[Federal Register Volume 68, Number 131 (Wednesday, July 9, 2003)]
[Proposed Rules]
[Pages 40857-40859]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17229]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-141669-02]
RIN 1545-BB41


Waiver of Information Reporting Penalties--Determining Whether 
Correction is Prompt

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to waiver 
under section 6724 of the Internal Revenue Code (Code) of a penalty 
imposed by section 6721 for failure to file a correct information 
return. The proposed regulations provide guidance on the requirement of 
prompt correction of the failure to file or file correctly. The 
proposed regulations provide that the IRS will deem information returns 
promptly corrected if corrected within 30 days of the required filing 
date, or by August 1 following that required filing date. After August 
1, a correction is prompt if made by the time announced by the IRS in 
published guidance. The proposed regulations do not change the rules 
for determining reasonable cause for waiving the penalty for failure to 
furnish correct payee statements under section 6722 or the time to 
comply with other information reporting requirements under section 
6723.

DATES: Written and electronic comments are due by October 7, 2003. 
Requests to speak (with outlines of topics to be discussed) at the 
public hearing scheduled for October 21, 2003, are due by September 30, 
2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-141669-02), Room 5526, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Commenters may hand deliver submissions Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG-141669-02), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, commenters may submit comments 
electronically to the IRS Internet site at http://www.irs.gov/regs. The 
public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
contact Robert A. Desilets, Jr. at (202) 622-4910; concerning 
submissions of comments, the hearing, and/or to be placed on the 
building access list to attend the hearing, Treena Garrett at (202) 
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Procedure and 
Administration Regulations (26 CFR part 301) under section 6724(a) of 
the Code. Section 301.6724-1(d)(1)(ii)(D) of the proposed regulations 
will clarify when a correction of an information return is prompt for 
purposes of establishing reasonable cause to waive the penalty under 
section 6721 of the Code. Existing Sec.  301.6724-1(d)(1)(ii)(D), 
adopted on December 31, 1991 (56 FR 67178), provides in pertinent part 
that a correction is prompt if it occurs on the earliest date of a 
regular submission of corrections, defining regular submissions as 
occurring at intervals of 30 or fewer days. Many information return 
filers have urged the IRS to replace the 30-day correction interval 
with an interval corresponding to the schedule for tiered penalties.

Explanation of Provisions

I. Section 6721

    Section 6721 imposes penalties on failures to file, or file 
correct, information returns. Section 6721 creates a three-tiered 
penalty structure to encourage timely filing and prompt correction of 
errors in previously filed returns. Congress enacted the three-tiered 
penalty structure in the Omnibus Budget Reconciliation Act of 1989 
(Public Law 101-239, 103 Stat. 2388, 2389). Section 6721 generally 
imposes a penalty in the amount of $50 for each return with respect to 
which a failure occurs, but not to exceed $250,000 per person per 
calendar year. However, if a filer corrects a failure within 30 days 
after the required filing date, the penalty with respect to such return 
shall be $15 in lieu of $50, but not to exceed $75,000 per filer per 
calendar year. Moreover, if a filer corrects a failure more than 30 
days after the required filing date, but before August 1 of the 
calendar year in which the required filing date occurs, the penalty 
with respect to each return shall be $30 in lieu of $50, but not to 
exceed $150,000 per filer per calendar year. Section 6721 provides 
these penalties to encourage prompt corrections of failures to file, or 
file correct, information returns. H.R. Rep. 101-386, at 648-649 
(1989).

[[Page 40858]]

