On December 19, 2023, the proposed changes to the US Code of Federal Regulations relating to the de minimis error safe harbor exceptions to penalties for information returns and payee statements were added to the Code as final regulations. The updates are effective as of the publishing date of December 19, 2023, but are applicable to returns required to be filed and payee statements required to be furnished on or after January 1, 2024.Most of the updates to the CFR are editorial, but some references have been changed to accommodate the changes elsewhere in the update.
The updates to the code were added to implement the de minimis error safe harbor exceptions already existing in the Code along with updating dollar amounts, definitions, and references reflecting other updates to the code not made in previous versions of the regulations. The final additions to the regulations provide rules relating to the reporting of basis of securities by brokers as related to the de minimis error safe harbor rules. The exceptions are expected to reduce the burden on all filers including small entities, regarding filing corrected information returns and furnishing corrected payee statements due to de minimis errors.
The rules treat information returns and payee statements with incorrect dollar amounts as returns or statements with the correct amounts for the purpose of certain penalties if the errors are de minimis in the dollar amount. Under sections 6721(c)(3) and 6722(c)(3), an error in a reported amount is considered “de minimis” if “the difference between any single amount reported in error and the correct amount required to be reported does not exceed $100. If such a difference is with respect to reporting an amount of tax withheld, the difference may not be more than $25.” Under the new regulations, penalties have been adjusted for inflation and may be adjusted to account for future inflation as well.
The IRS anticipated some impacts to filers; notably that the regulations may affect a substantial number of small entities though the economic impact on them is not expected to be insignificant, mostly in terms of payees opting to make the voluntary election for the de minimis safe harbor exceptions to not apply to a payee statement. Additionally, the regulations provide clarity for payee election to not apply the safe harbor exceptions, which should result in a more streamlined process for correcting payee statements. Similar cost increases are expected where payees opt to revoke a prior voluntary election. Despite the costs, smaller entities should benefit from the safe harbor exceptions, which reduce the burden to file corrected returns and furnish corrected statements due to de minimis errors.
The regulations can be found in the Federal Register here.
