Here’s a very useful FAQ about backup withholding from the IRS. I wrote about backup withholding in relation to improper W-9 filing here.
What is a Taxpayer Identification Number (TIN)?
A TIN is one of the following four numbers.
- A Social Security Number (SSN)
- An Employer Identification Number (EIN)
- An IRS individual taxpayer identification number (ITIN). Aliens who do not have an SSN, and are not eligible to get one should get an ITIN. Form W-7, Application for IRS Individual Taxpayer Identification Number, is used to apply for an ITIN.
- An Adoption Taxpayer Identification Number (ATIN). An ATIN is a temporary tax identification number issued for a child born in the U.S. An ATIN is used as an identifying number is the child is not eligible for an SSN.
When is a TIN considered missing or incorrect?
Missing TIN – We consider a TIN to be missing if it is not provided. We also consider a TIN to be missing if it has more or less than nine numbers or it has an alpha character as one of the nine numbers.
Example: Missing SSN: 123-45-678
Example: Missing SSN: 123-45-67899
Example: Missing EIN: 12- 345678P
Incorrect TIN – We consider a TIN to be incorrect if it is in the proper format but the name/TIN combination doesn’t match or can’t be found on IRS or SSA files.
Examples of Proper Format:
Correct SSN: 123-45-6789
Correct EIN: 12-3456789
How do I know if a TIN on my account is incorrect?
We will send you a CP2100 or a CP2100A Notice and a listing of incorrect name/TINs.
What should I do if a payee refuses or neglects to provide a TIN?
Begin backup withholding immediately on any reportable payments. Do the required annual solicitation (request) for the TIN. Backup Withhold until you receive a TIN.
Can a payee claim he or she is exempt from backup withholding?
Yes. Payees who may be exempt are listed in the Instructions for the Requester of Form W-9. They include tax exempt organizations, government agencies, corporations, and other listed entities.
Is a payee an exempt corporation if it uses the term “Company” or “Co.” in its name?
A payer cannot treat a payee as an exempt organization merely because the business name contains the words “Company” or “Co.” A payer can only treat the payee as exempt if:
- The name contains the term insurance company, indemnity company, reinsurance company or assurance company. Requirement one is also met if the entity’s name indicates that it is an entity listed as a corporation under IRS Regulations, section 301.7701-2(b)(8)(i).
- The payer has on file a corporate resolution or similar document clearly indicating corporate status.
- The payer receives a Form W-9 which includes an EIN and a statement from the payee that it is a domestic corporation or,
- The payer receives a withholding certificate described in Section 1.1441-1(e)(2)(i), that includes a certification that the person whose name is on the certificate is a foreign corporation.
What is a “B” Notice?
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/CP2100A Notice with respect to this account for the purpose of soliciting a correct name/TIN combination.
The text of the Second “B” Notice is different than that of the First “B” Notice. It 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. You must send the second B Notice after receiving the second CP2100 or CP2100A with respect to this account. The payee must certify the Name/TIN combination after receiving the second “B” Notice. Generally, you do not have to send a “B” Notice more than two times within three calendar years to the same account.
What should I do if a “B” Notice is returned as “undeliverable?”
You must begin backup withholding. However, try to get the correct address for the payee and remail the notice. If you can’t find the correct address, keep the undelivered notice with your records.
After I receive a CP2100 or CP2100A notice, when do I start and stop backup withholding?
You must backup withhold on all reportable payments to the payee 30 business days after you have received the CP2100 or CP2100a Notice. You must stop backup withholding on payments after 30 calendar days after you have received the required certification (Form W-9) form payee or TIN validation form the SSA or the IRS, if it was a second notification. At your option you may start and stop backup withholding at any time during these 30 day periods.
What are the first and second annual solicitation requirements?
A solicitation is a request for a payee’s correct TIN. You must make the request to satisfy the backup withholding requirements and to avoid a penalty for filing another information return with a missing or an incorrect TIN. Payee must furnish certified TIN (first solicitation) on Form W-9 with respect to payments of interest, dividends, and amounts subject to broker reporting. For other payments, the payee may furnish/provide a TIN in any manner.
For missing TINs: For all payees you must make the initial solicitation when the payee opens the account or when the transaction occurs. If the payee does not provide a TIN when you initially ask for it, you must begin backup withholding. In addition to avoid a penalty for filing an incorrect Information Return, you must make a first annual solicitation by December 31 of the year in which the account is opened (for accounts opened before December) or January 31 of the following year (for accounts opened the preceding December). If the payee doesn’t provide a TIN after the first annual solicitation, you must make the second annual solicitation by December 31 of the year following the calendar year in which the account was opened.
