like those mandated in the Trade Preferences Act of 2015, consider using an online accounting system.