When "Good Faith" Isn’t Good Enough to Avoid State Reporting Penalties

November 30, 2018 Sovos -

One of the prevailing trends of 2018 has been states making moves to boost tax revenues and enforce compliance requirements. For instance, following the model of the PATH Act, states have moved reporting deadlines up, putting pressure on companies to meet Jan. 31 deadlines in an increasing number of jurisdictions.

And they’re following through with penalties. If AP professionals thought they could avoid financial losses with a “good faith” defense simply because a breach of compliance wasn’t willful, a recent case in New Mexico might make them think again. In the case, a company had been making withholding payments for seven months after an employee retired. But the company had not filed withholding returns during that period.

State of New Mexico not impressed

The State of New Mexico pursued the business for failing to report, and the company offered the frequently used good faith defense. Essentially, the payer said that it was not negligent in reporting withholding, citing a change of staff as the main reason for not filing returns. Further, the company claimed it made payments with the Department of Revenue’s own payment system, which did not, the company said, specify that a return was required.  

The defense boiled down to, “Hey, we tried, but we didn’t know what we were supposed to do … and we’ve been making our payments, anyway.” It’s a defense that has worked many times in the past, but New Mexico wasn’t having it. The state said that the payer had no excuse for not reporting or not knowing that reporting was required and that this did not amount to good faith. In a ruling handed down this week, the state ruled against the company—and levied a fine of more than $47,000.

States are cracking down on compliance

This is a new era for state reporting regulations and enforcement. States are less likely to let reporting breaches slide than they might have been in the past. Payers need to stay on top of state-level reporting regulations—which, of course, can change in any state at any time. Only with help from a third-party partner can companies stay ahead of regulations and avoid state financial penalties. As the New Mexico case demonstrates, states are tightening rules and cracking down on non-compliance.

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Sovos has been helping companies stay ahead of 1099 reporting requirements for nearly four decades. Learn more about how Sovos helps keep companies out of trouble.

About the Author

Sovos -

Sovos is a leader in global tax, compliance and business-to-government reporting software, safeguarding businesses from the burden and risk of compliance in thousands of tax jurisdictions around the world.

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