Guidance Issued On De Minimis Safe Harbor For Information Returns

If the payee makes the election and seeks to have a corrected return issued, the safe harbor will no longer apply. The payor will be subject to penalties if a corrected return or statement is not furnished and/or filed within 30 days of the payee’s request. If a payor complies with this provision, the original error will be treated as due to reasonable cause rather than willful neglect, and the IRS will not impose any penalties.

A de minimus error relates to an incorrect dollar amount that differs from the correct amount by no more than $100, or $25 in the case of an error with respect to an amount of tax withheld. This is anticipated to impact information returns required to be filed and payee statements required to be furnished after December 31, 2016. Code Sec. 6721 and Code Sec. 6722 authorize civil penalties for the failure to file correct information returns, and the failure to furnish correct payee statements, respectively. With respect to Forms W-2, Notice encourages employers to correct any errors on Forms W-2c even though the safe harbor may apply. The notice expresses concern that failure to correct de minimis errors on Forms W-2 will result in combined annual wage reporting errors. Under the CAWR program, the IRS compares amounts reported on Forms 941 with those reported on Forms W-3 and the processed totals from Forms W-2.

Under the safe harbor, an error on an information return or payee statement is not required to be corrected, and no penalty is imposed, if the error relates to an incorrect dollar amount and the error differs from the correct amount by no more than $100 ($25 in the case of an error with respect to an amount of tax withheld). The information return or payee statement must be otherwise correct and timely filed or furnished on time.

However, this safe harbor is subject to an election by the payee to have the erroneous statement or return corrected. (See paragraph of this section for an exception to the provisions of this paragraph for returns that are not due on February 28 or March 15.) The total amount imposed on a person for all failures during any calendar year corrected after 30 days but on or before August 1 shall not exceed $150,000. According to Notice , if a payee makes the election under Code Sec. 6722, but the business furnishes a corrected payee statement to the payee and files a corrected information return with the IRS within 30 days of the date of the election, the error will be treated as due to reasonable cause and not willful neglect.

Comments are requested on the rules in the notice and are due by April 24, 2017. The payee may subsequently revoke an election at any time after the election is made by providing written notice to the payor. The revocation applies to all information returns and payee statements of the type specified in the revocation that are required to be filed and furnished, respectively, after the date on which the payor receives the revocation. The IRS reported that it will issue regulations to implement the de minimis safe harbor. The agency cautioned that such regulations may provide, to prevent abuse, that the safe harbor does not apply to certain information returns and payee statements.

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When the amounts do not match, an intentional disregard penalty is automatically assessed under Section 6721. Although the notice does not specify as much, these penalties would presumably be abated if the employer demonstrated that the mismatch resulted from de minimis errors that were not required to be corrected under the safe harbor. The notice also clarifies the process by which a payee may request a corrected information return by electing that the safe harbor not apply.

The safe harbor does not apply in cases of intentional disregard of the requirements to file or furnish correct information returns or payee statements. Further, the proposed regulations highlight the fact that the safe harbor does not apply if the payee elects in writing to receive a corrected statement. Section 202 of the Protecting Americans from Tax Hikes Act (Pub. L. ), also known as the PATH Act, amended Code Secs. 6721 and 6722 to establish a safe harbor from the application of these penalties when the information return or payee statement is correctly filed but includes a de minimis error in the amount required to be reported. The safe harbor applies to information returns required to be filed and payee statements required to be furnished after December 31, 2016. In general, an incorrect amount need not be corrected if the error for any single amount does not exceed $100, or $25 for errors in reporting a withholding or backup withholding amount.

Irs Releases Proposed Regulations Addressing De Minimis Errors In Certain Information Returns And Statements

The notice leaves unanswered, however, how this rule will apply when a payee has an ongoing election not to apply the safe harbor in effect as described below. Because receiving correct and timely information returns is essential to tax compliance, the penalties imposed for failing to file correct or timely returns are severe, with higher penalties charged for taxpayers that do not promptly correct a failure to file returns or provide payee statements. The provision allowing the safe harbor for de minimis errors was part of the Protecting Americans from Tax Hikes Act of 2015. It states that if one or more dollar amounts are incorrect on a return or payee statement that is furnished to a recipient, the payer is not required to correct the error if the error does not exceed $100. If there is an error in tax withholding, the report need not be corrected if the error does not exceed $25. But a correction must be made if the recipient requests a corrected statement. The payor is specifically required to inform all payees of the election’s availability.

