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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).
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.
Here’s what you need to do if you receive a CP2100 Notice:
When does backup withholding apply?
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.
Here are some important 1099 general rules to keep in mind:
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.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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