The IRS has issued final regulations regarding the de minimis safe harbors from the penalties under Code Sec. 6721 for failure to file information returns and Code Sec. 6722 for failure to furnish payee statements. The regulations also include the time and manner a payee may elect out of the safe harbor, as well as rules on reporting basis of securities by brokers as it relates to the de minimis safe harbors. The final regulations adopt the 2018 proposed regulations with only minor modifications.
Safe Harbor Exceptions
The safe harbor to the Code Sec. 6721 and Code Sec. 6722 penalties generally apply to an otherwise correctly filed information return or furnished payee statement that includes a de minimis error of the dollar amount required to be reported. A de minimis error is where:
- no single erroneous dollar amount differs from the correct amount by more than $100; and
- no single amount reported for tax withheld differs from the correct amount by more than $25.
The final regulations maintain that the safe harbors apply “per statement“ and not on a “per account” basis per the Code requirements. Nothing in the Code prohibits a filer from providing corrected payee statements on an account basis regardless of the de minimis error safe harbor.
The safe harbors do not apply to the failure to file on or before the required due date. They also do not apply to failures that are due to intentional disregard of the requirements to file an information return or furnish a payee statement.
Election Out of Safe Harbor
The person to whom a payee statement must be furnished may elect not to have the safe harbors apply to a payee statement. The election must be made no later than 30 days after the date when the statement must be furnished or October 15 of the calendar year. The election out is prospective and remains in effect for all subsequent calendar years until revoked.
The payee generally must make the election out of the safe harbors in writing to the filer. The filer, however, can provide a reasonable alternative manner for making the election, including electronically (for example, via email or website) or telephonically. The filer must provide timely notification to the payee describing these alternative methods electing out. The filer must retain records of any election, revocation, or notification.
Code Sec. 6045 provides that a broker that files an information return to report gross proceeds from the sale of a covered security must also include the customer’s adjusted basis in the security. The regulations provide that adjusted basis for this purpose must be based the correct dollar amount reported on any corrected information return or payee statement due to the de minimis safe harbors under Code Sec. 6721 or 6722.
The final regulations generally apply with respect to information returns and payee statements required to be file or furnished on or after January 1, 2024. However, Reg. §301.6724-1(h) providing for waiver of the Code Sec. 6721 or 6722 penalties caused by the presence of de minimis errors and an election out of the safe harbors applies with respect to information returns required to be filed and payee statements required to be furnished after January 4, 2017.