New IRS Rule Makes Ending Some Backup Withholding Easier

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By Keith M. Hill

Backup withholding on reportable payments not subject to normal income withholding by the payroll department can be required by the Internal Revenue Service for companies that compensate independent contractors for services if they were told that the tax identification number of a nonemployee was incorrect.

The IRS-issued guidelines, which took effect Aug. 1, are for those who have received a second backup-withholding notice, or B notice, from those paying for services within a three-year period, the agency said in Revenue Procedure 2014-43. The Social Security card serves as validation from the Social Security Administration and is an individual's tax identification number.

Backup Withholding at 28%

Upon notice from the IRS, a business must withhold taxes on reportable payments at a rate of 28 percent. Backup withholding also may be required in the case of underreporting by workers.

Workers that receive a second B notice can stop backup withholding by showing a copy of a Social Security card to validate their names and Social Security numbers. Businesses may rely on a Social Security card as being correct if the name and Social Security number combination appearing on the card differ from the combination appearing on the second B notice.

Additionally, businesses can rely on the Social Security card if there is a date appearing on the card that is no earlier than six months before the date of the second B notice.

If a worker's name and Social Security number combination on the second B notice is not current or is incorrect, the worker should update the records on file with the SSA and provide a copy of the updated Social Security card to the business.

The IRS sends CP2100 or CP2100A notices to businesses to say that they may be responsible for backup withholding because of a missing or incorrect taxpayer identification number, or TIN, discovered during the processing of Form 1099 information returns. This notice is accompanied by a listing of missing, incorrect and not currently issued taxpayer TINs.

A Social Security card can be used as validation to stop backup withholding after a second B notice is received from the IRS.

Filers of at least 250 erroneous documents would receive a CD or DVD data file CP2100 notice. Midsize filers of 50 to 249 erroneous documents would receive a paper CP2100 notice and small filers would receive a paper CP2100A notice.

A TIN is incorrect if there is either a name and TIN mismatch or the TIN cannot be found in IRS and Social Security Administration files. A TIN is considered missing if the number was not provided, if it did not have nine digits or if a character other than a number was included among the nine positions.

Businesses that receive a CP2100 or CP2100A notice should compare the listings with their records. Those that have not begun backup withholding in the case of a missing TIN must do so as soon as possible and continue until a TIN is received. They also must make up to three solicitations for a missing TIN to avoid a penalty for failing to include a TIN on an information return.

In the case of an incorrect TIN, the accounts on the listings should be compared with business records. If they match, businesses should send the appropriate B notice to the worker. If an account does not match, this could be because of a recent update to SSA records, an error in the information submitted or an IRS processing error.

If there was an incorrect TIN, payers should correct or update their records, if necessary. Payers must make up to two annual solicitations for a correct TIN in response to a CP2100 or CP2100A notice.

Dealing With B Notices

The B notice is for backup withholding. There are two B notices, distinguished as the first notice and the second. Businesses are to send the first B notice and a Form W-9, Request for Taxpayer Identification Number, to a worker within 15 business days of the date of the first CP2100 or CP2100A notice or the date of receipt, whichever is later.

For incorrect TINs, businesses only have to send a B notice to a worker whose name and TIN combination and account number on their records agrees with the combination that the IRS identified as incorrect.

Businesses must backup withhold on all reportable payments to a worker 30 days after they receive a CP2100 or CP2100A notice and must stop backup withholding within 30 days after receiving a Form W-9 in the case of a first notification from the IRS.

If a second notification of a name and TIN mismatch is received within three years from the date of a previous notification, the business must send a second B notice.

Those that fail to follow the backup withholding rules can be penalized for filing incorrect information returns and may be liable for uncollected amounts.

After a second B notice is sent, a TIN certified on a Form W-9 is not sufficient to stop or prevent backup withholding. Instead, a business must receive validation of the payee's name and TIN combination from the SSA or the IRS to stop or prevent backup withholding.