Volume 5, Issue 5

Posted on 10/30/2018

IRS Tax Tips
 
Newly revised publication helps taxpayers understand changes to backup withholding

 

The IRS urges taxpayers who make payments or receive payments to check out Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s). The newly revised publication helps taxpayers understand how tax reform affects backup withholding. Backup withholding can apply to most kinds of payments reported on Form 1099.

 

Last year's Tax Cuts and Jobs Act dropped the backup withholding tax rate from 28 percent to 24 percent. This affects taxpayers who make and receive payments. Taxpayers who make payments are known as "payers," while those who receive payments are known as "payees."

 

Backup withholding can apply to payments such as:
  • Interest payments
  • Dividends
  • Patronage dividends, but only if at least half of the payment is in money
  • Rents, profits or other income
  • Commissions, fees or other payments for work performed as an independent contractor
  • Payments by brokers and barter exchange transactions
  • Certain portions of payments by fishing boat operators
  • Payment card and third-party network transactions
  • Royalty payments
  • Gambling winnings that aren't subject to regular gambling withholding
  • Taxable grants and agriculture payments
 
Here are some situations when a payee may be subject to backup withholding They:
  • Fail to give a taxpayer identification number to the payer
  • Give an incorrect TIN
  • Supply a TIN in an improper manner
  • Underreport interest or dividends on their income tax return
  • Fail to certify that they're not subject to backup withholding for underreporting of interest and dividends
  • To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the underreported income and pay the amount owed, or file a missing return.
 
A TIN can be a:
  • Social Security number
  • Employer identification number
  • Individual taxpayer identification number
  • Adoption taxpayer identification number
 
The newly revised Publication 1281 is packed with useful information. It will help any payer who is required to impose backup withholding on any of their payees.

 


Related Webinar

IRAs: Reporting, Compliance Auditing, and Tax Code Changes for 2018

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Navigating TIN and Name Mismatches


irs.gov IRS Publication 1281  Tells you what to do:


Q: What is a CP2100 or CP2100A Notice?

A: It is a notice that tells a payer that he or she may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs. Large volume filers will receive a CD or DVD data file CP2100, mid-size filers receive a paper CP2100, and small filers receive a paper CP2100A.

Large Filer …………. 250 or more error documents;

Mid Size Filer ……… Between 50 and 249 documents.

Small Filer …............ Less than 50 error documents.

Q: What should I do if I receive a CP2100 or CP2100A Notice?

A: Compare the listing(s) with your records. For missing TINs: If you have not started backup withholding, begin to do so immediately and continue until you receive a TIN. You must make up to three solicitations for the TIN (initial, first annual, second annual), as described in Question 19, to avoid a penalty for failing to include a TIN on the information return.


For incorrect TINs: Compare the accounts on the listing with your business records. See Question 19 for the solicitation requirements in order to avoid a penalty for failure to include the correct TIN on an Information Return. If they agree, send the appropriate “B” Notice to the payee. If an account does not agree, this could be the result of a recent update to SSA records, an error in the information you submitted, or an IRS processing error. If this type of error occurred, the only thing you should do is correct or update your records, if necessary.


Remember: You do not have to call or write to the IRS to say that you made the correction or

update to your records.

Q: What is a “B” Notice?

A: A “B” Notice is a backup withholding notice. There are two “B” Notices -- the First “B” Notice and the Second “B” Notice. You must send the First “B” Notice and a Form W-9 to a payee after you receive the first CP2100 or CP2100A Notice with respect to this account for soliciting a correct Name/TIN combination. You must send the second “B” Notice to a payee after you receive a second CP2100 or CP2100A Notice within a 3 calendar year period. The text of the Second “B” Notice is different from that of the First “B” Notice. 


The Second “B” Notice tells the payee 
to contact IRS or SSA to obtain the correct Name/TIN combination. The mailing of the second notice should not include a Form W-9. The payor must receive validation of the payee’s Name/TIN combination from SSA or IRS after sending the second “B” Notice. Payees should be instructed regarding how to request validation of their name/TIN combinations in accordance with the procedures described in Part 4. Generally, you do not have to send a “B” Notice more than two times within three calendar years to the same account.


Q: When do I send a “B” Notice to a payee?

A: You have 15 business days from the date of the CP2100A or CP2100 Notice, or the date you received it (whichever is later), to send a “B” Notice to a payee. For incorrect TINS you only have to send a “B” Notice to a payee whose Name/TIN combination and account number on your records agrees with the combination that IRS identified as incorrect.


Q: How do I know which “B” Notice to send?

A: If this is the first CP2100 or CP2100A Notice you have received with respect to this account, you must provide the payee with (1) the First “B” Notice and (2) a copy of Form W-9 (or acceptable substitute). You may also provide an optional reply envelope. Your outside mailing envelope must be clearly marked “IMPORTANT TAX INFORMATION ENCLOSED” or “IMPORTANT TAX RETURN DOCUMENT ENCLOSED.”


If this is the second CP2100 or CP2100A Notice you have received within three calendar years with 
respect to this account, you must provide the payee with the Second “B” Notice. Do not include a Form W-9. You may also provide an optional reply envelope. Your outside mailing envelope must be clearly marked “IMPORTANT TAX INFORMATION ENCLOSED” or “IMPORTANT TAX RETURN DOCUMENT ENCLOSED.”


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