April has come and gone but a slew of IRS notices loom this fall as companies may be on the hook for erroneously filed returns, or incorrect information tied to details as simple as names and addresses.
Wendy Walker, VP, Regulatory Affairs at Sovos, told PYMNTS that when information is missing or doesn’t match IRS records, hefty fines can accrue — and the administrative burden of keeping track of all those details is considerable.
Case in point: The CP2100 notice — often referred to as a “B notice” for short — is the backup withholding notice issued by the IRS tied to payments of interest, dividends or gains from the sale of property. The withholding notice also applies to rent and royalties — in short, all non-employee types of compensation.
“The B notice tells a filer that the tax identification information that they reported on certain Form 1099s previously were incorrect, especially Taxpayer Identification Numbers [TIN] — and as a result, the IRS cannot match those forms with its own records, or collect the taxes that are due.”
As a result, the filer may need to “back up” or withhold 24% on future payments to the payee, until they can get the correct info from that payee. The details can be basic, spanning legal names and Social Security numbers, for example — and payees don’t always understand exactly what data they should be providing. The complexities can be pronounced with pass-through entities like sole proprietors, single member LLCs, where there can be the inadvertent inclusion of erroneous data.
B notices are issued in the September-to-October time frame and apply to the most recent calendar year — so companies will start receiving notices applicable to 2023 in just a few months. For the companies that do not get a TIN in the manner required — well, those firms can be liable for any withholding from the time period covered and beyond.
Eventually, companies that are found to be deficient in what they’ve filed, a 972CG notice — or “P notice” — often follows, representing a proposed penalty issued by the IRS for all manner of faulty returns.
“Any filer that files an information return that had incorrect information or filed late,” Walker said, “or filed using the incorrect formats, should expect to receive this notice every year” for each year that had errors. But there’s room for confusion here, as the P notices are issued in the August to September time frame, but address errors from two calendar years ago. Thus: Starting next month, filers will receive penalty notices from the IRS that apply to tax year 2022, but at roughly the same time will get the B notices that apply to 2023.
Juggling the different forms all can be challenging to say the least, especially in the financial services, payment processing and insurance industries, where tens of thousands of filings each year are the norm.
A significant percentage of firms, said Walker, tackle their 1099 reporting once a year … and then just wait for the IRS to issue these error notices and penalties. For a company that waits until Aug. 1 to address their issues, the penalty is $120 per filing. For the companies that wait until after that date, the penalty is $310 per record. Any finding that a company has intentionally disregarding the rules altogether is liable for a penalty of $630 per return.
In her own experience with these B and P notices, and working with client firms prior to Sovos, Walker said it has not been uncommon for entities to be fined hundreds of thousands of dollars or even millions of dollars. The penalty cap is nearly $4 million for a large business and $1.3 million for a smaller firm.
A proactive approach, she said, can help head those errors off at the pass — and companies that are careful about their W-9 documentation (which informs 1099s) can prevent headaches later. Walker told PYMNTS that Sovos recommends that firms use matching solutions in their onboarding and back-office operations. Providers such as Sovos have real-time solutions that offer real-time TIN matching according to the IRS database.
“If you’re in a company that does anti-money laundering practices or know your customer and you’re collecting a bunch of that information, unless you are actually verifying that TIN to the IRS database, verifying to [any] other database doesn’t matter from an IRS perspective.”
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