The IRS has provided information on the de minimis error safe harbor information reporting provisions added by the PATH Act in 2015 in Notice 2017-9.
The PATH Act added provisions (found in IRC §§6721 and 6722) that remove penalties for not providing revised returns to the IRS and taxpayers. As the notice describes:
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).
However, Congress decided that a payee should have the right to require the revised Forms 1099 (IRC §6721(c)(3)(B)) under regulations that the IRS may issue.
The notice serves to provide initial guidance in this area. If a payee files the election the notice provides a time period for the payor to file the revised form:
If a payee has made the election under section 6722(c)(3)(B), 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 the section 6721 and 6722 penalties will not apply to the error. Where specific rules provide for additional time in which to furnish a corrected payee statement and file a corrected information return, the 30-day rule does not apply and the specific rules will apply. See e.g., §31.6051-1(c)-(d) and §31.6051-2(b).
The notice goes on to provide rules for how a payor may provide methods for payees to make the election:
A payor may prescribe any reasonable manner for making the election, including in writing, on-line (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. If the payor provides an on-line (electronic) option to make the election, this must not be the exclusive manner to make the election. If a payor has prescribed a reasonable manner for making the election, the payee must adhere to that prescribed manner to make a valid election. If the payor has not prescribed a manner to make the election, a payee may make the election under section 6722(c)(3)(B) 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.
The notice warns that the payor may not 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.”
The Notice does go on to give the IRS’s view that W-2s should be corrected regardless of the amount of error. As the Notice provides:
The IRS encourages employers to correct any errors on Form W-2 (Wage and Tax Statement) and Form W-2c (Corrected Wage and Tax Statement). The IRS and Social Security Administration (SSA) have long maintained the Combined Annual Wage Reporting (CAWR) program to ensure that employees receive proper credit for their earnings and ensure that employers have paid and reported the proper amount of taxes.
The IRS notes that if errors are not corrected there could be mismatches when the IRS goes to reconcile employment tax returns and the Forms W-2. Presumably that would also eliminate correspondence that otherwise will be issued.
The notice goes on to describe when a payee may make the election to require a corrected statement:
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 (for example, 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 payee’s election under section 6722(c)(3)(B) applies to related information returns under section 6721(c)(3)(B).
A payee may revoke an election at any time subsequent to 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 payee statements required to be furnished on or after the date the payor receives the revocation until the payee makes a new election.
As well, a payor must decide to simply issue the corrected statements even if not required to do so.
Nothing in this notice prevents a payee from requesting that the payor file a corrected information return or furnish a corrected payee statement required to be filed or furnished in a calendar year preceding the calendar year in which the payee makes the election.
The notice provides the following regarding information that must be part of the election:
When making the election, the payee must: (1) clearly state that the payee is making the election; (2) provide the payee’s name, address, and taxpayer identification number (TIN) (as defined in section 7701(a)(41) of the Code) to the payor; (3) identify the type of payee statement(s) and account number(s), if applicable, to which the election applies (e.g., Form 1099-DIV (Dividends and Distributions)) if the payee wants the election to apply only to specific statements; and (4) if the payee wants the election to apply only to the year for which the payee makes the election, state that the election applies only to payee statements required to be furnished in that calendar year. If the payee does not identify (i) the type of payee statement and account number or (ii) 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 calendar years.
The notice cautions that the relief does not extend to intentional errors—so the payor can’t simply “reduce” Forms 1099 by the maximum adjustment. If a payor does so, the penalties will still apply. The relief also does not apply to the failure to file an information return that is otherwise required regardless of the fact that the amount required to be reported on the Form 1099 is less than the $100 “acceptable” inadvertent error amount.
The notice provides that the IRS plans to issue regulations to cover the issue and, to the extent the regulations implement provisions found in the notice, will be effective for forms filed after December 31, 2016.