Each year, financial institutions are required to mail out hundreds, and possibly thousands, of Form 1099s to customers, the most common of which are often the 1099-INT. This form is issued by payors, including banks, which pay interest income greater than $10 during the year. However, the following information applies to many different types of 1099 forms as it relates to the appropriate actions and related penalties regarding filing 1099 forms with improper taxpayer identification number (TIN) information.
For all financial institutions, an initial solicitation for a TIN—or Social Security number (SSN) or employee identification number (EIN)—is typically requested, using a Form W-9, when a customer opens an account or when a transaction occurs.
Each year, the IRS issues CP2100 Notices (for more than 250 incorrect Form 1099s) or CP2100A Notices (for fewer than 250 incorrect Form 1099s) informing financial institutions they may be responsible for backup withholding as a result of missing or inaccurate TINs discovered when processing the Form 1099 information returns.
With the introduction of TIN matching by the IRS, this process has improved; banks now can be proactive about ensuring TIN information is correct before the Form 1099 is filed.
According to BKD Senior Manager Todd Pefferman, “Institutions should spend a few hours of additional time upfront making sure they have the correct TIN information before filing Form 1099. This can save your company days or weeks of time to properly resolve the issue under the current regulations after the fact.”
Banks receiving CP2100 or CP2100A Notices are required to send a backup withholding notice, or “B Notice,” to each individual payee on the list and request accurate TIN information. There are two types of B Notices: the first B Notice and second B Notice. While this may seem simple, the IRS requires specific information in each B Notice, and the mailing requirements for each also are different.
The bank only has 15 business days from the date of the CP2100A or CP2100 Notice to send the first B Notice to each payee. A Form W-9 should be included with the first B Notice. The backup withholding regulations also require that the bank track the status of CP2100 and CP2100A Notices they receive.
If a payee neglects to provide accurate TIN information, the bank is required to begin backup withholding immediately on any reportable payments and perform required annual solicitation request for the TIN. The backup withholding rate is 28 percent, effective for all payments after December 31, 2002, until December 31, 2012.
As the following flowcharts from IRS Publication 1281 demonstrate, a series of complex actions is required of banks if the IRS discovers missing or incorrect TINs.
The Small Business Jobs Act of 2010 increases the penalty amounts for information returns (Form 1099) to $100 for returns due on or after January 1, 2011, for any combination of the following infractions related to information returns:
- Filed with a missing/incorrect TIN
- Filed untimely
- Filed on incorrect media
- Filed in an incorrect format
For more information regarding these topics, contact your BKD advisor.