January 16, 2017
IRS Explains de Minimis Error Safe Harbor for Info Returns and Payee Statements
By Eugene Kim, Senior Manager, Tax & Business Services
IRS Notice 2017-9, explains the scope of a new de minimis error safe harbor for information returns and payee statements created by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The notice also details a payee's option to elect out of the safe harbor and when and how such election is made. The notice is effective for information returns required to be filed, and payee statements required to be furnished, after December 31, 2016.
In general, except where there is reasonable cause and no willful neglect, and subject to certain other exceptions, a failure to include all of the information required to be disclosed on an information return or a payee statement is subject to a penalty. The actual amount of the penalty depends on various factors.
Effective for returns and statements required to be filed after December 31, 2016, the PATH Act established a de minimis error safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements. If the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed.
However, if any person receiving a payee statement requests a corrected statement by making an election, the payor must furnish a corrected statement to the payee and file a corrected information return, and cannot rely on the de minimis error safe harbor to avoid penalties.
The new notice explains the scope of the safe harbor, the payee's option to elect out of the safe harbor, and when and how the election is made.
Scope of Safe Harbor
The de minimis error safe harbor only applies to inadvertent errors on a filed information return or furnished payee statement. Intentional disregard provisions exist that preclude reliance on the de minimis error safe harbor for purposes of the penalties. Additionally, the de minimis error safe harbor doesn't 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).
When to Make the Election and its Duration
A payee may make an election prospectively. For example, on June 15, 2017, a payee may make an election for payee statements required to be furnished in calendar year 2017. Alternatively, the election can be made for payee statements required to be furnished in succeeding calendar years.
Communicating the Election Out to the Payor
A payor may prescribe any reasonable manner for the payee to make the election, including in writing, online (electronic), or by telephone, provided that the payor furnishes the payee written notification of the reasonable manner before the date the payee makes the election. Online notification cannot be the exclusive manner to make the election. The payor cannot impose any prerequisite, condition, or time limitation on the payee's ability to request a corrected payee statement, other than prescribing a reasonable manner for making the election.
If the payor doesn't prescribe how the election is to be made, a payee may make the election in writing to the payor's address appearing on a payee statement furnished by the payor to the payee, or as directed by the payor after making an appropriate inquiry.
Effect of the Election Out
If a payee elects to have the payor correct a furnished statement, the payor will be subject to penalties if any error is not corrected, even if the error is de minimis. If a payee has made the election, and the payor both 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, and penalties will not apply to the error.
Revocation of Election Out
A payee may revoke an election out of the de minimis error safe harbor at any time after making the election by providing the payor with written notification of revocation. Such revocation applies to all information returns of the type set forth in the revocation required to be filed and to payee statements required to be furnished on or after the date the payor receives the revocation until the payee makes a new election.
Should you have any questions related to the provisions of this notice, please contact your Marcum tax professional.