How to Avoid Form 1098 Penalties
This fall, the IRS sent out proposed penalty notices (Notice 972CG) to colleges and universities with respect to Forms 1098-T filed by the institutions reporting tuition and fees paid by students. While the IRS has annually sent these penalty notices to issuers of erroneous Forms 1099, in 2013, the IRS began targeting the Forms 1098-T filed by colleges and universities as well.
These penalty notices purport to impose automatic civil penalties of $100 per Form 1098-T filed by a college or university with an incorrect or missing student taxpayer identification numbers (TIN). While the penalty for any one Form 1098-T is small, the penalties can become substantial where there are many incorrect or missing TINs.
A college or university receiving this proposed penalty notice has 45 days to respond. The institution may avoid the proposed penalties where the institution can establish that the failure arose from events beyond the institution's control (e.g., the student's failure to furnish a correct TIN) and that the institution solicited TINs in a "responsible manner."
In responding to the proposed penalty notice, the institution should demonstrate that it requested the student's TIN in writing on or before December 31 of the applicable year. The request must clearly notify the individual that the law requires the individual to furnish a TIN so that it may be included on an information return. For example, a request made on Form W-9S satisfies this requirement. Alternatively, the institution may develop a separate form to request the TIN or incorporate the request into other customary forms, such as admission or enrollment forms, or financial aid applications. The institution should attach to its response a copy of the form (whether Form W-9S or otherwise) it regularly uses to solicit TINs.
If the university demonstrates that it requested the TIN as described above and either a student supplied an incorrect TIN or refused to supply a TIN, the IRS should abate the proposed penalties despite the incorrect Form 1098-T.
Because the Notices 972CG recently issued by the IRS relate to Forms 1098-T filed for calendar year 2011, the institution will likely receive proposed penalty notices in fall 2014 for the same students (for Forms 1098-T already filed with respect to 2012). However, to the extent the institution has received or will receive tuition payments from such students in 2013, the institution should re-solicit TINs from those students in preparation for filing the 2013 Forms 1098-T.
As a practical matter, colleges and universities should take the following measures in anticipation of responding to Notice 972CG in the future:
- Solicit a TIN from each student using a Form W-9S or substantially similar form. The form should be included in the registration packet sent to each student. In lieu of a paper form, the student's TIN and certification (where appropriate) can be requested electronically.
- Keep records to demonstrate that soliciting the TIN in this manner is the institution's standard practice.
IRS Circular 230 Disclosure: To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing, or recommending any partnership or other entity, investment plan, or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
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