II. Section 6724

    Section 6724(a) provides for a waiver of information reporting 
penalties under sections 6721 through 6723 if the failure giving rise 
to such penalties was due to reasonable cause and not willful neglect. 
Under Sec.  301.6724-1(a) of the regulations, to prove reasonable cause 
for a failure, the filer must establish either that there are 
significant mitigating factors with respect to the failure or that the 
failure arose from an event beyond the filer's control (an impediment). 
In addition, the filer must have acted in a responsible manner both 
before and after the failure.
    Under Sec.  301.6724-1(d) of the regulations, a filer is considered 
as acting in a responsible manner if the filer exercises reasonable 
care, i.e., the care that a reasonably prudent person would use under 
the circumstances in the course of business in determining filing 
obligations and in handling account information such as account numbers 
and balances. Section 301.6724-1(d) of the regulations also refers to 
the promptness of correction, i.e., when the filer undertook 
significant steps to avoid or mitigate the failure.
    Section 301.6724-1(d)(1)(ii)(D) currently provides, in part, that a 
correction is considered prompt if it is made within 30 days after the 
date of removal of an impediment or discovery of a failure, or on the 
earliest date thereafter on which a regular submission of corrections 
occurs. Submissions are regular only if they occur at intervals of 30 
days or fewer. Under the 30-day rule, a filer of a large number of 
information returns that discovers errors over a period of several 
months would be required to submit multiple corrections in a series of 
filings. Information return filers have urged the IRS to allow filers 
to ``bundle'' their corrections, i.e., submit the corrected information 
returns less frequently according to a defined timetable. The IRS 
agrees that the current rule may be burdensome and that bundling should 
be permitted.
    The proposed regulations provide that a correction of an 
information return is prompt if the filer makes the correction within 
30 days of the required filing date, or by August 1 following that 
required filing date. After August 1, a correction is prompt if the 
filer makes the correction by the date or dates announced in guidance 
governing the electronic or magnetic filing of information returns, or 
in other guidance including forms and instructions. It is anticipated 
that the date or dates will be in November and/or December of the 
calendar year in which the required filing date occurs. After the dates 
announced in the guidance, the proposed regulations provide that a 
correction is prompt if it is made within 30 days after the date the 
impediment is removed or the failure is discovered.
    The proposed regulations apply solely for the purpose of 
determining whether there is reasonable cause for waiving the penalty 
for failure to file correct information returns imposed by section 
6721. The proposed regulations do not apply for the purpose of 
determining whether there is reasonable cause for waiving the penalties 
imposed by sections 6722 and 6723. The IRS and Treasury Department 
believe that a filer should correct promptly a failure to furnish a 
correct payee statement or a failure to satisfy the reporting 
requirements described in section 6724(d)(2) and (3) with regard to 
sections 6722 and 6723, respectively. Therefore, the proposed 
regulations retain the 30-day correction period for waiving the 
penalties imposed by sections 6722 and 6723.
    The proposed regulations do not affect or alter the tiered penalty 
rate schedule of section 6721. To ensure that a reduced penalty amount 
under section 6721 will apply, in the event that the IRS does not grant 
a reasonable cause waiver, a filer should file correct information 
returns with the IRS within 30 days after the required filing date, or 
before August 1 of the calendar year in which the required filing date 
occurs.

Proposed Effective Date

    The proposed regulations apply to corrections of information 
returns made after the date of publication of a Treasury decision 
adopting the proposed regulations as final regulations in the Federal 
Register. However, filers may cite these rules for purposes of 
requesting a reasonable cause waiver prior to the date that the 
proposed regulations become final.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these proposed regulations, and 
because the proposed regulations do not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Code, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

    Before adoption of these proposed regulations as final regulations, 
the IRS will consider any electronic or written comments (a signed 
original and eight (8) copies) that a commenter submits timely (in the 
manner described in the ADDRESSES portion of this preamble) to the IRS. 
The IRS and the Treasury Department request comments on the clarity of 
the proposed regulations and how they can be easier to understand. All 
comments will be available for public inspection and copying. Written 
comments on the proposed regulations are due by October 7, 2003.
    A public hearing has been scheduled for October 21, 2003, beginning 
at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. All visitors must present 
photo identification to enter the building. Because of access 
restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT portion 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit electronic or written 
comments and an outline of the topics for discussion and the time for 
each topic (a signed original and eight (8) copies) by September 30, 
2003. Each person making comments will have 10 minutes to present 
comments. The IRS will prepare an agenda showing the scheduling of the 
speakers after the deadline for reviewing outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Robert A. 
Desilets, Jr., Office of the Associate Chief Counsel (Procedure and 
Administration), Administrative Provisions and Judicial Practice 
Division. However, other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

[[Page 40859]]

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


    Par. 2. Section 301.6724-1 is amended by:
    1. Revising paragraph (d)(1)(ii)(D).
    2. Adding paragraph (d)(3).
    The revision and addition read as follows:


Sec.  301.6724-1  Reasonsable cause.

* * * * *
    (d) * * *
    (1) * * *
    (ii) * * *
    (D) Correcting the failure as promptly as possible upon removal of 
the impediment or discovery of the failure. A person may correct a 
failure by filing or correcting the information return, by furnishing 
or correcting the payee statement, or by providing or correcting the 
information to satisfy the specified information reporting requirement 
with respect to which the failure occurs. This paragraph (d)(1)(ii)(D) 
does not apply with respect to information that specific information 
reporting rules prohibit the filer from altering. See Sec.  1.6045-
4(i)(5) of this chapter. In the case of a waiver of a penalty imposed 
by section 6722 or 6723 of the Internal Revenue Code, correction is 
prompt if it is made within 30 days after the date of removal of the 
impediment or discovery of the failure. For purposes of section 6721 of 
the Internal Revenue Code, a correction is prompt if the Internal 
Revenue Service receives the correction--
    (i) On or before 30 days after the required filing date;
    (ii) On or before August 1 following that required filing date;
    (iii) On or before the date or dates announced in guidance 
governing the electronic or magnetic filing of information returns;
    (iv) On or before the date or dates announced in other guidance 
including forms and instructions; or
    (v) Within 30 days after the date the impediment is removed or the 
failure is discovered if the correction is not submitted within the 
time frames set forth in paragraphs (d)(1)(ii)(D)(i) through (iv).
* * * * *
    (3) [Reserved] For further guidance, see Sec.  301.6724-1T(d)(3).
* * * * *

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-17229 Filed 7-8-03; 8:45 am]
BILLING CODE 4830-01-P