"The Pension Specialists" Blog

Great News – Major Exception Created to the $250 Per Incorrect Form 1099-R Penalty.

It was only 4 months ago when the Trade Preferences Extension Act of 2015 was enacted. This law authorized an increase in the per 1099 form penalty from $100 per form to $250 per form. The $250 penalty applies to the 2015 1099 forms (including form 1099-R) to be filed after December 31, 2015.

Under existing law, there is a de minimis exception, but it is very limited. A filer cannot be penalized even if it has prepared forms with errors (any error no matter how small) as long as the incorrect forms do not exceed the greater of 10, or .005 times the total number of information returns required to be filed by the filer during the calendar year.

The new law creates two “additional” exceptions - if the dollar amount of the distribution is incorrect by $100 or less then the general rule is that such incorrect form is not one for which the IRS may impose the $250 penalty. And the same is true if the amount of federal withholding differs by $25 or less from the correct amount. The IRS may issue regulations to prevent the abuse of these new exceptions.

There is, however, an exception to the exception at least with respect to the individual’s form (i.e the payee statement). It appears the IRA custodian need not issue a corrected form to the IRS, but it will need to issue a corrected form or statement to the individual. If he or she so elects pursuant to procedures to be defined by the IRS.

Note that this new de minimis exception applies to returns required to be filed, and payee statements required to be provided, after December 31, 2016. That is, it applies to 2016 reporting forms and not to the 2015 reporting forms. This new exception is certainly good news. It is a small but reasonable change.