You would typically learn that you are subject to backup withholding when the payer of income (e.g., your bank, employer, or investment firm) informs you, following notification they received from the Internal Revenue Service (IRS). The IRS communicates this information to the payer, not directly to the individual payee, primarily through specific notices.
Understanding the Notification Process
The IRS uses particular notices to alert payers when they need to begin backup withholding on payments made to a payee. This notification process is part of the IRS's "B" program, designed to ensure proper Taxpayer Identification Number (TIN) reporting.
Key IRS Notices for Backup Withholding:
The primary notices issued by the IRS to initiate backup withholding are:
- CP2100 Notice: This notice is typically sent to payers who have filed 50 or more information returns (such as Form 1099 or W-2G) with missing or incorrect payee TINs.
- CP2100A Notice: Similar to the CP2100, this notice is sent to payers who have filed fewer than 50 information returns with missing or incorrect payee TINs.
These notices inform the payer that the payee's TIN is either missing, obviously incorrect (e.g., not 9 digits or contains non-numeric characters), or that the name and TIN provided on the information return do not match the IRS's records.
Here's a breakdown of the notification flow:
- IRS Identifies Discrepancy: The IRS identifies issues with a payee's Taxpayer Identification Number (TIN) or a mismatch between the name and TIN submitted on an information return by a payer.
- IRS Notifies the Payer: The IRS issues a CP2100 or CP2100A Notice to the payer (the entity making payments to you, such as a bank, broker, or business). This notice instructs the payer to begin backup withholding on future payments to the specific payee(s) identified.
- Payer Notifies the Payee: Upon receiving an IRS notice, the payer is then required to notify the payee (you) of the discrepancy and that backup withholding will begin if the issue is not resolved. This notification usually comes in the form of a letter from the payer.
Why You Might Be Subject to Backup Withholding
Backup withholding is generally required when:
- Missing TIN: You fail to provide your correct Taxpayer Identification Number (TIN) to the payer.
- Incorrect TIN: The TIN you provide is incorrect, as determined by IRS records (e.g., it doesn't match your name or is not valid).
- IRS Notification of Incorrect TIN: The IRS notifies the payer that the TIN you provided is incorrect.
- Underreported Interest/Dividends: In some cases, if you have underreported interest or dividend income, the IRS may notify you and the payer to begin backup withholding.
What to Do If You Receive Notification
If you receive a notice from a payer indicating that you are subject to backup withholding, it's crucial to act promptly. Here are the general steps:
- Contact the Payer: Immediately contact the payer (the company, bank, or individual who sent you the notice) to understand the specific reason for the backup withholding.
- Provide Correct Information: Furnish them with your accurate TIN (usually your Social Security Number or Employer Identification Number) and ensure your name on their records exactly matches the name associated with your TIN with the IRS.
- Request Documentation: The payer may ask you to complete Form W-9, "Request for Taxpayer Identification Number and Certification," to certify your correct TIN.
By providing the correct information and resolving any discrepancies, you can typically stop backup withholding from continuing on future payments.
For more detailed information on backup withholding and what it means for taxpayers, you can refer to resources provided by the IRS, such as general guidance on Understanding Backup Withholding.
