By Carol Szwed, CPA, Tax Shareholder

Watch your mail for a special Internal Revenue Service (IRS) letter known as a CP2100 Notice (Backup Withholding).  In a new initiative launched by the IRS, many taxpayers can expect to receive a “love” letter of this sort if they filed 1099s and failed to provide correct payee names or Taxpayer Identification Numbers (TINs).

Understanding Backup Withholding

Before I share how to react to this notice, let’s go back to the beginning to understand what may have triggered such a notice.  When you have a new vendor, you should always be sure to receive a completed IRS Form W-9 from them prior to setting them up in your accounting system and issuing a payment.  Why?  Because it’s much easier to obtain the information before you make a payment.

Such information is required and will further aid in this process of preparing, and timely filing all 1099s each January.  That seems simple, but there are some vendors who may not want to report their income, so they may provide incorrect information or none at all.  Additionally, sometimes you may forget to follow up with the vendor until it comes time to prepare the 1099s and then you are unable to obtain the TIN.

You may be inclined to ignore the notice once you receive it, but that could prove costly.  Penalties are $260 per incorrect 1099, which can add up if you issue a large amount of them.

How to Respond

Here’s what you need to do if you receive a CP2100 Notice:

  • If you do not have a TIN for a vendor, start backup withholding immediately and continue until you receive the TIN.
  • Compare the W-9 to the TIN and name on the 1099s to check for clerical errors and correct any errors in your system.
  • If the W-9 agrees with the 1099, send the vendor a “B” Notice within 15 business days. The “B” Notice informs the payee of backup withholding if correct information is not provided.  There are different types of “B” Notices for different situations.
  • Review IRS Publication 1281 in detail for all the steps you need to follow to stay penalty-free. You should also obtain support from your trusted tax advisor to guide you in this process.

When does backup withholding apply?

  • Payee doesn’t furnish their TIN.
  • IRS notifies payer of incorrect TIN.
  • IRS notifies payer of underreported income of payee.

The backup withholding rate is 24%.  If you don’t send the “B” Notices and follow the IRS backup withholding rules, the penalties can really add up.  There’s penalty relief for first time offenders, but it’s better to stay out of trouble.

The good news is that the IRS will allow you to verify up to 25 TINs each year for FREE.  If the information the payee provides doesn’t match, do not make a payment to the vendor until you are able to verify their TIN.  If you need to check more than 25 TINs each year, there are various TIN check service providers who charge a fee for this service.

1099 Guidelines

Here are some important 1099 general rules to keep in mind:

  • Require vendors to complete Form W-9. Normally this is done prior to making any payments to new vendors, as it is the best chance to get it.
  • Form 1099s are required to be issued to all “unincorporated” businesses (sole proprietorship, partnerships, LLC’s)
  • Form 1099s are required to be issued for payments made in the ordinary course of your trade or business of at least $600 for rents, services (including parts and materials), prizes and awards, or other income payments
  • 1099s are NOT required for vendors that sell you merchandise, freight, storage or similar items
  • Any payment to an attorney requires a Form 1099 to be issued (regardless of entity type)

When it comes to 1099s, it’s important to have good accounting controls in place.  Our dedicated Tax Group brings several years of experience assisting clients with compliance and penalty abatement. For assistance or to obtain further guidance, contact us today.