Accounts Payable: How to Avoid 1099 Reporting Penalties for One-Time Vendor Payments

Sovos
June 15, 2018

Among accounts payable (AP) professionals, “B” Notices from the IRS are sometimes known as “bummer” notices. They’re a sign of missing or incorrect information on 1099 forms subject to backup withholding. For AP professionals, this usually involves form 1099-MISC, the form used to report to the IRS payment of services rendered for vendors and independent contractors.

A more recognizable name to AP pros may be the actual IRS name for a “B” notice, which is the CP2100. The IRS issues “B” notices due to payees’ names and Social Security numbers (SSNs) or Employer Identification Numbers (EINs) not matching information in the IRS’s database upon submission of 1099 forms during tax reporting season.

“P” Notices and financial penalties

The “B” notice itself doesn’t carry a financial penalty. Unfortunately, however, a “P” Notice, delivered via a 972CG letter, does. “P” Notices trigger penalties of $260 per form reported with incorrect information, which is expected to increase to $270 in 2019 for tax year 2017 penalties. Those penalties can quickly become expensive, and the real bummer is that a “P” Notice almost always follows a “B” notice.

A “B” Notice, then, is really just a warning that a penalty is coming. The “B” Notice also serves as a heads-up that the payer must solicit payees for correct information by sending a W-9 form. If a payee has appeared on a “B” Notice twice within three calendar years, the payee is required to provide additional documentation to the payer when responding to a solicitation. If a payee does not respond to the solicitation, they are subject to 24 percent backup withholding.

Payers that can prove they have received correct information after a “B” Notice solicitation might not avoid “P” Notices altogether, but they can use the solicitation process to prove their due diligence when abating financial penalties tied to “P” Notices.

“B” Notices and the one-time vendor payment

If a payer uses a vendor multiple times conducting multiple payment transactions, the vendor has a strong motivation to return a solicitation from the payer to correct its information on file. Ultimately, correcting information allows the vendor to avoiding 24 percent backup withholding on future payments received.>

However, vendors that only do business with an organization one time may not be as motivated to respond to a solicitation with correct information because they will not receive additional payments subject to 24 percent backup withholding.

So, a contractor that, say, maintains an HVAC system for a business on a scheduled basis will send the payer its correct name and EIN information as soon as possible. But a contractor that installs an HVAC system once and doesn’t plan to come back will have no financial motivation to respond and is likely to laugh at the payer’s solicitation and throw it in the garbage. That becomes a problem for the payer, which will ultimately receive a “P” Notice and a fine for incorrect information on the 1099 form filed.

Unresponsive vendors and abating P notices

At that point, the onus is on the business to seek an abatement of the penalty by proving that its AP staff did all it could to solicit correct information from the vendor and that it was, in fact, the vendor’s fault that the information never arrived.

This is where keeping close track of every step of the “B” and “P” Notice process is so important. A payer can avoid paying a penalty by completing the abatement process. What’s the best way to abate a “P” Notice? Prove that the payer properly solicited information from the payee within 15 business days after the “B” Notice arrived.

An abatement isn’t guaranteed, but proof of solicitation puts the responsibility for incorrect information on the payee rather than the payer. That makes an abatement for the payer more likely.

1099 reporting challenges for AP professionals

The biggest challenge most organizations face in dealing with “P” Notice abatements is simply keeping precise records of solicitations to vendors. But AP professionals have a lot to do in their jobs that doesn’t involve tax information reporting, so keeping up with “P” Notices can be an unwelcome distraction.

To be clear, the best way to avoid having to go through “P” Notice abatements is to avoid both “B” and “P” Notices in the first place. And the best way to do that is to use real-time TIN matching, offered in Sovos Tax Information Reporting solutions, to confirm during the vendor onboarding process that the vendor has provided correct information. Getting everything right up front will prevent problems from occurring later on, particularly in the case of one-payment vendors.

The advantage of partnering with a solution provider

But if “B” and “P” Notices do arrive, organizations need to make sure they have the records necessary to avoid financial penalties. A third party, such as Sovos, can provide data to support abatement of “P” notices. The process starts with the “B” Notice. A payer can simply hand over its “B” Notices to the third party, and the third party then prepares solicitations and mails them to the relevant payees, who then send information back to the third party.

If one-time vendors choose not to return solicitations, the solution provider has the payer covered. The solution provider records every step in the process, tracking every contact between the two parties. With the relevant records at its disposal, the payer has a smooth path to abatement with a complete record of all solicitations.

Giving up a process means taking control

Managing “P” Notices, particularly those involving one-payment vendors, is time- and resource-consuming process for most AP professionals, who generally have better things to do with their time. But it’s an important process nonetheless. Turning it over to a third-party solution provider isn’t giving up control of the process; it’s taking control by letting somebody else do it more efficiently with a dedicated solution.

Proactive methods for avoiding “P” Notices are still the best way to keep tax information reporting under control, but reactive measures can be necessary, too. Without them, organizations face the prospect of losing control of a process and incurring financial losses.

Take Action

Sovos has been enabling clients to manage B and P notices, both proactively and reactively, for three decades. Discover more, or contact Sovosfor more information.

Author
Sovos
Sovos is a global leader in tax compliance and business-to-government reporting software, safeguarding businesses from the burden and risk of compliance around the world. As governments go digital, businesses face increased risk and complexity. The Sovos Intelligent Compliance Cloud combines world-class regulatory analysis with a global cloud software platform to create an adaptable, connected and global compliance solution that keeps businesses ahead of the ever-changing regulatory environment. Sovos supports 4,500 companies, including half of the Fortune 500, and integrates with a wide variety of business applications. Based in Boston, Sovos has offices throughout North America, Latin America and Europe. For more information visit and follow us on LinkedIn and Twitter.

Relevant Posts

New York Implements Economic Nexus by Resuscitating 1980’s Law

When New York first passed its law defining what constitutes a “vendor” subject to collecting sales tax in the 1980’s, the idea of online shopping sounded like science fiction. In retrospect, NY may have effectively enacted the first “economic nexus” law when they drafted their definition of “vendor” to include a person who regularly or […]

Read More
IRS Uses Unprecedented Methods to Enforce ACA Reporting Penalties

With recent enforcement measures, the IRS has offered definitive proof that the Affordable Care Act (ACA) is still alive and that the agency plans to strictly enforce ACA reporting. Last spring, the agency issued Letter 226J to Applicable Large Employers (ALEs) that failed to cover 95 percent of employees. ALEs are companies with 50 or […]

Read More
Government Shutdown Will Not Move IRS 1099 Reporting Deadlines

UPDATE (Jan. 8): Reporting season is moving forward according to plan. The IRS has announced that it will process tax returns on schedule and without delays. While the agency will clarify its contingency plan in the coming days, organizations should proceed as planned with 1099 reporting and other seasonal filings. The IRS will recall a […]

Read More
4 Big Post-Wayfair State Sales Tax Developments to Watch 2019

The South Dakota v. Wayfair decision last June has created a lot of angst for indirect tax professionals and the businesses they work so hard to protect from the burdens of sales and use tax filing. Six months later as we begin the new year, that angst has not gotten any lighter. Any federal legislative […]

Read More
The 5 Biggest Stories in Indirect Tax Compliance 2018

2018 was a volatile year in indirect tax compliance for tax, finance and IT professionals worldwide. With an increase in globalization and tax gaps surpassing tens of billions in some countries, it’s not surprising that one of the biggest challenges governments are addressing is revenue collection. Like enterprises, governments are creating new, technology-driven processes to […]

Read More