Avoid Penalties for No Backup Withholding
How Does a Business Protect Themselves Against Contractors That Will Not Provide Their W-9 Information?
- Strong Independent Contractor Agreement
- Requirement to provide completed W-9 before receiving the first payment.
- Identity Check
- SSN Verification- Name and SSN Mismatch
- EIN Verification- Name and EIN Mismatch
Rules for receiving 1099-related payments.
When a contractor begins providing services and receiving payments reportable on Form 1099, the contractor must furnish their TIN or EIN in writing to the payor business and certify under penalties of perjury that it's correct. In many cases, the payor business will request this information on a Form W-9, Request for Taxpayer Identification Number and Certification PDF (PDF), or a similar form.
Backup Withholding “B” Program
The "B" Backup Withholding Program, Treasury Regulation § 31.3406(d)-5 and IRC § 3406(a)(1)(b), provides notices to payers (a financial institution, business, or person) who file certain information returns with incorrect Taxpayer Identification Numbers (TINs)or Employer Identification Number (EIN) to begin backup withholding.
If the payer business does not have a correct TIN or EIN, has reason to suspect that the TIN or EIN is invalid, or they receive a notice from the IRS that the TIN or EIN is incorrect or missing from the Form 1099 they submit, they are required to immediately begin backup withholding.
IRS To Issue Penalties for Backup Withholding Failures.
Updates from the IRS Nationwide Tax Forum.
At the IRS Nationwide Tax Form in 2019, on of the speakers conducted a presentation related to backup withholding and employment tax implications. He began by citing statistics from the Office of Management and Budget that forecast that by 2020, more than 75 percent of US tax revenue will come from withholding at the source. While backup withholding is only one form of source withholding taxes, it is generally triggered when a reportable payment is made, and the payer failed to collect valid taxpayer information from the payee.
Failure to report valid taxpayer identification information (TIN) on Forms 1099 and/or W-2s, makes it virtually impossible for the IRS to match off the income reported on those forms to a taxpayer’s income tax return. The IRS wants to minimize the collection resources the agency is spending on tracking down the right TIN information associated with those 1099s along with the subsequent enforcement of income tax collection that goes with it.
First wave of penalties to be issued in September of 2019.
In July of 2019, the IRS formed the Backup Withholding Enforcement Unit out of the Cincinnati office. This new unit issued penalty notices in September 2019 to payers that filed 2018 Forms 1099-MISC with missing or obviously invalid TINs or EINs and for which there is no corresponding backup withholding reported in Box 4.
The letter included a proposed penalty for the taxes that should have been withheld plus penalties and interest for failure to withhold and deposit taxes by the due date. The IRS does offer payers the opportunity to provide a reasonable cause explanation in an effort to qualify for consideration of penalty abatement.
What is coming next?
At the Nationwide Tax Forum, the speaker listed all Forms 1099 currently subject to backup withholding and confirmed that penalties will be issued on all forms in due course.
Is Not Filing the Form 1099 and Option to Avoid the Penalties
Effective with returns due after January 1, 2016, penalties for not filing correct information returns and/or not furnishing correct payee statements have increased and are now subject to inflationary adjustments.
Examples of affected forms include: Forms 1098, 1099, W-2G and W-2.
The amount of the penalty is based on when you file the correct information return (IRC 6721) or furnish the correct payee statement (IRC 6722). The penalty for not filing a correct information return is separate from the penalty for not providing the correct payee statement. For example, if you don’t file a correct Form 1099-MISC with the IRS and don’t provide a correct Form 1099-MISC statement to the payee, you may be subject to two separate penalties.
Penalty Rates
The penalty rates and maximums for not filing correct information returns and/or not furnishing correct payee statements, including inflationary adjustments if applicable, are reflected in the following table (*-as adjusted for inflation):
|
Large Businesses with Gross Receipts of More Than $5 Million |
||||
|
Time returns filed/furnished |
Not more than 30 days late |
31 days late – August 1 |
After August 1 or Not at All |
Intentional Disregard |
|
Due 01-01-2020 |
$50 per return or statement - |
$110* per return or statement - |
$270* per return or statement - |
$550 per return or statement - |
|
Due 01-01-2019 |
$50 per return or statement - $545,500* maximum |
$100 per return or statement - $1,637,500* maximum |
$270* per return or statement - |
$540* per return or statement - |
|
Due 01-01-2018 |
$50 per return or statement - $536,000* maximum |
$100 per return or statement - |
$260* per return or statement - |
$530* per return or statement - |
|
Due 01-01-2017 |
$50 per return or statement - $532,000* |
$100 per return or statement - |
$260* per return or statement - |
$530* per return or statement |
|
Due 01-01-2016 |
$50 per return or statement - |
$100 per return or statement - |
$260* per return or statement - |
$520* per return or statement - |
|
Due 01-01-2011 |
$30 per return or statement - |
$60 per return or statement - |
$100 per return or statement - |
$250 per return or statement - |
Note: Increased penalty amounts may apply for certain failures in the case of intentional disregard. See IRC 6721(e)(2) and IRC 6722(e)(2).
|
Small Businesses with Gross Receipts $5 Million or Less |
||||
|
Time returns filed/furnished |
Not more than 30 days late |
31 days late – August 1 |
After August 1 or Not at All |
Intentional Disregard |
|
Due 01-01-2020 |
$50 per return or statement - |
$110 *per return or statement - |
$270* per return or statement - |
$550* per return or statement - |
|
Due 01-01-2019 |
$50 per return or statement - |
$100 per return or statement - |
$270* per return or statement - |
$540* per return or statement - |
|
Due 01-01-2018 |
$50 per return or statement - |
$100 per return or statement - |
$260* per return or statement - |
$530* per return or statement - |
|
Due 01-01-2017 |
$50 per return or statement - |
$100 per return or statement - |
$260* per return or statement - |
$530* per return or statement - |
|
Due 01-01-2016 |
$50 per return or statement - |
$100 per return or statement - |
$260* per return or statement - |
$520* per return or statement - |
|
Due 01-01-2011 |
$30 per return or statement - |
$60 per return or statement - |
$100 per return or statement - |
$250 per return or statement - |
(Code Section 6721) may apply if you:
- Don’t file a correct information return by the due date and a reasonable cause is not shown;
- File on paper when you were required to file electronically;
- Don’t report a Taxpayer Identification Number (TIN);
- Report an incorrect TIN; or
- Don’t file paper forms that are machine readable.
Penalties for not providing correct payee statements (Code Section 6722) may apply if:
- You don’t provide a correct payee statement by the applicable date and a reasonable cause isn’t shown;
- All required information isn’t shown on the statement; or
- Incorrect information is included on the statement.