ComplianceTax & AccountingFebruary 10, 2017

IRA, HSA, and CESA reporting

Overview

One of the less known changes included in the 2015 Path Act is the ability for a financial organization to forego corrective reporting with respect to de minimis dollar amount errors. The Internal Revenue Service (IRS) recently issued Notice 2017-09 which provides implementation guidelines for this “safe harbor” provision. Although applicable to most information returns, this article focuses on individual retirement account (IRA), Health Savings Account (HSA), and Coverdell Education Savings Account (CESA) reporting that custodians and trustees of these accounts are responsible for, and the avoidance of penalties associated with not filing corrected information returns (i.e., IRS forms 1099 and 5498 series) with the IRS and to payees. This safe harbor provision applies to all Forms 1099 and 5498 reporting in 2017 (for 2016 filing) and subsequent years.

IRS reporting instructions

The following is taken from the IRS’s 2016 General Instructions for Certain Information Returns:

Safe Harbor for De Minimis Dollar Amount Errors on Information Returns and Payee Statements

If one or more dollar amounts are incorrect on an information return filed with the IRS or on a payee statement furnished to a recipient, no correction of the dollar amount shall be required, and the return shall be treated as having been filed or the payee statement furnished, as correct, if:

  • The difference between the dollar amount reported on the filed return or furnished payee statement, and the correct amount is no more than $100; and
  • The difference between the dollar amount reported for tax withheld, on the filed return or furnished payee statement, and the correct amount is no more than $25.

This safe harbor provision shall not apply if a recipient to whom a statement is required to be furnished elects to receive a corrected statement. In that case, a corrected return must be filed with the IRS and a corrected payee statement is furnished to the recipient.

Thus, IRA custodians or trustees that make de minimis dollar amount reporting errors as described above need not correct them unless a statement recipient requests a correction. If the requested corrections are not made, the custodian/trustee is subject to a penalty for incorrect filing.

IRS notice 2017-09

As mentioned earlier, the IRS has provided implementation guidance in Notice 2017-09 and has stated that regulations are forthcoming. Notice 2017-09 makes it very clear that this reporting penalty safe harbor is not available if a dollar amount error was intentional or if the payor fails to file an information return or furnish a payee statement. Moreover, the safe harbor for the penalty waiver does not apply to any information return or payee statement if the statement recipient elects that the safe harbor not apply by requesting a corrected return.

As previously stated, if a de minimis dollar amount error occurs, the payee may elect to have the custodian or trustee correct the reporting. There are two sides to this election process:

  • One, the custodian or trustee may provide a reasonable method for the payee to make an election in writing, online or electronically (however, the latter cannot be the sole method), or by phone prior to the payee’s election. If this is not done prior to the payee’s election, the custodian/trustee must accept a written correction request at the custodian’s/trustee’s address shown on the statement. Not stated in the Notice, but an idea to consider, is for a custodian/trustee to notify its account owners and beneficiaries in advance (or include such notice with statements provided to them) that de minimis errors will not be corrected unless there is a request made to do so.
  • Two, a request by the payee must: clearly state the reason for election; payee name address and TIN; the type of return(s) to which the request applies (i.e., Form 5498, 1099-R, or all returns); and the year(s) to which the election applies. If the payee does not specify the type of return(s) or year to which the request applies, the request applies to all returns and for current and all future years.

Analysis

Will this change impact IRA, HSA and CESA custodians and trustees? The answer to this question is “No” if the custodian/trustee makes it a policy to correct all de minimis dollar amount errors. As of this writing, Wolters Kluwer is still formulating a clear vision of the big picture, although we know that incorrect amounts within a custodian’s/trustee’s administration system should be corrected so that account balances are accurate. We also know this provision will provide some relief of the administrative burden and costs associated with filing corrected information returns and payee statements. As the IRS description of the safe harbor above states, no correction of de minimis amounts on an information return is necessary unless the recipient requests a correction.

If choosing to take advantage of the safe harbor, a custodian or trustee should have a policy for documentation. The policy should address how and when the organization notifies statement recipients of its decision to not correct de minimis dollar amount errors, and if applicable, to which de minims dollar amount errors it will automatically correct. Additionally, the policy should define the method (e.g., written vs. verbal, etc.) by which an election must be made by a statement recipient if a de minimis dollar amount error is made. The policy should dictate the creation of the notice and election documentation if any.

Custodians/trustees generally only file a corrected return or statement after determining an error was made on an original return. Thus, where a custodian/trustee finds an error, it will be incumbent on its part to inform the statement recipient of the error and whether the error falls within the terms of the safe harbor, and verify whether the statement recipient wants a corrected return filed.

Most individuals want full credit for contributions made and withholding paid. However, it is likely individuals would not want to report and pay taxes on more than they have received, and do not want to take more than their required minimum distribution. Consequently, account owners will generally want you to file corrected returns when contribution amounts and withheld amounts are reported as less than they should be, likewise corrections may be requested for distribution amounts or fair market value amounts which are greater than they should be, even if the errors qualify as de minimis. In these instances custodians/trustees may consider making a correction of de minimis amounts without trying to gather an election from the account owner or beneficiary requesting a correction. However, to counter the point made in this last sentence, in some cases account owners and beneficiaries may have filed their income tax return based on the original amounts reported by the custodian/trustee, and not having to file a corrected income tax return may be reason enough to not want a custodian/trustee to file a corrected return for a de minimis amount.

Note: As qualified distributions from a Roth IRA are not taxable, account owners and/or beneficiaries will probably not care whether a corrected Form 1099-R is filed for an overstated and de minimis distribution amount.

Conclusion

For the purpose of this article IRA, HSA, and CESA custodians and trustees are required to file corrected information returns and provide corrected payee statements when incorrect dollar amounts are reported. Custodians and trustees can choose to always make these corrections and disregard the point of this article. However, if a custodian/trustee wants to take advantage of the safe harbor, it must provide notice to payees of the opportunity to correct reporting, with the method to do so, and then correct if a payee decides to request a corrected information return and payee statement.

The safe harbor to avoid filing corrected information returns and payee statements for de minimis amounts may reduce some of the administration burden faced by IRA, HSA, and CESA custodians/trustees beginning in 2017. However, for implementation purposes, custodians/trustees need to develop notice and election documents, put in place procedures to gather elections from statement recipients to correct returns with errors, create policies for what types of de minimis errors it will choose to correct immediately, and thoroughly review IRS Notice 2017-09 and future regulations as they become available.

Steve LeRoux
Senior Specialized Consultant, Tax Advantaged Accounts
With more than 36 years of experience, Steve has worked closely with hundreds of financial organizations to help them create, implement, and maintain their tax-advantaged accounts program. Steve also has an extensive background in working with employer qualified plans.