A $65,000 penalty notice arrives from the IRS. You have 650 mismatched taxpayer ID (TIN) and name combinations. The IRS charges you $100 for each one ($250 each starting in the 2015 tax year – making that penalty $162,500). What do you do?
Well, first, maybe you freak out a little. But after that, what do you do?
Believe it or not, we had a filer in this situation come to us for help. Before becoming our client, they e-filed incorrect 1099-MISC forms. They contacted us when they got the $65,000 IRS penalty notice. Here is how we helped them out.
TIN Matching
TIN matching checks vendor-TIN combinations against the IRS database. Some matches were accepted; those forms didn’t need anymore work. We found a significant number of mismatches. For those we initiated a W-9 process.
W-9 Collection
With e-solicitation of W-9 forms, the vendor receives a W-9 form via e-mail. The e-mail includes instructions for accessing the W-9 through Tax1099.com’s secure portal. Once the vendor has edited the form, you will receive a notification via e-mail. The W-9 will be stored on your account in Tax1099.com.
Of course, this is better done before filing than after. Don’t pay the vendor/contractor until you receive the W-9. If the vendor refuses, begin withholding 28% of their compensation. Point the vendor to the IRS site for details on why you are doing the backup withholding. That page says:
Withholding rules: When you open a new account, make an investment, or begin to receive payments reportable on Form 1099, you must furnish your TIN to the bank or other business. In some cases, you must furnish your TIN in writing and certify under penalties of perjury that it is correct. The bank or business will give you Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form. You must enter your TIN on the form and, if your account or investment will earn interest or dividends, you must also certify that you are not subject to backup withholding due to previous underreporting of interest and dividends.
The payer must withhold at a flat 28% rate in the following situations:
· You do not give the payer your TIN in the required manner.
· The IRS notifies the payer that the TIN you gave is incorrect.
· The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.
· You fail to certify that you are not subject to backup withholding for underreporting of interest and dividends.
The threat of 28% backup withholding tends to encourage a vendor to complete the W-9.
TIN Match Again
After e-soliciting W-9’s from vendors, we had our client test the new information. The only way to know if the new information is correct is to redo the TIN Match. The process should be repeated until the TIN match comes back approved.
Some of our client’s recipients failed the TIN Match process many times. Each time a TIN match failed, we asked for new W-9 information. After some phone calls, the recipients completed their W-9’s.
Why was it difficult to process a correct vendor-TIN match? In the cases of mismatches, the vendor/contractor often used a DBA (doing business as) name. Most of the contractors in this case were small, independent businesses. Most of the contractors were issued an EIN. When issued an EIN, the vendor name is the vendor’s name, not a DBA name. Once we explain that, most of the issues clear up.
IRS Abatement
The IRS offers payers a chance to dispute penalties. Keeping records of the interactions with recipients can help abate the penalties. An electronic system is especially helpful here. Our system applies a time stamp to actions taken. If a W-9 was e-solicited through Tax1099.com, you have the record of the date and time.
In the case of our client, we could provide records of the effort to file correctly. The IRS received proof of TIN Matching, W-9 e-solicitation, and a second TIN Match. Going forward, the client established a TIN Match process for all new vendors.
The corrective actions and proactive plan convinced the IRS to waive the penalty.
Best Practice – Always TIN Match
The IRS wants filers of multiple 1099 forms to verify TIN/name combinations. To enforce this, the IRS established the backup withholding process. Penalties also provide enforcement for the importance of filing correct information. Use the TIN Match service to protect your business from large penalties. Don’t get stuck paying a penalty when there are proactive steps to prevent errors.