Guidance Issued on De Minimis Safe Harbor for Information Returns/Payee Statements

The IRS issued a notice (Notice 2017-9) 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 (PATH) Act, P.L. 114-113, 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).

Sec. 6721(c)(3)(B) and Sec. 6722(c)(3)(B) allow payees to elect out of the de minimis safe harbor and thereby request that the payers provide them with corrected returns. If the payee makes this election, the penalties for incorrect information on the return will continue to apply to the payer.

A payer can provide any reasonable manner for making the election, including in writing, online, or by telephone. However, if the payer provides for online notification, that cannot be the only method available. If the payer has prescribed a reasonable method, the payee must follow that method. If the payer has not prescribed a manner to make the election, the payee may make the election in writing to the payer’s address appearing on the information statement or as directed by the payer after making an inquiry.

A payee may make an election with respect to payee statements required to be furnished in the calendar year in which the payee makes the election (e.g., a payee making an election on June 15, 2017, may make an election with respect to payee statements required to be furnished in calendar year 2017), or, alternatively, with respect to payee statements required to be furnished in the calendar year of the election and succeeding calendar years.

The election out must (1) clearly state that the payee is making the election; (2) include the payee’s name, address, and taxpayer identification number; (3) identify the type of return and account number to which the payee wants the election out to apply (e.g., Form 1099-DIV, Dividends and Distributions); and (4) if the payee wants the election to apply only to that calendar year, state that fact. If the payee does not specify the type of form or the years under (3) and (4), the payer must treat the election as applying to all returns required to be furnished for that year and for all subsequent years, starting with that calendar year.

The payer may not impose any other requirements on making the election other than prescribing a reasonable manner for making the election and may issue corrected statements even if the payees do not request them. A payee may revoke the election at any time by written notice to the payer.

If a payee makes the election and the payer furnishes the corrected statement to the payee and the IRS within 30 days, the error on the original statement will be considered to be due to reasonable cause and the penalties will not apply.

The IRS encourages payers to correct Forms W-2, Wage and Tax Statement, and W-2c, Corrected Wage and Tax Statement, even if there are only de minimis errors, to ensure employees receive proper credit for their wages from the Social Security Administration.

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.

The penalties under Secs. 6721 and 6722 for filing incorrect information returns and payee statements were increased by the Trade Preferences Extension Act of 2015, P.L. 114-27. In addition, the due dates for Forms W-2 and for Forms 1099 reporting nonemployee compensation were moved up to Jan. 31 by the PATH Act.

—Sally P. Schreiber (sally.schreiber@aicpa-cima.com) is a Tax Adviser senior editor.