Your Guide to Tax Identity Management
Having the wrong tax identification number can cost businesses millions of dollars.
Ensuring your organization is filing correct tax information with the IRS is important to mitigate penalty and audit risk. With name and Tax Identification Number (TIN) information being the easiest items for the IRS to enforce penalties on, it’s often the side of tax information reporting (1099) that carries the most financial risk. Understanding the proactive and reactive ways to mitigate risk associated with mishandling of tax identification information, such as names and TINs, is increasingly important for organizations looking to control unexpected costs. This guide will help businesses:
Better understand what tax identity management is
Learn how to proactively validate tax identification information
Comprehend ways to identify fraudulent individuals before issuing payments
Understand best practices for handling IRS “B” and “P” notices
Take advantage of solutions and services to mitigate penalty risk
What is tax identity management?
The meaning of tax identity management varies depending on the type of industry you work in and the role you have within your organization. For those responsible for tax information reporting, also known as 1099 reporting, it means ensuring you are doing business with legitimate individuals and businesses by collecting and reporting correct tax identification information to government agencies. The two most common data elements tax regulators care about are tax identification numbers (TINs) and names. The combination of these two pieces of information is what governments use to reconcile with individual tax returns to ensure proper taxes have been collected. When incorrect tax identification information is provided to government agencies, hefty penalties are often proposed to filers of misinformation. Without properly managed tax identity management processes, it can be very difficult to abate such penalties.
What is a Tax Identification Number (TIN)?
Having the correct Tax Identification Number (TIN) is essential when filing W-2s, 1099s and ACA forms. The nine-digit number could be a Social Security Number (SSN), Employee Identification Number (EIN), Individual Taxpayer Identification Number (ITIN) or an Adoption Taxpayer Identification Number (ATIN). A valid Social Security Number may only be obtained through the Social Security Administration, while the IRS issues EIN, ITIN and ATINs.
Read more about TINs.
Filing 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. There are key basics to remember about TINs when filing 1099s.
Read more about the role TINs play in 1099 reporting.
Take advantage of real-time TIN matching
For organizations experiencing rapid growth, an influx of new contractors, distributors or service providers can be exciting, but fraught with risk as tax season approaches. Regardless of your business model and how you classify payments to your service providers, having correct TINs is a critical component for accurate tax reporting.
The most common cause of 1099 reporting errors is mismatches between recipient names with TINs. If the name and TIN reported on a 1099 form do not match what’s in the IRS database, an error will occur. Errors can lead to incorrect filing penalties and trigger withholding obligations for your organization.
Read more about real-time TIN matching.
Important verifications beyond TIN matching
TIN matching typically occurs at two points when paying a vendor or customer: when onboarding a new vendor or customer based on information collected on Form W9 and prior to reporting amounts paid on 1099s to ensure name/TIN information is still accurate. When it comes to onboarding new vendors or customers, there are two additional verifications beyond TIN matching businesses must be aware of. Understanding these verifications can help prevent your organization from working with fraudulent individuals or businesses.
Read more about verifications beyond TIN matching.
How Sovos can help you get started and stay on the path to tax identity management compliance
Avoiding tax identity management errors and maintaining compliance – even as your organization grows and regulations change – is a critical part of achieving your strategic objectives as a business.
Frequently Asked Questions
TIN Matching allows you to check name/TIN combinations against the IRS database prior to filing tax information returns (1099s) that are subject to backup withholding. The IRS offers two ways to TIN match, which include interactive TIN matching and bulk TIN matching.
TIN Matching through the IRS is a free service. The IRS’ service is provided as a way for filers to ensure they are submitting accurate information, and in return, the IRS receives correct information without having to enforce penalties. Sovos also offers extended TIN Verification services that can help scale TIN matching processes drastically, and also easily identify fraudulent individuals before you start doing business with them.
If you receive IRS Notice CP2100, or a Backup Withholding Notice (“B” Notice), you are required to solicit payees appearing on the notice for updated name/TIN information within 15 business days of receiving it. If the recipient does not respond to the notice within 30 business days, you should backup withhold at 24% on future payments made to the recipient.
IRS Notice 972CG, or a Proposed Penalty Notice (“P” Notice), proposes a penalty for three main reasons:
- Missing/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
The recommendation for responding to the penalty would be to gather all data that outlines why your organization was compliant and attempt abatement, if possible.
Penalties on Notice 972CG can vary depending on what you are being penalized for. If you are penalized for missing or invalid name/TIN combinations, penalties are $290 per record. If you are penalized for late filings, penalties are between $50 and $290 per record, depending on how late the returns were filed. Intentionally disregarding filing returns or forms can cost organizations $580 per record or form. Additionally, allocating time and resources to investigate and respond to IRS notices can add up quickly.
