In general, businesses are subject to penalties under IRC §6721 and §6722 for errors on information returns and statements they fail to correct. (See page 5 for the information reporting penalties that currently apply.)
In consideration of the likely increase in corrected Forms W-2 as a result of accelerating the filing due date to January 31 effective with forms required to be filed after December 31, 2016 (see page 2), the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) contains a provision waiving the penalties for incorrect information returns and statements if the errors are de minimis. Specifically, the de minimis error safe harbor applies to an incorrect dollar amount of no more than $100 and a withholding tax error amount of no more than $25.
The PATH Act stipulates, however, that taxpayers may veto the use of safe harbor by the business. If they do, the business must file corrected information returns and provide corrected statements for such taxpayers.
In Notice 2017-09, the IRS provides long-awaited guidance on the safe harbor from the requirement to file corrected information returns and provide corrected statements (e.g., Forms W-2) for de minimis errors. This guidance highlights the significant limitations in taking advantage of the safe harbor, particularly a taxpayer’s right to require the correction of de minimis errors.
The guidance applies to information returns required to be filed and information statements required to be provided after December 31, 2016. Written comments are requested by April 24, 2017.
Not correcting Forms W-2, whether or not allowed under the safe harbor, can create matching differences with employment tax returns (e.g., Form 941), resulting in notices from the Social Security Administration and IRS under the Combined Annual Wage Reporting (CAWR) program. In fact, the IRS states in Notice 2017-09 that in consideration of the CAWR program, employers are encouraged to correct all Form W-2 reporting errors, even those that are de minimis.
Circumstances under which the safe harbor does not apply
The IRS clarifies that the de minimis error safe harbor applies only to inadvertent errors on information returns and statements and not when the business has intentionally misreported a dollar amount, whether or not it is de minimis. A pattern of noncompliance indicates intention to misreport for these purposes.
In addition, the de minimis error safe harbor applies only to errors on information returns filed or statements provided. It does not apply if the business failed entirely to file a return or furnish a statement, even if the statement or information return would report dollar amounts ºf $100 or less or tax withheld of $25 or less.
Before choosing to take advantage of this safe harbor, businesses must consider the administrative costs associated with managing and accommodating taxpayer “opt out” elections.
IRS guidance governing taxpayer election for correction of de minimis errors
In Notice 2017-09, the IRS clarifies the rules and guidelines governing the use of the safe harbor relief penalties for information statements and returns as follows.
- 30 days to make de minimis corrections requested by taxpayers. Unless other filing deadlines apply, if the payee (e.g., employee) elects to have de minimis errors corrected, the business has 30 days from the day such election is made to furnish a corrected statement and file a corrected return. Corrections made within the 30-day deadline are not subject to penalties under IRC §6721 and §6722.
- Manner for taxpayer election to receive corrections. Businesses may prescribe any reasonable manner for taxpayers to elect to have de minimis errors corrected, including phone, written statements or online; however, online may not be the exclusive method available. If the business has not prescribed a manner for making the election, the taxpayer should provide a written statement to the businesses using the business name and address furnished on the information statement. Additionally, the business may not impose prerequisites, conditions or time limits on the payee’s ability to request a corrected statement, other than prescribing a reasonable manner for making the election.
- Revocation of election to receive corrections. Payees can revoke their election to receive corrections of de minimis errors by providing written notice to the business.
- Timing to make elections to receive corrections. Payees may make an election to receive correction of de minimis errors pursuant to statements required to be filed in the calendar year of the election and succeeding calendar years. Payees are also allowed to make the election in a calendar year preceding the calendar year when the payee makes the election.
- Corrections allowed even if not elected. Businesses may file corrected information returns and provide corrected statements even if employees do not elect to receive them.
- Information required within the payee election. To provide notice of the election to receive corrections of de minimis errors, the payee must provide the business with the following information:
- A clear statement that the payee is making the election
- The payee’s name, address and taxpayer identification number (TIN)
- Identification of the type of payee statement(s) and account number(s), if applicable to which the election applies (e.g., Form W-2, Form 1099-DIV) if the payee wants the election to apply only to specific statements
- A statement that the election applies only to payee statements required to be furnished in that calendar year if the payee wants the election to apply only to the year when 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 payer must treat the election as applying to all types of payee statements the payer is required to furnish to the payee and as applying to payee statements required to be furnished in the calendar year when the payee makes the election and in any succeeding calendar years.
Notice 2017-09 does not explicitly state that businesses must notify payees each time they intend to apply the de minimis error safe harbor. Instead, the IRS states that future regulations will include the requirement that businesses notify taxpayers of the de minimis error safe harbor and the election for the safe harbor not to apply. In advance of the upcoming regulations, businesses should take a conservative approach and notify taxpayers in each instance they intend to apply the safe harbor and provide time for taxpayers to make their elections.
Businesses must retain copies of any taxpayer election, or revocation of an election, for as long as this information is relevant in the administration of any internal revenue law.