It’s no secret that a large contributor to the tax gap—the difference between the taxes that are paid and the taxes that are owed—are independent contractors who don’t have taxes withheld from their payments.
B Notices, properly called CP 2100/2100A notices, which require payers to backup withhold, are a key tax collection tool, said Jerri Langer, founder and owner of Cokala Tax Information Reporting Solutions at the American Payroll Association’s Annual Congress.
Unwelcome mail. Information returns—Form 1099-MISC, for example—must contain a payee’s name and Taxpayer Identification Number (TIN). The IRS will send a B Notice to you if a payee’s TIN is missing or incorrect. You may receive a B Notice on paper, or if you have paid at least 250 payees, on CD. The CDs are locked, Langer pointed out. You will self-assign a PIN and unlock the disk, she advised.
A major problem with B Notices, Langer said, is that the IRS sends them to the address from which the last return was filed. The last return, she continued, could be an excise tax return, which means that the B Notice could go anywhere in the company. B Notices addressed to public companies could even be sent to shareholder services, she added.
Suggestion: Langer advised that there should be one point of entry for all IRS notices in your company.
You may also call the IRS to confirm that B Notices were or were not printed, but you need to have a Centralized Authorization File (CAF) number, Langer said. CAF numbers allow third parties to interact with the IRS to solve problems. To get a CAF number, file Form 2848 or Form 8821.
Next steps. Once you receive a B Notice, you must ask the payee to provide his or her TIN. Do this by forwarding them the B Notice and asking them to complete Form W-9. For incorrect TINs, backup withholding begins in 30 days, but you must stop backup withholding once the payee provides a TIN; for missing TINs, backup withholding begins with the next payment.
Langer warned that the IRS audits payers to follow up on their B Notice procedures. The IRS will want to see copies of the B Notice letters you mailed to the payee, she said.
PAYROLL PRACTICE TIP: Langer also warned that you must file Form 1099-MISC even if you don’t have a payee’s TIN. You may be subject to a penalty for doing so, but the penalty may be abated for reasonable cause.