How Tax Pros Can Avoid the Nightmare of 1099 B and P Notices

Note: This blog was updated on September 3, 2021.

According to the Treasury Department’s American Families Plan Tax Compliance Agenda, the most recent assessment of the gross tax gap for tax year 2019 is approximately $580 billion. Recently, Treasury Deputy Assistant Secretary Mark Mazur testified before Congress that the projected tax gap could balloon to $7 trillion over the next decade. Tax enforcement has become a priority for the IRS and the Biden administration, and the funds earmarked for IRS enforcement in the $3.5 trillion budget resolution are evidence of a forthcoming reality. Organizations need to be aware of their liabilities if they want to avoid dealing with B and P notices, financial penalties, unhappy customers and declines in revenue.

B and P notices are not just warnings from the IRS. They foreshadow potential disaster. Tax reporting professionals who have dealt with them firsthand know this all too well. Dealing with B(ummer) notices is rough. Dealing with P(ain) notices is worse.

B-ware

With the PATH Act pushing up federal 1099 reporting deadlines and states following suit, organizations are struggling more than ever to stay compliant and avoid the extra effort and expense that goes along with abatement requests, not to mention the risk of federal and state reporting penalties. Where there’s smoke, there’s fire. The surge in B notices will inevitably lead to a surge in P notices if organizations can’t adapt to the PATH Act and the complications it has presented.

A proactive approach

The best defense is a good offense when it comes to compliance and 1099 reporting. Organizations can eliminate B notices before they occur by taking a proactive approach.

Being proactive doesn’t mean worrying about reporting at reporting time. It means addressing the issue year round. When a new 1099 recipient is on-boarded, an organization must ensure that the person’s Tax Identification Number (TIN) matches his or her name before entering the contact’s information into the system that tracks 1099 recipients.

If they do not match, the organization must solicit the correct information from the recipient and not enter anything into the system until there is a match. Ensuring accuracy at the point of entry is the most sure-fire way to avoid reporting errors. It also eliminates the need to scramble to find correct information during reporting season and B notice season.

Bulk TIN matching is also a best practice for avoiding reporting errors for records that already exist. Again, the organization will need to find the correct information for any name and TIN mismatches. Though it may seem like a daunting process, once a bulk TIN match is done, it won’t need to be done again—provided the organization also matches names and TINs for new 1099 recipients at the point of entry. Bulk TIN matching can also facilitate the process of correcting second and third B notices.

Managing multiple data sources

Most organizations have a data source that stores tax data and a separate application for processing data in a reporting engine. It’s important to make sure that data matches in both sources to keep B notices at bay. Failure to update one source or to keep the two sources in sync could destroy the effort put into getting information correct in the first place.

With each W-9 or corrected tax information form that arrives, it’s critical to check that both data sources are accurate and up to date. Performing that task as forms arrive rather than in bulk or right before a reporting deadline will increase worker efficiency and eliminate errors. Another reason to have sources in sync is to avoid repeating the same errors year after year.

Responding to errors

Organizations that take a proactive approach to reporting will minimize the possibility of receiving B and P notices, but sometimes mismatches slip through the cracks. When that happens, organizations need to take action:

• Letters to 1099 recipients requesting information should be simple to follow and easy to read. Most payees don’t know what a W-9 is, and IRS rules require a payer to provide a W-9 along with the first B notice to the payee. It is important to provide a straightforward explanation of what they need to send back to a payer and when.
• Responses to B and P notices should be immediate, with a demonstrable and thorough explanation of how the organization will correct the error and make sure it never happens again. Regarding P notices, the key is to avoid incurring the proposed penalties resulting from what the IRS would consider “willful neglect” and instead demonstrate that the problem had a “reasonable cause” and will be solved.
• If it’s impossible to gather or validate W-9 information from a payee, be prepared to implement backup withholding. The standard rate is 24% of a payee’s funds withheld. If a valid W-9 arrives during withholding, the payer has 30 days to end backup withholding.

The cost of non-compliance

With the IRS and states actively seeking to close the $580 billion gross tax gap, tax information reporting has become a critical part of an organization’s effort to remain profitable. Failure to implement effective reporting processes can lead to penalties that ripple throughout a business.

Taking a proactive approach to tax reporting by validating names and TINs at the point of entry, and syncing data sources, puts organizations in the best position to avoid penalties and remain compliant.