The IRC 3406(a) requires payers under certain circumstances to withhold 28% for gambling winnings, and 31% for vendor payments as backup withholding taxes on payments of interest, rents, royalties, commissions, non-employee compensation, and certain other payments. Payments subject to backup withholding are defined in IRC sections 6041, 6041(a), 6042(a), 6044, 6045, 6049(a), 6050A, and 6050N. Backup withholding is required for governments under three circumstances:
2. The IRS sends the agency a first B Notice (CP2100) and the vendor does not respond within 30 days to the agencys request for certification of the TIN. The agency must begin to backup withhold on any payment made to this vendor. Backup withholding continues until the vendor provides a TIN certified on IRS Form W-9.
3. The IRS sends the agency a second B Notice within a three year period. The agency must begin backup withholding immediately. Backup withholding continues until the IRS notifies the agency to stop withholding. This notification may be an IRS Letter 147C or SSA Form 7028.
Each year the IRS issues CP2100 Notices for prior year information returns that contained missing, incorrect and/or currently not issued taxpayer identification numbers. Upon receipt of the CP2100, IRS procedures require each agency/recipient to compare their records with the information furnished by the IRS. There are two separate procedures that must be followed depending on whether the CP2100 listing agrees or disagrees with the agencys records.
For account information that does not agree to the agencys records, check to see if the correct information was given on the return, if the information was changed after filing, or if the IRS changed the information when processing the return. In these instances, it is not necessary to respond to the IRS, but it is necessary to do the following:
2. If the information changed after filing the return, be sure to include that information on any future information returns filed. Do not send a B Notice to the payee.
3. If the IRS changed the information, make note on the agency records and take no further action.
b) Allow the payee 30 calendar days to provide a newly signed Form W-9. Keep this W-9. Please note, once the IRS has informed the agency that the TIN of a vendor does not match, a telephone call is not sufficient documentation.
c) Update agency records with the corrected information received from the vendor and include it on any future information returns filed.
2. Second Notice
b) The vendor must contact the Social Security Administration (SSA) to have a social security number validated or the Internal Revenue Service (IRS) to validate an employer identification number (EIN).
c) Allow 30 business days from the date of request to receive either SSA Form 7028, Notice to Third Party of Social Security Assignment from the SSA or a copy of IRS Letter 147C from the vendor.
d) Begin backup withholding on payments made to payees if SSA Form 7028 or IRS Letter 147C is not received within 30 business days. Backup withholding must continue until either validation is received.
It is the agencys responsibility to deposit and report backup withholding. Once funds are withheld, the withholding agent must deposit the money using the same rules as those used for employment taxes. Most deposit situations will require that a deposit be made by the fifteenth day of the following month in which backup withholding occurred. Withheld taxes are deposited in a federal reserve bank using a Form 8109, Federal Tax Deposit Coupon. IRS Form 945, Annual Return of Withheld Federal Income Tax must be used to report backup withholding. This return is due by January 31 of the following calendar year.
MISCELLANEOUS BACKUP WITHHOLDING INFORMATION:
The Backup Withholding rules apply to taxable grants or agricultural payments reported on Form 1099-G. It does not apply to any other Form 1099-G type payment. Backup withholding rules apply even if the amount is less than $600 per year.
At the present time the backup withholding rate is 31% of the payment amount.
Once backup withholding has begun, continue to withhold until the payee provides a TIN. Do not refund the amounts withheld before the TIN was provided. Reflect these amounts on Form 1099-MISC. The payee will get credit for the withholding just as employees get credit for the wages withheld from their paychecks.
Failure to withhold will result in a liability for the amount that should have been withheld. Relief of that liability is only by obtaining an affidavit (Form 4669) from the payee stating that the payee included the payment on a tax return. Obtaining a Form W-9 allows withholding to stop (at least until the second B Notice), but does not relieve the liability for missing withholding.