The IRS issued a notice (Notice ) that provides guidance on the de minimis safe harbor from information-reporting penalties under Secs. 6721 and 6722 and the payee election not to have the safe harbor apply, effective for information returns required to be filed and payee statements that must be furnished after Dec. 31, 2016 (thus including ones that are due by this Jan. 31). Under the de minimis rules, added by the Protecting Americans From Tax Hikes Act, P.L. , payers are not required to correct an error on an information return or payee statement and are not subject to penalties for failure to file a correct information return or payee statement if the error relates to an incorrect dollar amount and is no more than $100 ($25 for withholdings). The Protecting Americans from Tax Hikes Act of 2015 (P.L. ) established a “de minimis error safe harbor” from information reporting penalties under Internal Revenue Code Sections 6721 and 6722. Such penalties apply for failure to file correct information returns and/or failure to furnish correct payee statements.

However, the IRS did not describe which, if any, information returns and payee statements, would be excluded. These provisions are effective for information returns required to be filed and payee statements required to be furnished after December 31, 2016. However, given the substance of the IRS notice and the prospect of further guidance, employers may wish to take a cautious approach, and consult with appropriate legal and tax professionals. Also, the de minimis error safe harbor does not apply to a failure to file or furnish an information return or payee statement, even if the payee statement or information return would report dollar amounts of $100 or less, or $25 or less with respect to any amount of tax withheld. The IRS announced that it intends to issue regulations that adopt the rules in this notice. To the extent that the regulations are consistent with the notice, they will be effective for information returns required to be filed and payee statements that must be furnished after Dec. 31, 2016, which is also the effective date of the rules in the notice. Sec. 6721 and Sec. 6722 allow payees to elect out of the de minimis safe harbor and thereby request that the payers provide them with corrected returns.

On Oct. 17, 2018, the IRS issued proposed regulations relating to the de minimis error safe harbor exceptions to penalties for failure to file correct information returns or furnish correct payee statements under IRC sections 6721 and 6722. These proposed regulations are consistent with prior guidance on the safe harbor included on page five of the final instructions to Forms 1094/1095-C, which were reported on in our Oct. 16, 2018 edition of Compliance Corner. Under the safe harbor, no penalty is imposed for an error on an information return or payee statement, nor are the return or statement required to be corrected, if the error is de minimus.

Internal Revenue Code §§ enables the IRS to impose penalties against payors for various reporting errors — such as failure to furnish statements or returns on or before the due date, failure to include complete and required information, or providing incorrect information on a return. The new safe harbor rule applies to that last category of errors — providing incorrect information. Under Code Sec. 6722, the penalty for failing to furnish correct payee statements applies to failures to furnish a payee statement by the due date , and/or include correct information on the payee statement . The second type of failure encompasses situations where a business does not include all information required to be shown on the statement, or includes incorrect information on the statement.

Impact To State And Local Tax Reporting Obligations

The IRS recently issued Notice to provide guidance on the de minimis error safe harbor and the election by a payee to not have the safe harbor apply. Under the statute, filers are not subject to penalties under either Section 6721 and 6722 if an amount reported on the return is within $100 of correct amount or within $25 if the amount is an amount of tax withheld. However, if the payee requests a corrected return, the filer must file and furnish one or the payee is liable for potential penalties. Prior to the enactment of the PATH Act, any error in an amount was considered consequential and could result in a penalty—even if the error was only one cent. With this change, de minimis errors no longer necessitate corrected information returns or payee statements. The safe harbor is effective for information returns and payee statements required to be filed after December 31, 2016.

Notice specifies that the safe harbor will not apply in the event of an intentional error or if a payor fails to file a required information return or furnish a required payee statement. In other words, a filer cannot use the safe harbor to increase the filing threshold for reporting by arguing that the amount that should have been reported was within $25 of a threshold. Accordingly, if a filer determines that a Form 1099-MISC was not required because the amount paid to the payee was $550 and later determines the amount paid was actually $650, the safe harbor would not apply. Similarly, filers cannot apply the safe harbor to avoid penalties for payees of interest of less than $100 for whom they did not file a Form 1099-INT because the filer incorrectly believed the interest paid was less than $10.

