The two-part test
"The penalty is waived for reasonable cause only if the filer establishes that either (i) There are significant mitigating factors with respect to the failure ... or (ii) The failure arose from events beyond the filer's control (impediment) ... (iii) Moreover, the filer must establish that the filer acted in a responsible manner ... both before and after the failure occurred" (Treas. Reg. 301.6724-1(a)(2)). Mitigating factors or an impediment alone "will not be sufficient to obtain a waiver of the penalty."
Treas. Reg. 301.6724-1(a) to (g).
The regulation implements IRC 6724(a), under which no penalty is imposed "if it is shown that such failure is due to reasonable cause and not to willful neglect." The regulation's test is conjunctive. A filer must show a qualifying reason, under paragraph (b) or (c), and must show responsible conduct, under paragraph (d), and for missing or incorrect TINs paragraph (d) is satisfied "only if the filer satisfies the requirements of paragraph (e) ... or paragraph (f)" (Treas. Reg. 301.6724-1(d)(2)). The IRS's own guide to the regulation is Publication 1586, and its manual applies it at IRM 20.1.7; the how the IRS judges a response guide covers the manual's side. What follows is the regulation itself.
(b) Significant mitigating factors
The factors "include, but are not limited to (1) The fact that prior to the failure the filer was never required to file the particular type of return or furnish the particular type of statement with respect to which the failure occurred, or (2) The fact that the filer has an established history of complying with the information reporting requirement." History is judged by "Whether the filer has incurred any penalty under § 301.6721-1, § 301.6722-1, or § 301.6723-1 in prior years for the failure; and ... the extent of the filer's success in lessening its error rate from year to year" (Treas. Reg. 301.6724-1(b)). A first-year filer and a filer with a clean record both qualify here, but both must still pass paragraph (d). A falling error rate is itself evidence: a payer whose CP2100 count has dropped each year has a (b)(2) argument even with prior penalties.
(c) Events beyond the filer's control
The listed impediments are "(i) The unavailability of the relevant business records, (ii) An undue economic hardship relating to filing on magnetic media, (iii) Certain actions of the Internal Revenue Service (IRS), (iv) Certain actions of an agent, and (v) Certain actions of the payee or any other person providing necessary information" (Treas. Reg. 301.6724-1(c)(1)). Each has a definition.
Records unavailable (c)(2). The records "must have been unavailable under such conditions, in such manner, and for such period as to prevent timely compliance (ordinarily at least a 2-week period prior to the due date ...), and the unavailability must have been caused by a supervening event," which "includes, but is not limited to (i) A fire or other casualty that damages or impairs the filer's relevant business records or the filer's system for processing and filing such records; (ii) A statutory or regulatory change that has a direct impact upon data processing and that is made so close to the time that the return or payee statement is required that, for all practical purposes, the change cannot be complied with; or (iii) The unavoidable absence (e.g., due to death or serious illness) of the person with the sole responsibility for filing." This is the paragraph a disaster claim is made under, and "sole responsibility" is the word that defeats most illness claims in a business with more than one person who could have filed.
IRS actions (c)(4). "The failure was due to the filer's reasonable reliance on erroneous written information from the IRS," and "the filer must provide a copy of the written information provided by the IRS and, if applicable, the filer's written request for the information." Oral advice from the help desk is not within it.
A failure by a service bureau or payroll provider is excused only if "The filer exercised reasonable business judgment in contracting with the agent to file timely correct returns ... including contracting with the agent and providing the proper information sufficiently in advance of the due date" and "The agent satisfied the reasonable cause criteria" itself (Treas. Reg. 301.6724-1(c)(5)). Hiring a vendor is not reasonable cause; hiring a competent one in time, and the vendor having its own excuse, is.
Payee actions (c)(6). "The failure resulted from the failure of the payee ... to provide information to the filer, or ... from incorrect information provided by the payee (or any other person) upon which information the filer relied in good faith." This is the paragraph nearly every TIN penalty is argued under, and the regulation immediately routes it to paragraphs (e) and (f): for a missing or incorrect TIN the filer "will be deemed to have acted in a responsible manner ... only if the filer satisfies the requirements of paragraph (e) ... or paragraph (f)" (Treas. Reg. 301.6724-1(d)(2)).
