Title VII, SEC. 7302. INCREASE IN SERVICES REPORTING PENALTIES. (a) Increase in Penalty. Section 6721(a) (relating to imposition of penalty) is amended by adding at the end the following new paragraph: ``(3) Increased penalty for returns involving payments for services. ``(A) In general. Subject to the overall limitation of paragraph (1), the amount of the penalty under paragraph (1) for any failure with respect to any applicable return shall be equal to the greater of $50 or 5 percent of the amount required to be reported correctly but not so reported. ``(B) Exception where substantial compliance. Subparagraph (A) shall not apply to failures with respect to applicable returns required to be filed by a person during any calendar year if the aggregate amount which is timely and correctly reported on applicable returns filed by the person for the calendar year is at least 97 percent of the aggregate amount which is required to be reported on applicable returns by the person for the calendar year. ``(C) Applicable return. For purposes of this paragraph, the term `applicable return' means any information return required to be filed under ``(i) section 6041(a) which relates to payments to any person for services performed by such person (other than as an employee), or ``(ii) section 6041A(a).'' (b) Conforming Amendment. Section 6721(a)(1) is amended by striking ``In'' and inserting ``Except as provided in paragraph (3), in''. (c) Effective Date. The amendments made by this section shall apply to returns the due date for which (without regard to extensions) is more than 30 days after the date of the enactment of this Act.