IRS Clarifies Safe Harbor Rules for De Minimis Errors

This blog was last updated on June 26, 2021

The Protecting Americans from Tax Hikes Act (PATH Act) enacted in December 2015 creates, extends and permanently implements a number of exemptions and deductions that affect individual and business taxpayers alike. The PATH Act also contains a number of provisions intended to cut down on potential tax fraud. One of these Tax Information Reporting provisions introduces a “safe harbor” for de minimis errors.

The Internal Revenue Service recently published guidance (Notice 2017-09) further explaining the safe harbor’s scope and limits. According to the IRS, one of the primary drivers for issuing this notice is to ensure that these provisions are not abused.

It is important for businesses to completely understand the safe harbor parameters so they can best determine where penalty liability may exist, when corrections are required, and where they can avoid the cost of unnecessary filings.

The Reporting Requirement

Internal Revenue Code §§ 6721-6722 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.

The Safe Harbor

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, this safe harbor is subject to an election by the payee to have the erroneous statement or return corrected.

The Notice Requirement and the Payee Election

The notice outlines a number of specific requirements related to the payee election.

1. The payor is specifically required to inform all payees of the election’s availability. 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.
2. The payor will determine the manner in which the election must be made, and the payee will be required to adhere to that manner as long as it is reasonable. If the election method is unreasonable, the payee can make the election in writing to the payor’s address, and the payor will be required to honor that election as valid. While payors may provide an online election option, this cannot be the exclusive manner of making the election.
3. A payee may make the election with respect to statements required to be furnished in the calendar year in which the election is made or in subsequent years. A valid election generally requires the following information:
   • Payee’s intent to make the election
   • Payee’s name, address, and TIN
   • The type of payee statements and account numbers to which the election applies
   • The calendar year to which the election will apply

It is important to note that the safe harbor will only apply to inadvertent errors. Failures to furnish or file by the deadline will not fall within the safe harbor, and the applicable penalties will be imposed if the failures were not due to reasonable cause.

The safe harbor rule also requires that payors maintain records of any elections, or revocations thereof, made by a payee for as long as that information may be relevant to the IRS.

Important Next Steps for Businesses

Notice 2017-09 provides needed clarity regarding the requirements for businesses when negotiating payee elections. However, organizations should also understand that the IRS has signaled additional guidance is forthcoming that may impose important limits on the safe harbor. Specifically, the notice provides that the Treasury Department and the IRS intend to issue regulations to incorporate the rules contained in the notice. It may also provide that certain information returns may be expressly excluded from the safe harbor to prevent abuse.