Proposed W-9 Update Expands Backup Withholding Requirements

For the third year in a row, the U.S. Department of the Treasury’s annual General Explanations of the Administration’s FY2024 Revenue Proposals (Greenbook) includes a proposed update that would expand the federal backup withholding requirements. The proposed change would help facilitate more accurate tax information, supporting “the broader goals of improving IRS service to taxpayers, enhancing compliance, and modernizing tax administration,” according to the 2024 Greenbook.

Currently, payees must provide a signed Form W-9, or an acceptable substitute, on or before the time of payment for payments reported on Forms B, DIV, INT, OID, PATR and S. Additionally, payees must provide a tax identification number (TIN) on or before the time of payment for payments reported on Forms 1099-G, K, MISC, NEC and W-2G. There is no specific method or form that a business is required to use to collect the TIN information for these payments. Businesses can collect the information verbally or in writing, so long as they can demonstrate that it was collected before any reportable payments were made. If a TIN is not collected before issuing payment, a business is required to withhold 24% of the gross payment and remit those amounts directly to the IRS.

Under the proposed change, all payments subject to backup withholding would need to have a corresponding W-9 from the payee that is signed under penalties of perjury on or before the time of payment.

“The intent of backup withholding is to serve as an enforcement tool in ensuring payors and payees are compliant with their reporting obligations,” the 2024 Greenbook reads. “Requiring payees to certify their TINs to payors on a Form W-9 or equivalent form reduces the level of enforcement necessary to ensure information is accurate.”

Payors that fail to withhold when required become liable for the withholding taxes plus interest. Further, if a business fails to report an accurate TIN on any information return, the penalties can be costly. For returns filed in 2024 that contain invalid TINs, a large organization could be charged a penalty of up to $310 per form with a maximum of $3.5 million.

It’s not clear how the Treasury and the IRS would implement such changes, but presumably businesses would need to get signed W-9 forms from all existing payees, if they were not doing so before. Ensuring you have a process in place to collect and validate tax identification information is one of the best practices to avoid costly audits and penalties. Collecting a signed Form W-9 or acceptable substitute, even for payments that do not currently require it, can be helpful for a business in the long run – especially if a 972CG Notice of Proposed Penalty is issued or the IRS conducts an audit of organizational payments.