IRS Updates

IRS Posts Third Draft of New Income Withholding Publication

On November 4, the IRS issued a third early release draft of the 2020 Publication 15-T (Federal Income Tax Withholding Methods) that contains a look at the new employer steps to compute federal income tax withholding (FITW).

Substantial changes to the Form W-4 were required after the enactment of the Tax Cuts and Jobs Act in late-December 2017. To help employers and payroll providers calculate federal income tax withholding, as a result of the redesign of the 2020 Form W-4, new Publication 15-T was created.

The first draft was issued in early-June 2019 and the second draft was issued on August 13. The IRS notes that in the third draft of the 2020 Publication 15-T, the percentage method and wage bracket computations have not changed from the second draft. Instead, the third draft expands on the first two drafts by including a discussion on the alternative methods of withholding, information about withholding on distributions of Indian gaming profits to tribal members, and information on withholding on periodic payments of pensions and annuities.

The IRS explained that while the final 2020 Publication 15-T will not be issued until December 2019, there will be no further substantive changes to the percentage or wage bracket method.

Comments on this draft may be submitted to WI.W4.Comments@IRS.gov by Nov. 15, 2019. The final 2020 Form W-4 is expected to be issued by the end of November.

IRS Increasing Some Maximum Information Reporting Penalty Amounts on Late Filed 2020 Returns

The IRS has announced the penalty amounts for failure to file correct 2020 information returns, and failure to furnish correct 2020 payee statements in 2021 [Rev Proc 2019-44, 2019-47 IRB].

Code Sec. 6721 imposes a penalty on a taxpayer for failing to file a correct information return (e.g., any 1099 series form or a Form W-2; see Payroll Guide ¶ 4294).

Code Sec. 6722 imposes a penalty for failure to furnish a payee statement (employee’s copy of Form W-2, recipient’s Form 1099) on time, failure to include all information required to be shown on the statement, or including incorrect information.

The maximum penalty is lower if the taxpayer is a small business. A small business is a taxpayer with average annual gross receipts for the most recent three tax years of $5 million or less.

The amount of the penalty depends on when the return or statement is corrected.

  • The penalty on 2020 information returns required to be filed in 2021, and 2020 payee statements required to be furnished in 2021, that are corrected within 30 days, is $50 per return/statement, up to a maximum penalty of $565,000 ($197,500 for small businesses). The maximum penalty is $556,500 on 2019 information returns and payee statements ($194,500 for small businesses).
  • The penalty on 2020 information returns required to be filed in 2021, and 2020 payee statements required to be furnished in 2021, that are corrected later than 30 days after the due date but before August 1st, is $110 per return/statement, up to a maximum penalty of $1,696,000 ($565,000 for small businesses). The maximum penalty is $1,669,500 on 2019 information returns and payee statements ($556,500 for small businesses).
  • The penalty on 2020 information returns required to be filed in 2021, and 2020 payee statements required to be furnished in 2021, that are not corrected by August 1 (or if no return or statement is filed at all), is $280 per return/statement ($270 for 2019 information returns), up to a maximum penalty of $3,392,000 ($1,130,500 for small businesses). The maximum penalty is $$3,339,000 on 2019 information returns and payee statements ($1,113,000 for small businesses).

Intentional disregard penalty. The intentional disregard penalty for 2020 information returns required to be filed in 2021, and 2020 payee statements required to be furnished in 2021, is $560 per return/statement, or if greater, 10% of the amount required to be shown on the return/statement (without any limit on the maximum penalty in a calendar year). The intentional disregard penalty for 2019 information returns required to be filed in 2020, and 2019 payee statements required to be furnished in 2020, is $550 per return/statement, or if greater, 10% of the amount required to be shown on the return/statement (without any limit on the maximum penalty in a calendar year).

Code Sec. 6651(a) imposes a penalty for failure to file a tax return, e.g. Form 941 or Form 940, see Payroll Guide ¶4292. For tax returns filed in 2020, the minimum penalty for failure to file a tax return within 60 days of the due date is $330 ($215 for tax returns filed in 2019.

IRS Announces 2020 Dollar Limitations for Pension Plans

The IRS has announced the dollar limitations for pension plans and other retirement-related items for the 2019 tax year. Many limitations are higher than in 2019 due to cost-of-living adjustments [IR 2019-179; Notice 2019-59, 2019-46 IRB].

  • Elective deferrals. The limitation on the exclusion for elective deferrals under Code Sec. 402(g)(3) will increase from $19,000 to $19,500 in 2020. This limitation affects elective deferrals to various plans, including Code Sec. 401(k) plans, Code Sec. 403(b) annuities, SEPs, and the federal government’s thrift savings plan.
  • Defined benefit plans. The limitation on the annual benefit under a defined benefit plan will increase from $225,000 to $230,000 in 2020. For participants who separated from service before Jan. 1, 2020, the limitation for 2020 is computed by multiplying the participant’s compensation limitation, as adjusted through 2019, by 1.0176.
  • Defined contribution plans. The limitation on total annual contributions to defined contribution plans will increase from $56,000 to $57,000 in 2020.
  • Annual compensation limit. The maximum amount of annual compensation that may be taken into account for various qualified plan purposes, including plans under Code Sec. 401(a)(17), Code Sec. 404(l), Code Sec. 408(k)(3)(C), and Code Sec. 408(k)(6)(D)(ii), will increase from $280,000 to $285,000 in 2020.
  • Key employee in top-heavy plan. The dollar limitation under Code Sec. 416(i)(1)(A)(i) that is used in the definition of a key employee in a top-heavy plan will increase from $180,000 to $185,000 in 2020.
  • Highly compensated employee. The dollar amount used in defining highly compensated employees for nondiscrimination testing purposes under Code Sec. 414(q)(1)(B) will increase from $125,000 to $130,000 in 2020.
  • ESOP five-year distribution period. The dollar amount for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,130,000 to $1,150,000 in 2020, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $225,000 to $230,000.
  • Catch-up contributions. The dollar limitation for catch-up contributions to an applicable deferred plan (other than SIMPLE plans) for individuals age 50 or over will increase from $6,000 to $6,500 in 2020. The dollar limitation for catch-up contributions under SIMPLE plans will remain at $3,000 in 2020.
  • Compensation limit on grandfathered government plans. The annual compensation limit under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed COLAs to the plan’s compensation limit to be taken into account, will increase from $415,000 to $425,000 in 2020.
  • SEP compensation limit. The annual compensation limit under Code Sec. 408(k)(2)(C) will remain at $600 in 2020. Employees who earn more than $600, and who meet other requirements, must be allowed to participate in the employer’s SEP plan.
  • SIMPLE salary deferrals. The maximum amount of compensation that an employee/participant may elect to defer to a SIMPLE plan will increase from $13,000 to $13,500 in 2020.
  • Government deferred compensation plans. The limit on deferrals to Code Sec. 457 deferred compensation plans of state and local governments and tax-exempt organizations will increase from $19,000 to $19,500 in 2020.
  • Control employee. The employee compensation amount used in the definition of “control employee” for purposes of the auto commuting valuation rule in Reg. § 1.61-21(f)(5)(iii) will increase from $225,000 to $230,000 in 2020. The compensation amount used in the definition of company officers who are ineligible for the commuting valuation rule in Reg. § 1.61-21(f)(5)(i) will increase from $110,000 to $115,000 in 2020.