CCA 1234025: Slot-machine reporting procedures can satisfy the annual TIN solicitation exception

Plain-English summary

Chief Counsel Advice considered a gaming establishment that prepared Forms W-2G for slot-machine jackpots of $1,200 or more and later learned that some taxpayer identification numbers were incorrect. The advice concluded that following the special initial solicitation procedures for slot-machine winnings satisfied an exception to the annual solicitation requirement. It also noted that the separate exception for no payments to an account might apply when each gaming transaction stands alone, but would not apply if evidence showed an ongoing relationship with the same patron and reportable payments in the relevant years. The advice addressed the possible reasonable-cause waiver of section 6721 penalties.

Ruling snapshot

• Question: Whether following the slot-machine TIN solicitation rules avoided the annual solicitation requirement after incorrect TINs were reported.
• Outcome: Advice given.
• Key authorities: IRC §§ 6041, 6721, and 6724; Treas. Reg. §§ 7.6041-1 and 301.6724-1.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201234025
       Release Date: 8/24/2012
       CC:PA:02:CWGorham
       POSTN-109534-12

UILC: 6721.00-00, 6721.01-00

date: May 11, 2012

 to:   Michelle M. Robles
       Senior Attorney (Miami)
       (Small Business/Self-Employed)

from: Blaise G. Dusenberry
Senior Technical Reviewer
(Procedure & Administration)

subject: I.R.C. 6721 Penalty for Missing or Incorrect TINs on Form W-2G or Form 1099-MISC

       This Chief Counsel Advice responds to your request for assistance dated March 2,
       2012. This advice may not be used or cited as precedent.

       ISSUE

       When a gaming establishment follows the procedures to solicit taxpayer identification
       numbers (TINs) from patrons to create Forms W-2G, Certain Gambling Winnings, under
       Treas. Reg. § 7.6041-1, if the TIN is later found to be incorrect, is the gaming
       establishment subject to the annual solicitation requirement of Treas. Reg. § 301.6724-
       1(f)?

       CONCLUSION

       Under the facts presented, the gaming establishment satisfies an exception to the
       requirement to make an annual solicitation under Treas. Reg. § 301.6724-1(f).

       FACTS

       Your inquiry is not case specific. Accordingly, we present a factual scenario that
       highlights your question:

       For the 2006 taxable year, the taxpayer, a gaming establishment, prepared and filed
       numerous Forms W-2G pursuant to Treas. Reg. § 7.6041-1. Specifically, every time a

POSTN-109534-12 2

patron won $1,200 or more from slot machine play, the gaming establishment would
stop play (e.g., the slot machine would lock up, thereby not allowing further gaming),
and prepare a Form W-2G containing: (1) the name, address, and employer
identification number of the gaming establishment, (2) the name, address and TIN of the
patron, (3) a general description of two types of identification (e.g., driver’s license,
social security card, voter registration card) furnished to the gaming establishment by
the patron for verification of the patron’s name, address and TIN, (4) the date and
amount of the payment, and (5) the type of wagering transaction and identification
number of the slot machine.

The Service examined the Forms W-2G and determined that a certain number of them
contained incorrect TINs (and were not inconsequential errors). In 2008, the Service
issued a notice proposing a penalty under section 6721 for taxable year 2006. In
correspondence with the taxpayer, the Service requested that the taxpayer provide
copies of the annual solicitations made in 2008 by the gaming establishment to the
patrons for whom the gaming establishment submitted Forms W-2G with incorrect TINs.
The gaming establishment filed a protest, claiming that it acted in a responsible manner
for purposes of determining whether the penalty should be waived for reasonable
cause.

LAW AND ANALYSIS

In the event of a failure to file an information return on or before the required filing date,
the failure to include all of the information required to be shown on an information return
or the inclusion of incorrect information on an information return, a taxpayer is subject to
a penalty of $100 for each return with a failure. I.R.C. § 6721. The penalty for all
failures for a particular calendar year may not exceed $1,500,000. I.R.C. § 6721(a).
For purposes of section 6721, a statement of payments made to another person
required to be filed under section 6041, such as a Form W-2G, Certain Gambling
Winnings, is an information return. See I.R.C. § 6724(d); Treas. Reg. § 301.6721-1(g).

