In Notice 2017-09
, the IRS provided guidance on the safe harbor for de minimis and inadvertent errors in amounts reported on information returns.
As part of the Protecting Americans from Tax Hikes (PATH) Act of 2015, Congress amended Sections 6721 and 6722 to establish a safe harbor from penalties for failure-to-file correct information returns with the IRS and failure-to-furnish correct payee statements to employees and other service providers for certain de minimis and inadvertent errors. This de minimis safe harbor applies to the forms described in Section 6724(d), which include, among other forms, Forms W-2 and 1099-MISC, required to be furnished after Dec. 31, 2016 on which compensation and employment tax withholding are reported to service providers.
A service recipient (e.g., an employer) is required to correctly report compensation for services and applicable withholdings to the IRS and service providers on either a Form W-2 or Form 1099-MISC, depending on whether the worker is an employee or independent contractor. If correct information is not timely reported on the appropriate form to both the IRS and service provider, the service recipient may be subject to penalties under Sections 6721 and 6722 equal to $520 in aggregate (as indexed for inflation in 2017) for each incorrect or untimely form. This would require service providers to correct very small errors in the amounts reported on the forms, which could lead to large administrative costs. Under the safe harbor, an error on a Form W-2 or Form 1099-MISC is not required to be corrected and no penalty will be imposed, if the error relates to an incorrect dollar amount, and the error differs from the correct amount by not more than $100 ($25 for errors in reporting withholding amounts).
The service provider (e.g., the employee) may make an election that the de minimis error safe harbor not apply so that penalties are applicable to a service recipient who fails to correct an error, even if the error is de minimis. If the service provider makes this election, and the service recipient corrects the Form W-2 or Form 1099-MISC within 30 days of the date of the election, the error will be treated as due to reasonable cause and the sections 6721 and 6722 penalties will not apply. Notice 2017-09 provides additional details about when the election can be made and the information that must be included in the election.
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