The good news is that real-time TIN matching works to reduce errors in 1099 reporting. The bad news is that when errors do sneak through, organizations aren’t necessarily finding out about them until it’s too late.
Those are the primary conclusions of a TIGTA report released earlier this month, titled Improved Communication and Outreach With Federal Entities Could Further Reduce the Number of Incorrect Miscellaneous Income Statements Filed Each Year. The Department of the Treasury oversight group found that federal agencies reduced errors involving tax identification numbers (TINs) on 1099-MISC forms, including mismatches and omissions, by 80 percent between 2009 and 2016.
Real-time TIN matching reduces 1099-MISC errors
Agencies achieved the reduction in errors by using a TIN matching program that matches payee information against IRS records. Agencies checked for TIN matches in real time as they onboarded payees throughout the year successfully, ensuring that payee information was correct before submitting 1099-MISCs forms to the IRS.
Sovos customers have experienced comparable results with TIN matching. Using a process similar to that used by federal agencies in the TIGTA study, one Sovos customer was able to reduce CP2100, or B notice, errors (and the subsequent 972CG penalties, or P notices) by more than 60 percent.
Additionally, reducing errors in the B and P notice processes transferred into operational savings for this customer, including costs associated with researching erroneous accounts, mailing B notices, handling related customer service issues and updating systems with corrected information.
Payers aren’t receiving B notices
The importance of real-time TIN matching was accentuated by the TIGTA report’s finding that agencies did not respond properly or promptly to B notices in some cases because the agencies never knew the B notices existed. Since B notices require backup withholding to be applied to payments until updated TIN information is secured, the agencies didn’t even know that they had any obligation. The report recommended that the IRS find alternative methods for delivering B notices.
The IRS bristled at the suggestion, noting that it has an established file-sharing system for distributing B notices to federal agencies. But problems with the system persist, TIGTA found. One major issue is that the IRS has only one address option per payer in its system. Given that a significant number of federal agencies (and US entities) operate in multiple locations around the world, allowing for only one address opens the IRS system to potential errors in distributing B notices.
For example, every time a division of a federal agency or a line of business in a company files any type of return, the IRS updates that line of business’s records with that address and begins sending all future correspondence to that location. B notices going to an incorrect address likely results in the team(s) in charge of dealing with them not being aware that they exist.
The IRS allows organizations to request a recreation of B notice files, but if payers want that information sent to an address other than what the IRS has on file, payers then have to submit a Form 8821 reflecting the new address and wait for the IRS to process that change before they can request the recreation of the notice. This is time-consuming and inefficient, especially since payers are including full address information in the 1099 file that they submitted in the first place.
Why missing B notices can cause problems
That’s a problem for payers on multiple levels. B notices contain highly private information, including names and TINs. When private information is sent, whether electronically or via traditional “snail mail,” it is imperative that the sender take precautions to safeguard that information. A process that does not track the location of private information sent from a federal agency does not align with data privacy standards adopted by the IRS in many of its other programs, such as its e-file Security program.
B notices also require payers to take action in tight timeframes. Payers must undertake a rigorous research and notification process within 15 days of receiving the notice. Perhaps most critically, though, B notices require payers to backup withhold 24 percent from future payments until a new Form W-9 is secured. When payers do not receive B notices, they have no way of knowing the notices exist without actually calling the IRS. Therefore, they don’t withhold as required, contributing to the vast amount of underreporting cited by TIGTA in this report.
The TIGTA report on Form 1099-MISC reporting by federal agencies laid out the problem in numbers:
“According to IRS data, in TY2015, federal entities were notified by the IRS of more than 17,000 miscellaneous income statements with missing or incorrect TINs that reported more than $5 billion in payments. However, TIGTA found that few federal entities withheld federal income tax, despite notification of their responsibility to do so. TIGTA estimates that these federal entities could have potentially withheld nearly $400 million in backup withholding in TY2015 for missing and incorrect TINs if all payments were reportable and not exempted from backup withholding provisions.”
TIGTA recommended in its report that the IRS “explore alternative notification processes” for B notices, but the agency disagreed.
Risk of filing another erroneous 1099-MISC form exists
Another issue to note, and one not pointed out in the TIGTA report, is that when a payer does not receive a B notice from the IRS, it is highly possible that another erroneous Form 1099-MISC will be filed. This is due to the timing of when B notices are sent and when the Forms 1099-MISC with non-employee compensation are due to be filed with the IRS and the states.
The IRS sends the original B notice files to payers in October and November of the year in which the erroneous data was filed. For example, 2018 information was filed in March of 2019, and B notices will subsequently be sent in October or November of 2019.
If a payer does not receive the B notice, the IRS allows the request for a recreation of the notice to occur starting in mid-November. The IRS generally sends the notice within another 2-4 weeks of requesting the recreation. Given the end-of-year timeframe and the January due date for Forms 1099-MISC with non-employee compensation, it is highly possible that a payer will not receive updated Form W-9 information until after another erroneous Form 1099 has been filed.
Sovos TIN matching solutions have helped customers reduce B notice errors by up to 80 percent, minimizing subsequent 972CG penalties assessed by the IRS.
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