Irs Explains Safe Harbor For De Minimis Errors On Information Returns And Statements

The IRS has provided guidance regarding the de minimis safe harbor from information reporting penalties under Code Secs. 6721 and 6722 , as well as guidance regarding the payee election to have the safe harbor not apply. The safe harbor was established by Section 202 of the Protecting Americans from Tax Hikes Act of 2015 (P.L. ) . The guidance is effective for information returns required to be filed and payee statements required to be furnished after December 31, 2016.

Sections 6721 and 6722 apply to failures to file correct information returns and furnish correct statements, including the required IRS 1095 schedules for reporting of Applicable Large Employers under the Affordable Care Act. Moreover, a pattern of non-compliance may indicate intentional disregard for purposes of penalties.

Safe Harbor Only Applies To Inadvertent Errors, And Not To Failures To File Or Furnish

The IRS has issued Notice , providing guidance on the safe harbor exemption for certain “de minimis” reporting errors. Notice contains the requirements for a payee statement or information return recipient to make an election to not have the safe harbor exemption apply. An election to not apply the safe harbor makes the payer subject to penalties, even if the error is de minimis. An inconsequential error or omission is not considered a failure to include correct information. An inconsequential error or omission does not prevent or hinder the IRS from processing the return, from correlating the information required to be shown on the return with the information shown on the payee’s tax return, or from otherwise putting the return to its intended use. Errors and omissions that are never inconsequential are those related to a TIN, a payee’s surname, and any money amount except with respect to the safe harbor for de minimis dollar amount errors.

• , payers are not required to correct an error on an information return or payee statement and are not subject to penalties for failure to file a correct information return or payee statement if the error relates to an incorrect dollar amount and is no more than $100 ($25 for withholdings).
• 6721 and 6722 and the payee election not to have the safe harbor apply, effective for information returns required to be filed and payee statements that must be furnished after Dec. 31, 2016 (thus including ones that are due by this Jan. 31).
• Such penalties apply for failure to file correct information returns and/or failure to furnish correct payee statements.
• The IRS issued a notice (Notice ) that provides guidance on the de minimis safe harbor from information-reporting penalties under Secs.
• Under the de minimis rules, added by the Protecting Americans From Tax Hikes Act, P.L.

If the payee makes this election, the penalties for incorrect information on the return will continue to apply to the payer. Notice also clarifies that the safe harbor does not apply if the error is intentional, or if an information return or payee statement is not filed at all. In other words, the de minimis exemption does not function as a filing waiver if the amount to be reported is below the $100/$25 thresholds. The new safe harbor rule will be effective for filings after December 31, 2016. It provides that an information return or payee statement containing an incorrect dollar amount may be exempt from penalties — and therefore would not require corrections — in certain circumstances. Specifically, the payor would not have to make a correction when the incorrectly reported dollar amount differs from the correct dollar amount by $100 or less or, in the case of withholding, by no more than $25.

However, the safe harbor does not apply to any payee statement if the payee makes an election under Code Sec. 6722. Therefore, if an election is in effect, a payor may be subject to penalties for a de minimis error on an information return or payee statement if the error goes uncorrected. But if a payee has made the election and the payor furnishes a corrected payee statement to the payee and files a corrected information return with the IRS within 30 days of the election, the penalties will not apply.

Examples of this include the unavailability of pertinent business records, reliance on erroneous written information from the IRS, or contracting with an agent to file timely and correct returns and/or furnish timely and correct payee statements. The notice states that the Treasury Department and IRS intend to issue regulations incorporating the rules contained in the notice. The regulations are also expected to require payors to notify payees of the safe harbor and the option to make an election to have the safe harbor not apply. The notice also indicates that the regulations may provide that the safe harbor does not apply to certain information returns and payee statements to prevent abuse as permitted by the statute, but does not indicate which, if any, information returns the IRS believes raise such concerns.