If you have been reporting 1099s for a while, you know that Tax Identification Number (TIN) matching is essential to ensure you don’t receive notices or penalties from the IRS. 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.
Verifications against Death Master File (DMF)
TIN matching is essential when it comes to reporting accurate 1099 name/TIN information, but accuracy only goes so far. TINs assigned to individuals, like Social Security Numbers (SSN), are unique to those individuals and remain with the individual after death. This means SSNs are never reused or removed from the IRS database once an individual passes.
When companies perform TIN matching, the IRS is aware that a name/TIN match may result in a match for deceased individuals, which could be the same result your organization is receiving as well. The IRS is aware of this issue because of an outside audit conducted by the Treasury Inspector General for Tax Administration (TIGTA) that reviewed the progress the IRS made in improvements to its federal tax withholding processes and procedures.
During this audit, TIGTA found 2.7 million 1099 forms where the payee being reported was deceased at least three years prior to the issuance of the 1099. The IRS views this as taxes not being collected on at least 2.7 million payments made annually, further contributing to the nation’s federal tax gap, which was last reported as $496 billion. The IRS has mentioned increased enforcement to narrow the tax gap. Knowing 2.7 million forms are still being reported with deceased individuals’ names and TINs, it’s inevitable the IRS will be cracking down to ensure accurate names/TINs are provided and that the payments were made while the individual was alive.
Organizations must verify that the name/TIN combination does not appear on the Death Master File (DMF) to prevent issuing payments to individuals doing business under a deceased person’s identify. The Social Security Administration (SSA) created the DMF, which contains over 83 million records of deaths that have been reported to the SSA.
“Sovos helps us easily identify fraudulent individuals before we even issue payments to ensure we always have accurate information and are doing business with legitimate individuals.” – Kim Iliff, Accounts Payable Manager, Tank Holding Corp
Verifications against Office of Foreign Asset Control (OFAC) lists
Organizations 22work with individuals, entities and countries that the U.S. Treasury Departments have placed restrictions on conducting business with could be at risk of fines and penalties. Every person and every business transaction should be screened against lists created by the Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury. OFAC publishes lists that contain “individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called ‘Specially Designated Nationals’ or ’SDNs.’ Their assets are blocked and U.S. persons are generally prohibited from dealing with them.” These watch-lists ensure you are not conducting business with dangerous individuals or entities.
Unlike IRS penalties for name/TIN discrepancies, payers neglecting to verify against OFAC lists open themselves up to civil and criminal penalties. OFAC non-compliance carries civil penalties of up to $1 million per violation plus criminal fines of up to $10 million and imprisonment ranging from 10 to 30 years.
“I appreciate that Sovos’ Tax Identification Verifications does TIN matching and matches against DMF and OFAC lists to make sure we are doing legitimate business. Those additional verifications have saved us from working with fraudulent individuals several times.” – Kim Iliff, Accounts Payable Manager, Tank Holding Corp
In 2022 alone, OFAC levied over $42 million in penalties/settlements, but has issued far more in previous years. In 2019, OFAC levied nearly $1.3 billion in penalties/settlements with two financial institutions facing $600 million+ in penalties and many other organizations facing six and seven figure penalties. It is important for organizations to understand who they are working with prior to onboarding new vendors or customers, and especially prior to making any payments, to avoid civil and criminal penalties.
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