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Court Absolves Poker-Playing President for Corporation's Failure to File Forms W-2 and W-3.

(Parker Tax Publishing September 18, 2015)

Failing to file Forms W-2 and W-3 for two non-consecutive years did not, in and of itself, establish a pattern of conduct of repeatedly failing to file timely and, thus, the penalty under Code Sec. 6721(e) for intentional disregard of the filing requirement did not apply. Hom v. Comm'r, T.C. Summary 2015-49.

John Hom is the owner and president of John C. Hom & Associates, Inc., a geotechnical engineering firm. Hom, the only licensed engineer on staff, performed geotechnical investigations for various projects, explored the subsurface conditions of proposed jobsites, and analyzed the results of fieldwork to provide recommendations for construction. In 2002, Hom decided to become a professional poker player and began to spend less time running his engineering firm.

For 2004 and 2006, John C. Hom & Associates issued Forms W-2, Wage and Tax Statement, to employees, but failed to file those forms and Forms W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration (SSA). Hom generally followed a procedure for issuing Forms W-2 to employees and filing Forms W-2 and W-3 with the SSA. After mailing the forms to the SSA, Hom would save copies of the Forms W-2 and W-3 on his computer. Because he retained copies of the 2004 and 2006 Forms W-2 and W-3 on his computer, Hom believed that he had completed the previous step of filing those forms with the SSA. The IRS assessed penalties of more than $10,000 against John C. Hom & Associates under Code Sec. 6721(e) for intentional disregard of the Form W-2 and W-3 filing requirement. Hom contested the penalty and took the case to the Tax Court.

The Tax Court held that the company was not liable for the Code Sec. 6721(e) penalty. The penalty applies, the court noted, when the failure to file is not accidental, unconscious, or inadvertent. Citing Reg. Sec. 301.6721-1(f)(3), the court looked at the following factors:

(1) whether the failure to file timely was part of a pattern of conduct of repeatedly failing to file timely;

(2) whether a correction was promptly made upon discovery of the failure;

(3) whether the failure to file was corrected within 30 days after the date of any written request from the IRS to file; and

(4) whether the amount of the information reporting penalties is less than the cost of complying with the requirement to file timely.

The court found that (1) the fact that Hom failed to file the 2004 and 2006 Forms W-2 and W-3 with the SSA did not, in and of itself, establish a pattern of conduct of repeatedly failing to file timely; (2) there was no evidence that the IRS ever prompted the company to correct the failure to file the missing Forms W-2 and W-3; and (3) since no payment is required with the filing of Forms W-2 and W-3, there was no cost of complying with the provision other than the time taken to prepare the Forms W-2 and W-3 and the cost of postage.

The court said Hom testified convincingly that he believed that he filed the 2004 and 2006 Forms W-2 and W-3 because he had retained copies of the forms on his computer and he was in the habit of storing the copies on his computer after the forms were filed. In addition, there was no pattern of conduct that indicated to the court that Hom consistently failed to file Forms W-2 and W-3 since the forms were unfiled only for 2004 and 2006. As a result, the court concluded that, while the evidence was insufficient to establish actual filing of the Forms W-2 and W-3, the evidence did establish that Hom did not intentionally disregard the filing obligation for such forms.

For a discussion of penalties relating to information reporting returns, see Parker Tax ¶262,130. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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