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<p>Tax Insights from Financial Markets www.pwc.com IRS issues guidance on de minimis error safe harbor from information reporting penalties February 28, 2017 In brief The Internal Revenue Service (IRS) recently issued Notice 2017-09 (the Notice) providing guidance to implement amendments made by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) to Sections 6721 and 6722 of the Internal Revenue Code regarding the de minimis error safe harbor from penalties for failure to file correct information returns and failure to furnish correct payee statements, and the payee election to have the safe harbor not apply to certain payee statements or information returns. The Notice sets forth requirements for the election, including the time and manner for making the election, and clarifies that the safe harbor applies only to unintentional errors on information returns that are actually filed with the IRS and statements actually furnished to the payee. The Notice applies to information returns required to be filed and payee statements required to be furnished after December 31, 2016. In detail Background Penalties under Sections 6721 and 6722 apply when a payor (a reference to ‘payor’ includes withholding agent throughout this insight) required to file an information return or furnish a payee statement fails to do so timely, fails to include all of the required information, or includes incorrect information. The newly established de minimis error safe harbor provides that 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 that 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 safe harbor does not apply to any payee statement if the payee makes an election that the safe harbor not apply and, as a result, the penalties will apply even if the error was de minimis. Election to have safe harbor not apply A payee may elect to have the de minimis error safe harbor not apply. This election would result in the application of penalties to a payor that fails to correct an error on an information return or payee statement, even if the error is de minimis. The Notice provides that an error will be treated as attributable to reasonable cause and not willful neglect, and penalties will not apply, if a payee makes such an 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 election. The 30-day rule does not apply where specific rules provide for additional time for the payor to furnish a corrected payee statement and file a corrected information return. Observation: The election gives payees a means to require payors to send corrected statements to them in lieu Tax Insights 2 pwc of simply applying the safe harbor without updating information reported to payees. While this election would obligate payors to update information returns and payee statements, the Notice still allows payors to avoid penalties where the information is corrected in a timely manner. Reasonable manner for making election The Notice provides that a payor may not impose any prerequisite, condition, or time limitation on a payee’s ability to request a corrected payee statement, other than prescribing a reasonable manner for making a valid election for the de minimis safe harbor to not apply. A payor may prescribe any reasonable method for making the election provided that the payor furnishes the payee written notification of the reasonable manner before the date the payee makes the election. Any on-line electronic option offered by the payor must not be the only method for the payee to make the election. The payee must adhere to any reasonable manner prescribed by the payor for making a valid election. If the payor has not prescribed a manner to make the election, the payee may make the election in writing to the payor’s address appearing on a payee statement, or as directed by the payor after making an appropriate inquiry. Observation: The IRS has permitted payors much flexibility in creating a mechanism for their payees to make the election to have the safe harbor not apply. However, the IRS also will allow the election to be made even where a payor does not specify a certain method or delivery address. Payors, particularly those with high volumes of information returns and payee statements, should create and specify to payees a method for making the election to avoid confusion or missed payee elections made under the default method. The Notice does not prohibit a payor from filing corrected information returns and furnishing corrected payee statements if the payee does not make an election. For example, the IRS encourages employers to help resolve any discrepancies between employment tax returns (e.g., Form 941, Employer’s Quarterly Federal Tax Return, and Schedule H, Household Employment Taxes) and amounts reported the Social Security Administration (SSA) via Forms W-3, Transmittal of Wage and Tax Statements, by filing corrected information returns and furnishing corrected payee statements whenever Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement, include incorrect information, even if the error is de minimis. Time for making and revoking election The Notice provides that a payee may make an election to have the de minimis error safe harbor not apply with respect to payee statements required to be furnished in the calendar year in which the payee makes the election (e.g., payee may make election on June 15, 2017 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 Notice provides that a payee may revoke an election in writing at any time after making the election. The revocation applies to all information returns of the type identified in the revocation and required to be filed or furnished until the payee makes a new election. Information required to be included in election The Notice provides that a payee making the election must: clearly state that the payee is making the election, provide the payee’s name, address, and taxpayer identification number to the payor, identify the specific type of payee statement(s) and account number(s) to which the payee wants the election to apply, and state that the election applies only to payee statements required to be furnished in the calendar year for which the payee makes the election. If the payee does not identify the type of payee statement and account number or the calendar year to which the election relates, the payor must treat the election as applying to all types of payee statements the payor is required to furnish to the payee and as applying to payee statements required to be furnished in the calendar year in which the payee makes the election and in any succeeding years. Safe harbor applies only to inadvertent errors and not to failure to file or furnish The Notice provides that the de minimis safe harbor applies only to inadvertent errors on a filed information return or furnished payee statement. It does not apply if a payor intentionally misreports a dollar amount on an information return or payee statement, whether or not the amount otherwise qualifies as de minimis, or to a failure to file or furnish an information return or payee statement, even if the payee statement or information return Tax Insights 3 pwc would report dollar amounts of $100 or less (or $25 or less with respect to any amount of tax withheld). Regulations to implement the de minimis error safe harbor The Notice announces that the IRS and the US Department of the Treasury intend to issue regulations to implement the de minimis error safe harbor and the payee election to have the safe harbor not apply. These regulations are expected to incorporate the rules contained in the Notice, include a requirement for payors to notify payees regarding the safe harbor and election for the safe harbor not to apply, include provisions to prevent abuse of the safe harbor, and include provisions that the safe harbor does not apply to certain information returns and payee statements. To the extent the regulations incorporate rules set forth in the Notice, they will be effective for returns required to be filed and payee statements required to be furnished after December 31, 2016. Observation: To the extent that a correction of an item would result in an adjustment to cost basis, if the safe harbor applies such that the correction is not made, then the related cost basis adjustment would not be made. Payors that make cost basis adjustments at a security level may find it difficult to ‘turn off’ the cost basis adjustment with respect to payees for whom they applied the safe harbor. This difficulty could minimize the use of the safe harbor by payors that find themselves in this situation. The takeaway This Notice provides a measure of relief to payors for common errors in filing information returns with the IRS and furnishing statements to payees. Where the errors fit within the de minimis threshold, the payor is not required to take action and will not be subject to penalties. However, the threshold is small and may be inadequate. In addition, regardless of whether payors affirmatively provide a means, payees can elect to require updated information returns and payee statements even where the de minimis threshold is met. Payors should continue to strive for correct information returns and payee statements to avoid having to rely on the de minimis threshold, but recognize unavoidable situations where it may be useful in avoiding penalties and interest. SOLICITATION © 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. SOLICITATION This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. At PwC, our purpose is to build trust in society and solve important problems. PwC is a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com/US. Let’s talk Financial Markets Dominick Dell' Imperio (646) 471-2386 dominick.dellimperio@pwc.com Candace Ewell (202) 312-7694 candace.b.ewell@pwc.com Erica Gut (415) 498-8477 erica.gut@us.pwc.com Jon Lakritz (646) 471-2259 jon.w.lakritz@pwc.com Rob Limerick (646) 471-7012 robert.limerick@pwc.com Jason Spitzer (202) 346-5287 jason.spitzer@pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions </p>
