How to Avoid a Section 6721 Intentional Disregard Penalty

The 6721(e) Penalty for ‘Intentional Disregard’: How to Avoid

6721(e) Penalty for ‘Intentional Disregard’ 

There are several statutes contained within the Internal Revenue Code that deals with the issuance of penalties. Section 6721 in general refers to the imposition of penalties for the failure to file correct information returns. There are many different types of information returns, and while the negligent or unintentional failure to file will not result in a 6721(e) penalty — when a person acts with intentional disregard, they are at risk of penalties.  The statute can be a bit complicated, so let’s walk through the verbiage of 6721(a) and (e), Section 6724, and the corresponding regulations.

6721 (a) Imposition of penalty

• • • (1) In general

      • In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $250 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $3,000,000.

    • (2) Failures subject to penalty

      • For purposes of paragraph (1), the failures described in this paragraph are

        1. any failure to file an information return with the Secretary on or before the required filing date, and

        2. any failure to include all of the information required to be shown on the return or the inclusion of incorrect information.

26 U.S. Code § 6724 (Definition of an Information Return)

• • • (1) Information return The term “information return” means—

      • (A) any statement of the amount of payments to another person required by—

        • (i) section 6041(a) or (b) (relating to certain information at source),

        • (ii) section 6042(a)(1) (relating to payments of dividends),

        • (iii) section 6044(a)(1) (relating to payments of patronage dividends),

        • (iv) section 6049(a) (relating to payments of interest),

        • (v) section 6050A(a) (relating to reporting requirements of certain fishing boat operators),

        • (vi) section 6050N(a) (relating to payments of royalties),

        • (vii) section 6051(d) (relating to information returns with respect to income tax withheld),

        • (viii) section 6050R (relating to returns relating to certain purchases of fish), or

        • (ix) section 110(d) (relating to qualified lessee construction allowances for short-term leases),

• • • • (B) any return required by—

        • (i) section 6041A(a) or (b) (relating to returns of direct sellers),

        • (ii) section 6043A(a) (relating to returns relating to taxable mergers and acquisitions),

        • (iii) section 6045(a) or (d) (relating to returns of brokers),

        • (iv) section 6045B(a) (relating to returns relating to actions affecting basis of specified securities),

        • (v) section 6050H(a) or (h)(1) (relating to mortgage interest received in trade or business from individuals),

        • (vi) section 6050I(a) or (g)(1) (relating to cash received in trade or business, etc.),

        • (vii) section 6050J(a) (relating to foreclosures and abandonments of security),

        • (viii) section 6050K(a) (relating to exchanges of certain partnership interests),

        • (ix) section 6050L(a) (relating to returns relating to certain dispositions of donated property),

        • (x) section 6050P (relating to returns relating to the cancellation of indebtedness by certain financial entities), (xi)section 6050Q (relating to certain long-term care benefits),

        • (xii) section 6050S (relating to returns relating to payments for qualified tuition and related expenses),

        • (xiii) section 6050T (relating to returns relating to credit for health insurance costs of eligible individuals),

        • (xiv) section 6052(a) (relating to reporting payment of wages in the form of group-life insurance),

        • (xv) section 6050V (relating to returns relating to applicable insurance contracts in which certain exempt organizations hold interests),

        • (xvi) section 6053(c)(1) (relating to reporting with respect to certain tips),

        • (xvii) subsection (b) or (e) of section 1060 (relating to reporting requirements of transferors and transferees in certain asset acquisitions),

        • (xviii) section 4101(d) (relating to information reporting with respect to fuels taxes), (xix)subparagraph (C) of section 338(h)(10) (relating to information required to be furnished to the Secretary in case of elective recognition of gain or loss),

        • (xx) section 264(f)(5)(A)(iv) (relating to reporting with respect to certain life insurance and annuity contracts),

        • (xxi) section 6050U (relating to charges or payments for qualified long-term care insurance contracts under combined arrangements), (xxii)section 6039(a) (relating to returns required with respect to certain options),

        • (xxiii) section 6050W (relating to returns to payments made in settlement of payment card transactions),

        • (xxiv) section 6055 (relating to returns relating to information regarding health insurance coverage),

        • (xxv) section 6056 (relating to returns relating to certain employers required to report on health insurance coverage), or

        • (xxvi) section 6050Y (relating to returns relating to certain life insurance contract transactions)

      • (C) any statement of the amount of payments to another person required to be made to the Secretary under—

        • (i)section 408(i) (relating to reports with respect to individual retirement accounts or annuities), or

        • (ii)secion 6047 (d) (relating to reports by employers, plan administrators, etc.), and

26 USC 6721 (e) Penalty in case of intentional disregard

If 1 or more failures described in subsection (a)(2) are due to intentional disregard of the filing requirement (or the correct information reporting requirement), then, with respect to each such failure—