(d) Acting in a responsible manner
"Acting in a responsible manner means (i) That the filer exercised reasonable care, which is that standard of care that a reasonably prudent person would use under the circumstances in the course of its business in determining its filing obligations and in handling account information such as account numbers and balances, and (ii) That the filer undertook significant steps to avoid or mitigate the failure" (Treas. Reg. 301.6724-1(d)(1)). A rectification "is considered prompt if it is made within 30 days after the date the impediment is removed or the failure is discovered."
The "significant steps" are listed: "(A) Requesting appropriate extensions of time to file, when practicable, in order to avoid the failure, (B) Attempting to prevent an impediment or a failure, if it was foreseeable, (C) Acting to remove an impediment or the cause of a failure, once it occurred, and (D) Rectifying the failure as promptly as possible once the impediment was removed or the failure was discovered" (Treas. Reg. 301.6724-1(d)(1)(ii)). Submissions of corrections "will be considered regular only if made at intervals of 30 days or less." A response that establishes a casualty but shows no Form 8809, no attempt to file from backup, and corrections three months after the systems came back fails (d) and therefore fails altogether.
(e) Missing TINs: the solicitation schedule
For a missing TIN the responsible-manner test is replaced by a calendar. "An initial solicitation for a payee's correct TIN must be made at the time an account is opened," where "account" "includes accounts, relationships, and other transactions"; if the account is opened in person the request may be oral, and if by mail, telephone or other means the filer must request the TIN as part of the process (Treas. Reg. 301.6724-1(e)(1)(i)). If no TIN comes back, "The first annual solicitation must be made on or before December 31 of the year in which the account is opened (for accounts opened before December) or January 31 of the following year (for accounts opened in the preceding December)," and if still none, "The second annual solicitation must be made after the expiration of the period for the first annual solicitation and on or before December 31 of the year immediately succeeding the calendar year in which the account was opened" (Treas. Reg. 301.6724-1(e)(1)(ii) and (iii)). Which solicitation covers which year is stated: "The initial and first annual solicitations relate to failures on returns filed for the year in which an account is opened. The second annual solicitation relates to failures on returns filed for the year immediately following the year in which the account was opened and for succeeding calendar years" (Treas. Reg. 301.6724-1(e)(1)(iv)). "No more than two annual solicitations are required," and a filer that missed one may make two consecutive "make-up solicitations" in later years to restore the position for those years (Treas. Reg. 301.6724-1(e)(1)(vi)). A mailed annual solicitation must include a Form W-9 or acceptable substitute, a return envelope, and the statement that the payee is subject to backup withholding; a telephone solicitation must be "reasonably designed and carried out in a manner that is conducive to obtaining the TIN" (Treas. Reg. 301.6724-1(e)(2)). The solicitation deadline calculator and the solicitation rules guide apply these dates.
(f) Incorrect TINs: solicitation after notice
For an incorrect TIN the schedule starts from the IRS's notice. The initial solicitation is the same, and "No additional solicitation is required after the filer receives the TIN unless the IRS or, in some cases, a broker notifies the filer that the TIN is incorrect" (Treas. Reg. 301.6724-1(f)(1)(i)). Then: "a filer must undertake an annual solicitation only if the payor has been notified of an incorrect TIN and such account contains the incorrect TIN at the time of the notification," and "the annual solicitation ... must be made on or before December 31 of the year in which the filer is notified of the incorrect TIN or by January 31 of the following year if the filer is notified of an incorrect TIN in the preceding December" (Treas. Reg. 301.6724-1(f)(1)(ii)). A second annual solicitation is owed only "if the filer is notified in any year following" of the same account's incorrect TIN. Notice can come two ways: "A filer may be notified of an incorrect TIN by the IRS or by a broker pursuant to section 3406(a)(1)(B) or by a penalty notice issued by the IRS pursuant to section 6721," that is, by a CP2100 or by a 972CG. The coordination rule matters: a filer notified by CP2100 "will satisfy the solicitation requirement of this paragraph (f) only if it makes a solicitation in the manner and within the time period required under § 31.3406(d)-5(d)(2)(i) or (g)(1)(ii)," the 15-business-day B-Notice (Treas. Reg. 301.6724-1(f)(3)(i)); a filer notified only by a 972CG may solicit by mail, telephone or in person by the December 31 date. And "Upon receipt of a TIN, a filer must include that TIN on any information returns the original due date of which ... is after the date that the filer receives the TIN" (Treas. Reg. 301.6724-1(f)(1)(iv)). The backup withholding regulations page covers the B-Notice side of the same event.
