The Internal Revenue Code provides that if a business files an information return that has a missing or incorrect Taxpayer Identification Number (TIN), the business will be notified by the IRS and may be required to withhold a specified percentage (24% for payments made after 12/31/17) of certain reportable payments made to the payee with the missing or incorrect TIN. Businesses that ignore the IRS notices and fail to comply may be responsible for uncollected taxes and face penalties for filing incorrect information returns.
The IRS will send a Notice CP2100/2100A to notify a business that there are problems with the TIN on the information returns that the business filed and that the business may be responsible for backup withholding. A business that receives a Notice CP2100 must send the first B-Notice (backup withholding notice) and a Form W-9, Request for Taxpayer Identification Number, to a payee within 15 business days of receiving the Notice CP2100. The outside of the mailing envelope must be clearly marked “Important Tax Information Enclosed” or “Important Tax Return Document Enclosed”. The payee is required to complete the Form W-9 and return it to the business. If the payee does not respond within 30 days of the first B-Notice, the business must begin withholding at a rate of 24 percent, which is remitted to the IRS via Form 945, Annual Return of Withheld Federal Income Tax. The business must continue backup withholding until the payee furnishes a completed Form W-9 or TIN validation from the Social Security Administration (SSA) and certifies that it is correct.
If a business receives a second Notice CP2100/2100A within three years with respect to the same payee, the business must send the second B-Notice to the payee within 15 days of receipt. The outside of the mailing envelope again must be clearly marked “Important Tax Information Enclosed” or “Important Tax Return Document Enclosed”. The second B-notice tells the payee to contact the IRS or the SSA to obtain a correct name/TIN combination. If the payee does not respond within 30 days of the second B-Notice the business must begin withholding at a rate of 24 percent. The business must continue backup withholding until it receives a Form W-9 from the payee.
A business that fails to follow the backup withholding rules may be responsible for paying the uncollected amounts. In addition, as discussed in a prior blog post, the business could be responsible for penalties under IRC Section 6721 for any failure to include all required information or for the inclusion of incorrect information. Those penalties can be as high as $260 per incorrect or incomplete information return with a maximum of $3,218,500 per year.