• • 1. subsections (b), (c), and (d) shall not apply,

    2. the penalty imposed under subsection (a) shall be $500, or, if greater—

• • • • (A) in the case of a return other than a return required under section 6045(a), 6041A(b), 6050H, 6050I, 6050J, 6050K, or 6050L, 10 percent of the aggregate amount of the items required to be reported correctly,

      • (B) in the case of a return required to be filed by section 6045(a), 6050K, or 6050L, 5 percent of the aggregate amount of the items required to be reported correctly,

        • (C) in the case of a return required to be filed under section 6050I(a) with respect to any transaction (or related transactions), the greater of— (i)$25,000, or (ii)the amount of cash (within the meaning of section 6050I(d)) received in such transaction (or related transactions) to the extent the amount of such cash does not exceed $100,000, or

      • (D) in the case of a return required to be filed under section 6050V, 10 percent of the value of the benefit of any contract with respect to which information is required to be included on the return, and

        • in the case of any penalty determined under paragraph (2)—

          • • (A) the $3,000,000 limitation under subsection (a) shall not apply, and

            • (B)such penalty shall not be taken into account in applying such limitation (or any similar limitation under subsection (b)) to penalties not determined under paragraph (2).

Intentional Disregard Definition (26 CFR 301.6721-1)

• • • (2) Meaning of “intentional disregard.”

      • A failure is due to intentional disregard if it is a knowing or willful –

        • (i) Failure to file timely, or

        • (ii) Failure to include correct information.

          • Whether a person knowingly or willfully fails to file timely or fails to include correct information is determined on the basis of all the facts and circumstances in the particular case.

    • (3) Facts and circumstances considered.

      • The facts and circumstances that are considered in determining whether a failure is due to intentional disregard include, but are not limited to –

        • (i) Whether the failure to file timely or the failure to include correct information is part of a pattern of conduct by the person who filed the return of repeatedly failing to file timely or repeatedly failing to include correct information;

        • (ii) Whether correction was promptly made upon discovery of the failure;

        • (iii) Whether the filer corrects a failure to file or a failure to include correct information within 30 days after the date of any written request from the Internal Revenue Service to file or to correct; and

        • (iv) Whether the amount of the information reporting penalties is less than the cost of complying with the requirement to file timely or to include correct information on an information return.

301.6724-1 Reasonable cause

As with many code sections, when the Taxpayer can provide their mistake was due to reasonable cause, penalties may be avoided or abated.

• • • (a) Waiver of the penalty –

      • (1) General rule.

        • The penalty for a failure relating to an information reporting requirement (as defined in paragraph (j) of this section) is waived if the failure is due to reasonable cause and is not due to willful neglect.

    • (2) Reasonable cause defined.

      • The penalty is waived for reasonable cause only if the filer establishes that either –

        • (i) There are significant mitigating factors with respect to the failure, as described in paragraph (b) of this section; or

        • (ii) The failure arose from events beyond the filer’s control (“impediment”), as described in paragraph (c) of this section. Moreover, the filer must establish that the filer acted in a responsible manner, as described in paragraph (d) of this section, both before and after the failure occurred. Thus, if the filer establishes that there are significant mitigating factors for a failure but is unable to establish that the filer acted in a responsible manner, the mitigating factors will not be sufficient to obtain a waiver of the penalty. Similarly, if the filer establishes that a failure arose from an impediment but is unable to establish that the filer acted in a responsible manner, the impediment will not be sufficient to obtain a waiver of the penalty. See paragraph (g) of this section for the reasonable cause safe harbor for persons who exercise due diligence

    • (b) Significant mitigating factors.

      • In order to establish reasonable cause under this paragraph (b), the filer must satisfy paragraph (d) of this section and must show that there are significant mitigating factors for the failure. The mitigating factors include, but are not limited to –

        • (1) The fact that prior to the failure the filer was never required to file the particular type of return or furnish the particular type of statement with respect to which the failure occurred, or

        • (2) The fact that the filer has an established history of complying with the information reporting requirement with respect to which the failure occurred. In determining whether the filer has such an established history, significant consideration is given to –

          • (i) Whether the filer has incurred any penalty under §§ 301.6721-1, 301.6722-1, or 301.6723-1 in prior years for the failure (or under parallel provisions of prior law), and

          • (ii) If the filer has incurred any such penalty in prior years, the extent of the filer’s success in lessening its error rate from year to year. A filer may treat as a penalty not incurred any penalty under sections 6721 through 6723 that was self-assessed under section 6724(c)(3) and any penalty under section 6676(b) that was self-assessed under section 6676(d), prior to amendment or repeal by the Omnibus Budget Reconciliation Act of 1989. See paragraph (c)(5) of this section for the application of this paragraph (b) to failures attributable to the actions of a filer’s agent.

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