(g) The due-diligence safe harbor
The due-diligence safe harbor: "A filer is not subject to a penalty for failure to provide the payee's correct TIN on an information return, if the payee has certified, under penalties of perjury, that the TIN provided to the filer was the payee's correct TIN, and the filer included such TIN on the information return before being notified by the IRS (or a broker) that such TIN is incorrect" (Treas. Reg. 301.6724-1(g)(2)). A signed W-9 on file before the CP2100 is a complete answer to a first-year incorrect-TIN penalty.
Paragraph (g) is the strongest sentence in the regulation for a payer with a W-9 program, and it is rarely quoted in responses. Its general rule needs no solicitation history and no mitigating factor: a certified TIN, used on the return before notice, ends the penalty for that return. Its limits are stated. "Once notified by the IRS (or a broker) that a number is incorrect, a filer is liable for the penalty for all prior years in which an information return was filed with that particular incorrect number if the filer has not exercised due diligence with respect to such years," and "A pre-existing certified TIN does not constitute an exercise of due diligence after the IRS or a broker notifies the filer that the number is incorrect unless the filer undertakes the actions described in § 31.3406(d)-5(d)(2)(i)," the B-Notice (Treas. Reg. 301.6724-1(g)(3)(ii)). And the filer must have processed the number with care: it "is liable for the penalty if the filer obtained a certified TIN for a payee but inadvertently processed the TIN or name incorrectly on the information return unless the filer exercised that degree of care in processing the TIN and name ... that a reasonably prudent filer would use" (Treas. Reg. 301.6724-1(g)(3)(iii)). A W-9 keyed wrong is the payer's error, not the payee's. The regulation's language on "reportable interest or dividend payment" in (g)(3) reflects its 1980s origin; the general rule in (g)(2) is not so limited.
Writing to the regulation
A response built on this regulation identifies, for each penalty reference code on the notice, the paragraph it is argued under and the proof that paragraph demands. For an incorrect-TIN penalty on a payee whose W-9 was on file before the CP2100: paragraph (g)(2), with the W-9 and its date. For an incorrect-TIN penalty after a notice: paragraph (f), with the B-Notice sent within 15 business days of the notice date and the solicitation record. For a missing TIN: paragraph (e), with the initial solicitation at account opening and the first and second annual solicitations by their December 31 dates. For a late or non-electronic filing: paragraph (b) or (c) with its specific proof, plus paragraph (d), which means the extension request, the steps taken, and corrections within 30 days. The solicitation log is the record the regulation describes; the 972CG guide has the response format and the intentional disregard guide the regulation's other end, 301.6721-1(g), where no reasonable cause exists at all.
Questions people ask
We have a W-9 for every payee on the 972CG. Is that enough?
For incorrect-TIN penalties on returns filed before any IRS notice about that payee, yes, under paragraph (g)(2), provided the TIN on the return is the TIN on the W-9. For returns filed after a CP2100 named the payee, the W-9 is not enough; the B-Notice within 15 business days is required under (f)(3). For missing TINs a W-9 by definition does not exist and paragraph (e) applies.
Our service bureau filed late. Is that reasonable cause?
Only under (c)(5), which requires that you chose the bureau with reasonable business judgment, gave it the data in time, and that the bureau itself had reasonable cause under (b) or (c)(2) to (6). A bureau that was simply late has none, and neither do you.
Does a first-year filer get an automatic pass?
No. Never having filed this type of return is a mitigating factor under (b)(1), but the filer must still show it acted in a responsible manner under (d): that it determined its obligations with reasonable care and corrected promptly once it learned of them.
What does "ordinarily at least a 2-week period" mean for the records rule?
That the records must have been unavailable for roughly the two weeks before the due date, with extensions counted. A one-day outage on January 30 is not a (c)(2) impediment; a casualty on January 15 with no backup is.