Government entities are subject to rules that require income tax withholding of 28% from certain payments if the payee is not exempt from backup withholding and fails to furnish correct taxpayer identification number (TIN). The IRS may also notify a payer to begin backup withholding because of payee underreporting.
Failure to follow the backup withholding rules can result in penalties to the payer for filing incorrect information returns. The payer may also become liable for any uncollected amounts.
Payments Subject to Backup Withholding
Rents, non-employee compensation for services, royalties, reportable gross proceeds paid to attorneys, and other fixed or determinable gains, profits, or income payments that are reportable on Form 1099-MISC, Miscellaneous Income.
Backup withholding does not apply to wages or pension payments.
Requirement for Payer To Secure a TIN
For all payees, you must make an initial solicitation for a TIN when the payee opens an account or when the transaction occurs. Use Form W-9, Request for Taxpayer Identification Number, to request the taxpayer identification number.
In addition to beginning backup withholding on a payee, if the payee continues to fail to provide you with a TIN, you generally must make an annual solicitation of the payee for a TIN. See Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s).
Missing Taxpayer Identification Number
A taxpayer identification number is considered "missing" whenever (1) the TIN is not provided, (2) the TIN has more or less than nine digits, or (3) the TIN includes an alpha character in one or more of its nine positions.
The CP2100 or CP2100A Notice
CP2100 and CP2100A notices are notices that inform a payer that he or she may be responsible for backup withholding. This may be due to missing or potentially incorrect taxpayer identification numbers identified during the processing of Form 1099 information returns. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TIN. Large volume filers (250 or more erroneous documents) receive the CP2100 notice, while all other filers receive the CP2100A notice.
"Incorrect" Taxpayer Identification Number
A taxpayer identification number is considered "incorrect" whenever the TIN is displayed in the proper format but (1) the Name/TIN combination does not match, or (2) the TIN cannot be found in the files of the IRS and/or the Social Security Administration.
If the IRS sends you a CP2100 or CP2100A Notice indicating an incorrect payee TIN, you are required to send the “B” Notice within 15 days from the date you received it, or the date of the CP2100/2100A, whichever is later. See Publication 1281 for details. Begin backup withholding no later than 30 business days after the date of the CP2100 notice or the date you received it, whichever is later. Stop backup withholding no later than 30 days after the payee furnishes a TIN and certifies that it is correct.