The IRS recently published Notice 2017-9 announcing its intent to issue regulations regarding the obligation of a payor (e.g., employer) to document payee (e.g., employee) elections for application of the de minimis error safe harbor from penalties under IRC Sections 6721 and 6722 as amended by Protecting Americans from Tax Hikes Act of 2015 (P.L. 114-113) (“PATH Act”). This is anticipated to impact information returns required to be filed and payee statements required to be furnished after December 31, 2016.
Sections 6721 and 6722 apply to failures to file correct information returns and furnish correct statements, including the required IRS 1095 schedules for reporting of Applicable Large Employers under the Affordable Care Act. A safe harbor from penalties for such failures exist for inadvertent errors relating to an incorrect dollar amount with an error differential of no more than $100 ($25 in the case of an error with respect to an amount of tax withheld) but for failures to file or furnish an information return or payee statement or for intentional misreporting of a dollar amount on such return or statement, regardless of otherwise qualifying as a de minimis error. Moreover, a pattern of non-compliance may indicate intentional disregard for purposes of penalties.
However, this de minimis safe harbor is not available with respect to those payees who have made an election under Section 6722(c)(3)(B). Although a payee may revoke that election by written notification, the payee may subsequently make a new election. If such an election is made by the payee, the payor may be subject to penalties for an incorrect dollar amount appearing on an information return or payee statement even if the incorrect amount is a de minimis error.
The payor (e.g., employer) may prescribe any reasonable manner for making the election, including in writing, on-line (electronic) (provided it is not the exclusive manner), or by telephone, provided that the payor furnishes the payee written notification of the reasonable manner before the date the payee makes the election. However, the payor may not otherwise impose any prerequisite, condition or time limitation on the payee’s ability to request a corrected payee statement.
The IRS Notice requires the payor (e.g., employer) to retain records of any such election, or revocation of any election, “for as long as that information may be relevant to the administration of the internal revenue law.” For employers, to show compliance, this requirement may include documentation of the reasonable procedures for employee election and revocation in addition to documentation of the employees’ actual elections and/or revocations.
Should the employer opt to allow for telephonic elections, employers are cautioned to ensure that they maintain documentation of such telephonic elections. Moreover, all such documentation should be maintained for at least as long as the employer is subject to an IRS audit related to such elections.
