If your business issues certain types of 1099s or W-2s, you may get a notice from the IRS saying that the information you filed doesn’t match IRS records. You’ll either need to get correct information from the person listed in the notice or start backup withholding for them.
What responsibilities does a business have to report payments to the IRS?
When you pay someone more than a certain amount of money, you have to report those payments to the IRS if they’re over a certain amount. The purpose is to keep the person you’re paying from failing to report their income. If the IRS gets an information return from you but that person doesn’t report the income on their tax return, the IRS knows to audit them.
The minimum amounts to issue an information return and when you need to do it vary based on the form. The following forms commonly have information mismatches and errors that result in CP2100 or CP2000A notices.
- Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
- Form 1099-DIV, Dividends and Distributions
- Form 1099-G, Certain Government Payments
- Form 1099-INT, Interest Income
- Form 1099-K, Payment Card and Third-Party Network Transactions
- Form 1099-MISC, Miscellaneous Income
- Form 1099-NEC, Nonemployee Compensation
- Form 1099-OID, Original Issue Discount
- Form 1099-PATR, Taxable Distributions Received from Cooperatives
- Form W-2G, Certain Gambling Winnings
What happens if you submit incorrect information to the IRS?
If you submit incorrect information to the IRS, they’re not able to match it to the person or their tax returns. That defeats the purpose of the information return.
In many cases, it’s not even your fault the information is incorrect. The person might have made a mistake filling out their W-4, W-9, or other tax form. Or, they might intentionally give you incorrect information to try to avoid having their income reported.
The IRS starts by trying to get the information corrected. If you can’t get corrected information, they’ll tell you to start withholding taxes on that person’s payments. If you continue to have problems submitting correct information returns or don’t withhold taxes when you should, it could lead to penalties.
What is backup withholding?
Backup withholding is withholding that’s only required in certain situations. (Compare to regular withholding that applies to everyone like W-2 jobs.)
Common situations where backup holding may apply are: