Can I File 1099s with Missing or Invalid TINs?

Tax identification numbers (TINs) play an extremely important role in the 1099 reporting process. However, it is often misunderstood just how important a role valid TINs play. If incorrect names and/or TINs are reported, the consequences can be substantial. Here are key basics to remember about TINs when filing 1099s.

What is the initial impact of filing 1099s with missing or invalid TINs?

Expect the IRS to send Notice CP2100, sometimes referred to as a Backup Withholding Notice or B Notice, that informs the payer of all name/TIN mismatches filed. The notice acts as a warning that potential penalties are bound to follow. It’s important that you adhere to IRS requirements to solicit payees appearing on the notice for updated information. If no response is received from the payee, then backup withholding of 24% is removed from their future payments.

Why is Notice CP2100 compliance important?

Failing to comply with IRS Notice CP2100 will lead to IRS Notice 972CG being sent. This is known as the Penalty Notice, or P Notice, because it proposes a penalty amount for a multitude of reasons. Missing or invalid name/TIN combinations is the most common one. Reasons for receiving IRS Notice 972CG include:

• Missing or invalid name/TIN combinations filed on returns​
• Returns filed or furnished to the recipient late​
• Returns filed or furnished to the recipient in incorrect formats

Payers should have already been notified via Notice CP2100 of the payees with missing or invalid name/TIN combinations for forms that are subject to backup withholding. Payees should have also been solicited, but the IRS does not know if the proper steps have been taken so it sends the proposed penalty notice regardless.

What are the penalties that the IRS assesses on Notice 972CG?

For forms filed with missing or invalid name/TIN combinations, the IRS assesses $290 per form. This is set to increase to $310 per form for forms filed in 2024. Penalties can quickly become expensive if filing large amounts of name/TIN combinations with missing or invalid information.

Below is a real-life example:

• Large Financial Institution receives Notice 972CG for 900 forms filed with missing or invalid name/TIN combinations
  • 900 forms * $290 = $261K in penalties alone

What are the unexpected costs associated with handling IRS notices?

In addition to financial penalties, there can be other unforeseen circumstances with IRS notices. These can include:

• Resource allocation – Companies must ensure they have enough knowledgeable resources to determine the correct solicitation type, can handle incoming calls from payees, properly process responses and manage backup withholding for those that did not respond.
• Process risk – Due to the manual nature of generating solicitations and processing the incoming responses, there is associated process risk of sending the wrong solicitation, entering updated name/TIN information incorrectly (again) or not having enough resources to process the notices timely.
• Printing and mailing – At a bare minimum, it costs 63 cents for postage for one form. However, there are other printing and mailing costs, such as paper, envelopes, ink and personnel/vendor expenses.
• Compliance research – Having enough resources to process IRS notices is not enough. Businesses must understand the unique and time-sensitive requirements of complying with IRS Notices CP2100 and 972CG. Otherwise, they run the risk of paying the penalty outright for non-compliance.
• Lawyer engagement – Many organizations will attempt to abate proposed penalties, which often requires outside lawyer engagement. Lawyers can be expensive on their own, but hiring external legal assistance will also require internal resources to gather and deliver data points to build a reasonable case for penalty abatement.

For organizations experiencing a large growth to their form volume, it’s important to ensure they have proper tax documentation on file and that it has been validated upon payee onboarding and again prior to filing. Remember that businesses can take proactive measures to verify their tax identification information before the 1099 filing process begins.