This blog was updated on March 9, 2023.
Every 1099 form transmitted to the IRS has the potential to become a costly penalty; these penalties can be alleviated with proactive 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 tax identification numbers (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.
These errors from the IRS are called B notices and require payors to withhold 24 percent backup withholding tax from the gross amount of payments until a new Form W-9 is obtained. Companies remit those amounts to the IRS and file annual reconciliation returns. Name and TIN mismatch errors can also result in expensive IRS information reporting penalties, amounting to $290 per form, with a cap of about $3.5 million for large businesses.
Penalties for inaccurate data are not the only issue for organizations focused on rapid growth. The additional time and expense of payee outreach and corrections are extremely costly as well.
Luckily much of this can be avoided with a simple automated check during the onboarding process.
What is TIN matching?
The IRS gives payors of certain types of transactions the ability to proactively prevent these errors by performing name and TIN matches according to their database. Matching names and TINs before filing 1099 forms enables payors to take action to correct the information before a filing error occurs. There are two types of TIN matching offered by IRS:
- Bulk TIN matching matches many records against the IRS’s database at one time. The payor uploads .txt files composed of up to 100,000 name/TIN combinations and receives a response from IRS within 24 hours on the status of the uploaded records.
- Interactive TIN matching enables payors to quickly verify that information is correct, usually for individual or small groups of forms. The payor can submit up to 25 name/TIN combinations at a time, and the IRS system responds within seconds.
While bulk TIN matching is useful for checking records just before or during reporting season, interactive TIN matching can be incorporated into upstream onboarding processes prior to reporting season. With it, payors can check for name/TIN consistency during the customer and vendor onboarding process, meaning they can correct errors one at a time rather than getting hit with a load of bulk-matching corrections.
Expanded Form 1099-K Reporting
The decrease in 1099-K threshold for some companies means that they will be reporting more tax information than ever before. This increase in 1099-K form volume also increases the risk of TIN errors – so it is more essential than ever that businesses verify TIN information proactively to mitigate IRS penalty risk.
How the IRS handles TIN matching
The IRS requires an e-services ID for TIN matching issued through IRS.gov, and obtaining one isn’t a simple process. For some organizations, there is inherent risk in even obtaining and using a TIN matching ID.
New and existing users now have to register (or re-register) with the IRS and provide information, including a personal mobile phone number and one of the following financial account numbers: credit card, mortgage loan, home equity line of credit or auto loan.
The log-in process requires two-factor authentication, which sends a security code to a personal mobile device. That code is necessary for login. As such, the TIN match ID is associated with the individual employee who enters personal information, not with the payor company itself.
These new, more rigid access rules present potential problems for organizations that use TIN matching services:
- Employees now have to provide personal information to the IRS to conduct TIN matching, which they might be hesitant or unwilling to do. This inherently involves a security risk.
- The two-factor authentication process limits the number of people within an organization who are able to log into the TIN matching system. As a result, a payor might not be able to proactively TIN match across the organization during vendor or customer onboarding, which eliminates one of the major advantages of interactive TIN matching.
How Sovos can solve ID issues
As a third-party reporting solution provider, Sovos can solve TIN matching issues for payors. Sovos clients access the IRS TIN matching system through a Sovos ID eliminating the need to obtain one of their own – and for each of their employees to obtain one.
Using Sovos solutions. businesses can scale interactive TIN matching to as many employees as necessary at any time.
Download our comprehensive whitepaper on Tax Identity Management to learn more about state reporting changes and how to safeguard your business.