Section 6724(a) provides that a penalty under section 6721 may not be imposed if the
failure is due to reasonable cause and not to willful neglect. A filer has reasonable
cause if (1) either there are significant mitigating factors with respect to failure, or the
failure arose from events beyond the filer’s control, and (2) that the filer acted in a
responsible manner. Treas. Reg. § 301.6724-1(a)(2). Significant mitigating factors
include, but are not limited to, the fact that a filer has a history of compliance and
whether the filer has incurred penalties in the past. Treas. Reg. § 301.6724-1(b). If a
payee provides incorrect information upon which the filer relies in good faith, it may
constitute an event beyond the filer’s control. Treas Reg. §§ 301.6724-1(c)(1), (c)(6).
Acting in a responsible manner generally means that the filer exercised reasonable care
and undertook significant steps to avoid or mitigate the failure. Treas. Reg. § 301.6724-
1(d).
POSTN-109534-12 3

Where a filer seeks a waiver for reasonable cause on the basis that the actions of the
payee or any other person caused the filer to include incorrect information on an
information return, the filer will be deemed to have acted in a responsible manner if the
filer makes an initial and annual solicitation upon the payee pursuant to Treas. Reg. §
301.6724-1(f). Treas. Reg. § 301.6724-1(d)(2).

The initial solicitation refers to the filer soliciting the payee’s TIN at the time an account
is opened, a relationship is started, or at the time of some other transaction requiring an
information statement to be created. Treas. Reg. § 301.6724-1(f)(1)(i). If the Service
notifies the filer that a TIN is incorrect, the filer generally must make an annual
solicitation to obtain the correct TIN from the payee on or before December 31 of the
year in which the filer is notified of the incorrect TIN (January 31 if the filer is notified of
the incorrect TIN in the preceding December). Treas. Reg. § 301.6724-1(f)(1)(ii). A filer
may have to perform a second annual solicitation, if notified in the following year that
the account still contains an incorrect TIN.

The Treasury Regulations contain numerous exceptions to the requirement to perform
an annual solicitation. One exception is, if the filer is required by an information
reporting provision to follow specific requirements relating to the time and manner in
which the TIN must be initially solicited from the payee, and the filer follows those
provisions, the filer is not required to file an annual solicitation. Treas. Reg. § 301.6724-
1(f)(5)(i). Additionally, if the filer makes no payments to an account in the year that the
annual solicitation might be required to be made, the annual solicitation requirement
does not apply. Treas. Reg. § 301.6724-1(f)(5)(ii).

In this case, both of the exceptions listed above potentially apply. Treasury Regulation
section 7.6041-1 imposes specific requirements relating to when and how a gaming
establishment must make and file a Form W-2G. Upon a slot machine jackpot of
$1,200 or more, the gaming establishment must solicit the patron’s name, address, and
social security number, and two forms of identification to verify the patron’s name,
address and social security number. See Treas. Reg. § 7.6041-1(c). These initial
solicitation requirements are unique to slot machine winnings and must be followed with
each reportable slot machine jackpot, regardless of whether multiple reportable slot
machine jackpots occur in a short amount of time. Accordingly, because the gaming
establishment follows the initial solicitation requirements of Treasury Regulation section
7.6041-1, the taxpayer will be deemed to have acted in a responsible manner.

Additionally, the second exception listed above could apply. The annual solicitation
requirements generally apply when there is an account for the payee or an ongoing
relationship between the filer and payee. In the case of gaming, it is arguable whether
there is an ongoing account or relationship between a gaming establishment and a
patron. Each transaction stands on its own as a separate and discrete transaction. The
initial solicitation essentially occurs with each and every payment. It is probable,
however, that a patron will patronize a gaming establishment multiple times over several
years. If there is evidence that the gaming establishment made reportable payments to
POSTN-109534-12 4

the same patron in 2006 and in 2008 with the same or different incorrect TINs, the
gaming establishment has an ongoing relationship with the patron and would not satisfy
the exception under Treasury Regulation section 301.6724-1(f)(5)(ii).

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

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