IRS “B” Notices and Backup Withholding


Internal Revenue Service “B” Notices and Backup Withholding

The Internal Revenue Service (“IRS”) is in the midst of an initiative of issuing CP2100 and CP2100A notices to taxpayers informing them that they may be responsible for backup withholding. These notices are commonly referred to as “B” notices and are generally issued to payers who in the prior year filed Form(s) 1099 information returns, with the IRS.

Why Are These Notices Received?

A CP2100/2100A notice is sent to taxpayers that issue Forms 1099 with missing or incorrect taxpayer identification numbers (“TIN”). A TIN is considered incorrect if the payee name and TIN does not match that on file with the IRS or Social Security Administration (“SSA”). A CP2100/2100A notice includes a list of payees for which the TIN is missing or incorrect.

What Is a Backup Withholding?

If a payer receives a CP2100/2100A notice indicating a missing or incorrect payee TIN, they could potentially be responsible for backup withholding. Mandated by the IRS under Internal Revenue Code (“IRC”) §3406, backup withholding rules require payers to withhold 28% of payments made to these payees, which is remitted to the IRS via Form 945, Annual Return of Withheld Federal Income Tax.

Which Payments Are Subject to Backup Withholding?

Backup withholding applies to most kinds of payments that are reported on Form 1099.

These include, but are not limited to:

  • Interest payments (Form 1099-INT).
  • Dividends (Form 1099-DIV),
  • Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR),
  • Rents, profits, or other gains (Form 1099-MISC),
  • Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-MISC),
  • Payments by brokers/barter exchanges (Form 1099-B),
  • Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC),
  • Royalty payments (Form 1099-MISC),
  • Gambling winnings (Form W-2G) may also be subject to backup withholding, and
  • Original issue discount reportable on (Form 1099-OID), Original Issue Discount, if the payment is in cash.

There are certain other payments that may also be subject to backup withholding. A listing of these can be found in IRS Publication 505, Tax Withholding and Estimated Tax.

Certain payees are exempt from backup withholding. A complete list of exempt payees can be found on in the instructions to Form W-9, Request for Taxpayer Identification Number and Certification.

Process to Correct Backup Withholding

When the IRS sends a CP2100/2100A notice indicating a missing or incorrect payee TIN, the payer is required to send the payee a Form W-9 packet within 15 business days from the date of the CP2100/2100A notice or date of receipt of the notice, whichever is later. A Form W-9 packet should include a copy of the notice and a blank Form W-9. The outside of the mailing envelope must be clearly marked “Important Tax Information Enclosed” or “Important Tax Return Document Enclosed”.

In order to avoid backup withholding, the payee must correct the TIN information and respond within 15 days. If the TIN information is not corrected by the payee within 30 days of receiving the “B” notice, payers must begin backup withholding at the 28% rate. It is important to note that once a “B” notice is received, the payee must complete and return the Form W-9 package to the payer in order to correct the situation. The payer should cease backup withholding no later than 30 days after a payee furnishes a completed Form W-9 or TIN validation from the SSA and certifies that it is correct.

If the CP2100/CP2100A notice received is the second within three calendar years with respect to the same payee account, payers must provide the payee with a Second “B” Notice but are not required to include a Form W-9. The outside of the mailing envelope again must be clearly marked “Important Tax Information Enclosed” or “Important Tax Return Document Enclosed”.

IRS Publication 1281, Backup Withholding For Missing and Incorrect Names/TIN(s), contains detailed information with respect to backup withholding and the “B” notice process in question and answer format.

Conclusion

The IRS has increased the number of CP2100/2100A notice fines and penalties, with businesses that have received a CP2100/2100A notice being fined up to $100 (up from $50) per notice. Additionally, the IRS has increased the maximum penalty from $250,000 to $1,500,000 and eliminated the cap on penalties issued for repeatedly uncooperative businesses.

As the anticipated number of CP2100/2100A notice increases, there are processes that taxpayers can follow that can minimize potential backup withholding issues. After receiving a CP2100/2100A, a taxpayer should compare the listing included with the notice to its internal records. For missing TINs, taxpayers should confirm whether or not they are already withholding and, if not, should then follow the process outlined above to correct the error(s). For TINs that are incorrect and agree with internal records, a “B” notice must be sent to the payee. If the TIN does not agree, internal records should be updated.

It is recommended that taxpayers have on file a completed Form W-9 for every vendor. Having a completed Form W-9 on file eliminates any backup withholding requirement and, accordingly, avoids any penalties associated with missing or incorrect TINs provided by payees.

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