For incorrect TINs: You must make up to 2 annual solicitations in response to penalty notices on the CP2100 or CP2100A Notice. You must send a B Notice within 15 business days after you receive a CP2100 or CP2100A Notice. If you receive a Penalty Notice but not a CP2100 or CP2100A, your annual solicitation must be made by December 31 of year you received the Penalty Notice. However, if you already sent a B Notice in the calendar year pursuant to a CP2100 or CP2100A Notice, you do not have to send another solicitation in response to the penalty.
Generally, you must make the second annual solicitation within the same time frame as required for the first annual solicitation if IRS notifies you of an incorrect TIN within one of the next calendar years following the calendar year in which you received the first notification.
Does a CP2100 or CP2100A Notice indicate whether it is the first or second notification of an incorrect TIN for a specific account?
No. The backup withholding regulations provide that payers are responsible for tracking the status of the notices they receive.
What is the relationship between the requirement to make an annual solicitation for a payee’s TIN and the requirement to send a “B” Notice?
Sending a “B” Notice to a payee in response to a CP2100A or CP2100 Notice also satisfies the annual solicitation requirement to avoid a penalty for filing another information return with an incorrect TIN.
Why are accounts I corrected still on the listing of missing or incorrect TINs?
Due to processing cut-off points, a listing may or may not reflect your latest corrections. If you know that an account was corrected, do not send a “B” Notice to the payee.
What should I do if a TIN was actually on file but it was left off the Form 1099 or reported incorrectly?
Make any required change to your records and use the correct information on future filings. Do not send a “B” Notice to the payee.
What should I do if this is the first notification and the Form W-9 is returned with the same incorrect information?
Keep the Form W-9 on file to show that the payee certified the name/TIN combination. Do not backup withhold.
If I no longer do business with a payee, or if it was a one-time transaction, what should I do with the “B” Notice?
Send it and try to get the correct TIN. If you don’t receive the TIN, notate your records so that if you do business again with the payee, you can track the notices for the “two in three year rule.” We require that you track these accounts for three years after the date of the first CP2100A or CP2100 Notice.
Note: A “B” Notice is not required if no payments have been made to an account and no return is required for the account for one year.
Can a sole proprietor have an SSN or does he or she need an EIN?
A sole proprietor may have an SSN or an EIN. However, he or she must always furnish his or her individual name, regardless of whether he or she uses an SSN or an EIN. A sole proprietor may provide a business name, but he or she should list his or her individual name first on the accounts with you.
Should I backup withhold on a payee who is a nonresident alien?
Yes. A nonresident alien is subject to backup withholding unless you have a signed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, or W-8, Certificate of Foreign Status, on file. Nonresident aliens are subject to backup withholding, and identified via Form W-8BEN.
Can a Form W-9 for one account be used to correct all accounts?
Yes, if the payer required a payee to file only one Form W-9 for all accounts or instruments of the payee.
Can a payee be subject to backup withholding for more than one reason?
Yes. However backup withhold for only one reason at a time.
How do I get an EIN?
Complete Form SS-4, Application for Employer Identification Number. Follow “How To Apply” in the instructions for Form SS-4 to obtain an EIN by mail, telephone, or facsimile (FAX).
What form do I use to report backup withholding?
Report backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. For more information, including the deposit requirements for Form 945, see the separate instructions for Form 945, or Circular E, Employer’s Tax Guide.
How is a Name/TIN mismatch identified?
A Name/TIN combination is incorrect if it doesn’t match or can’t be found on IRS or SSA files. An example of a Name/TIN mismatch is when an individual name is submitted with an EIN. Your TIN is not interchangeable with different names. A business EIN must be used for a partnership, corporation, or Limited Liability Company (LLC). A SSN must be used with an individual name. A sole proprietor must his/her individual name, but may also provide his/her DBA name.
What amount is subject to backup withholding with respect to security sales made through margin accounts?
The amount subject to backup withholding in case of a security sale made through a margin account is limited to the amount of cash available for withdrawal by the customer immediately after the settlement of the sale. The amount available for withdrawal by the customer does not include amounts required to satisfy margin account maintenance. If a margin call forces a customer into a sale off, such proceeds are not subject to backup withholding.
In what manner should a payer treat erroneously withheld tax?
If a payer withholds from a payee in error or withholds more than the correct amount of tax, the payer may refund the amount improperly withheld. The refund must be made prior to the end of the calendar year and prior to the time the payer issues a Form 1099. If the payer has not deposited the amount of the tax prior to the time that the refund is made to the payee, the payer should not deposit the amount of the improperly withheld tax. If the improperly withheld tax has been deposited prior to the time the refund is made to the payee, the payer may adjust any subsequent deposit of tax collected, which the payer is required to make in the amount of the tax which has been refunded to the payee. Payers may use refund alternatives only when backup withholding is the result of an error by the payer. The timely submission of requested TIN information including any verifications and/or certifications by the payee does not establish an error by the payer.