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Treasury finalizes de minimis error safe harbor rules for information returns and payee statements
January 2024
In brief
What happened?
Treasury and the IRS on December 18 issued final regulations (Final Regulations) implementing statutory safe harbor rules that protect filers from penalties for failure to file correct information returns or furnish correct payee statements. The safe harbor rules treat information returns and payee statements with erroneous dollar amounts as correct returns or statements for certain penalty purposes if the errors are de minimis in dollar amount.
The Final Regulations also detail the time and manner in which a payee may elect to not have the safe harbor rules apply. In addition, the Final Regulations update dollar amounts, definitions, and references in existing regulations relating to information return and payee statement penalties. Finally, the Final Regulations provide rules relating to the reporting of basis of securities by brokers as this reporting relates to the de minimis error safe harbor rules.
Why is it relevant?
The Final Regulations apply to information returns required to be filed and payee statements required to be furnished on or after January 1, 2024.
Action to consider:
Payors should consider how they want to manage certain practical aspects of the safe harbors, and in particular, whether they want to apply them in all instances. For example, because the safe harbors are based on the dollar amounts reported as income and tax withheld, it is possible that an account holder that has multiple accounts with the payor that hold the same investment could be required to receive a correction in one account, but would not be required to receive a correction in a second account due to application of the safe harbor. Thus, a payor may want to give some thought as to whether it will apply the safe harbor any time that it can, or whether in cases such as the one described here, it may want to correct the same transaction in all accounts of a particular account holder if it has to correct any accounts for that account holder.
In detail
Background
The Final Regulations implement two statutory safe harbors that exempt certain de minimis errors in reporting correct dollar amounts on information returns and payee statements from the Section 6721 penalty for failure to file correct information returns and the Section 6722 penalty for failure to furnish correct payee statements. An error in a reported dollar amount generally is de minimis if the difference between any single amount reported in error and the correct amount required to be reported does not exceed $100. The difference may not be more than $25 with respect to an amount of tax withheld. These de minimis error safe harbor exceptions apply on a per statement or per security basis.
Treasury and the IRS in October 2018 published proposed regulations (Proposed Regulations) implementing the de minimis safe harbor exceptions, as well as updating dollar amounts, definitions, and references reflecting various statutory amendments that are accounted for in the existing regulations relating to information return and payee statement penalties. Treasury and the IRS received six comments in response to the Proposed Regulations.
De minimis error safe harbor election
Applying election to individual securities and accounts
Sections 6721(c)(3) and 6722(c)(3)(A) mandate the option for filers to choose whether to correct de minimis errors, subject to an election by a payee to override this option. A payee need not decide on elections individually for each payment statement associated with a single account or filer, but may elect as to all payee statements or any combination of payee statements, with the election lasting indefinitely by default.
Potential for inconsistencies in basis reporting
A comment raised a concern that the Proposed Regulations could cause inconsistencies in basis reporting and was specifically concerned with a situation in which a payee would elect to override the de minimis error safe harbor exceptions with respect to one form but not another corresponding form. For example, a payee could elect to override the safe harbor exception with respect to a Form 1099-DIV, Dividends and Distributions, but not elect to override the safe harbor exception with respect to a corresponding Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, potentially resulting in inconsistently reported basis.
The Final Regulations amend the Proposed Regulations to provide that if a Form 1099-DIV is corrected because a payee elects to override the de minimis safe harbor exceptions as applied to the Form 1099-DIV, then the adjusted basis reported on the corresponding Form 1099-B must be based on and consistent with the corresponding corrected dollar amount on the corrected Form 1099-DIV. After taking into account the corrected dollar amount shown in the Form 1099-DIV, Form 1099-B should be corrected if there is a non de minimis error on Form 1099-B.
Effective date of payee election
The payee election to override the de minimis error safe harbor is prospective in that a filer must furnish corrected statements after the date the election is made by the payee. The payee must make the election no later than the later of 30 days after the date on which the payee statement is required to be furnished to the payee or October 15 of the calendar year to receive a correct payee statement required to be furnished in that calendar year.
Clarification of items in the Proposed Regulations and other guidance
Addressing a comment requesting clarification, the Final Regulations amend the Proposed Regulations to clarify that the term “tax withheld” includes Social Security, Medicare, and Additional Medicare taxes.
A comment requested clarification on whether different taxes withheld and reported separately on an information return or payee statement are considered separately in determining whether the de minimis threshold is reached. The Final Regulations include new examples to illustrate that the definition of “de minimis” refers to “any single amount in error.” Accordingly, if a payee statement does not require taxes withheld to be combined into a single amount for the reporting purposes, then each single amount of tax required to be reported separately would be considered separately in determining whether an error is de minimis.
Addressing a concern raised in a comment, the Final Regulations clarify that the de minimis error safer harbor exceptions under Sections 6721(c)(3) and 6722(c)(3) apply only for information return and payee statement penalty purposes, respectively, and not for other purposes, including requirements to pay and report taxes under other code sections.
The Final Regulations also make clear that, regardless of whether the de minimis error safe harbor exceptions provide an exception for not filing or furnishing the corrected statement, a filer may voluntarily file (1) a corrected information return if the corresponding payee statement is furnished concurrently or (2) a corrected payee statement if the corresponding information return is filed concurrently.
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