It’s the time of year when the IRS sends to taxpayers Notice 972CG, “Notice of Proposed Civil Penalty,” proposing information return penalties. This year’s notices generally relate to 2019 information returns, such as Form 1099-MISC, “Miscellaneous Information,” and Form 1099-NEC, “Nonemployee Compensation,” that were filed in 2020. Filers that receive these notices should investigate whether the penalties are warranted and take steps to request relief where appropriate. Following are answers to five common questions about these notices:
1. Why am I getting this notice?
Generally, filers are subject to penalties under IRC Section 6721 for failure to timely file correct information returns in the manner required. Some errors or omissions subject to penalty include:
- Having missing or incorrect taxpayer identification numbers (TINs)
- Filing the return late
- Not electronically filing the return if required
For 2019, the penalty under IRC Section 6721 generally is $270 per return. Additional penalties apply for failure to timely furnish copies of these returns to the payees. Separate rules apply for non-U.S. payees.
2. How do I determine if I am subject to a penalty?
Filers that receive a Notice 972CG should review the information in the notice to determine the specific issue with their return. For incorrect TINs, generally two possible sources of errors exist: Either the filer made an error (for example a data entry or a system error) or the payee provided incorrect information. The notice also could be based on incorrect information the IRS has in its records. For instance, if paper returns were filed, the IRS might not have processed the returns or might not have processed them correctly, especially for returns filed in 2020 during the height of the pandemic and amid IRS closures and mail backlog.
Ahead of receiving Notice 972CG, taxpayers might have received Letter CP2100 from the IRS identifying forms filed with missing or incorrect TINs. Payments reported on these forms might be subject to backup withholding under IRC Section 3406. Payments made to U.S. payees and reported on certain information returns, such as Form 1099-MISC and Form 1099-NEC, might be subject to backup withholding if the payee does not provide its TIN to the filer in the manner required, if the IRS informs the payer that the TIN is incorrect, or if the filer receives notification that backup withholding is required.
3. How do I respond to the notice?
Filers are not required to respond to the notice if they choose to pay the penalty. However, filers seeking reasonable cause penalty relief or that disagree with the information in the IRS’ records should respond to the notice as soon as possible. The response should include the facts, including the reason for each error, and, in the case of requests for reasonable cause relief, why the filer is eligible for such relief. The detailed rules for reasonable cause relief from information reporting penalties can be found in Treasury Regulation Section 301.6724-1 and IRS Publication 1586. Penalty relief from information reporting penalties is not available under first-time abatement rules.
If a filer is not able to respond to a Notice 972CG by the deadline set forth in the notice, the filer still may respond to the notice even if the IRS already has sent a notice requesting payment or has started automated collection. Filers that receive a notice requesting payment of the penalty should consult with their tax adviser and request a hold on their account to pause collection notices while awaiting the IRS’ decision on their penalty relief request.
4. What are my options if my request for penalty relief is denied?
The IRS letter denying relief will provide information about how and where to request appeals consideration. Requests for appeals consideration after the deadline set forth in the notice denying the initial request for relief are possible, though, as described earlier, the IRS might send a demand for payment and collection action might begin.
