IRS issues proposed rules on De Minimis error safe harbors

The Treasury Department and the IRS have proposed regulations on the penalties for failure to file correct information returns under Code Sec. 6721 and failure to furnish correct payee statements under Code Sec. 6722. The proposed regulations:

  • contain safe harbor rules that generally treat as correct payee statements or corresponding information returns that contain errors relating to de minimis incorrect dollar amounts;
  • provide the time and manner in which a payee may elect not to have the safe harbor rules apply;
  • update penalty amounts and references to information reporting obligations; and
  • provide rules on reporting the basis of securities by brokers as it relates to the de minimis error safe harbor rules.

Safe harbor exceptions

The proposed regulations provide, among other things, that—

  • the safe harbor exceptions to the Code Sec. 6721 and Code Sec. 6722 penalties generally apply when an information return or payee statement is otherwise correct and is timely filed or furnished and includes a de minimis error in a dollar amount reported on the return or statement;
  • the safe harbor exceptions do not apply in cases of intentional disregard of the requirements to file correct information returns or furnish correct payee statements;
  • a payee can elect to have the safe harbor exceptions not apply, but the election is not available for information that may not be altered under specific information reporting rules;
  • an election out of the safe harbors must be made no later than the later of (i) 30 days after the date when the payee statement must be furnished to the payee, or (ii) October 15 of the calendar year;
  • an election out remains in effect for all later years until revoked under the proposed regulations;
  • revocation of an election out will be effective for payee statements furnished or due to be furnished after the revocation is received;
  • the payee may make the election out in a reasonable alternative manner, including electronic elections by e-mail or telephonic elections, if the filer provides a valid, timely notification to the payee describing the reasonable alternative manner;
  • a filer may establish that a failure caused by the presence of de minimis errors and an election out is due to reasonable cause and not willful neglect by filing a corrected information return or furnishing a corrected payee statement, or both, within 30 days of the election date;
  • filers must retain records of any election, revocation, or notification for as long as its contents might be material in federal tax administration; and
  • penalty and other dollar amounts will be adjusted for inflation.

Effect on other documents

Notice 2017-9, I.R.B. 2017-4, 542, was issued to provide guidance on the de minimis error safe harbor exceptions from the penalties under Code Secs. 6721 and 6722. Notice 2017-9 will be superseded for information returns required to be filed and payee statements required to be furnished on or after January 1 of the calendar year immediately following the date of publication of a Treasury Decision adopting the proposed regulations as final regulations in the Federal Register.

Comments requested

Written or electronic comments and requests for a public hearing must be received by 60 days after publication of the document in the Federal Register. Send submissions to: CC:PA:LPD:PR (REG-118826-16), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-118826-16), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC, or sent via the Federal eRulemaking Portal at (REG-118826-16). (IRS Proposed regulations, NPRM REG-118826-16, RIN 1545-BN59, October 12, 2018.)

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