The IRS requires that companies obtain a vendor’s TIN (Taxpayer Identification Number) before making a payment to them. The TIN is normally either a vendor’s Employer Identification Number or Social Security Number. Although using a W-9 form is typically not mandated by the IRS outside of interest, dividend, and broker payments, asking vendors to complete a W-9 form is the standard practice companies use to obtain a vendor’s TIN.
If a vendor refuses or neglects to provide a TIN, the company is required to withhold 24% of all 1099 reportable payments owed to the vendor that are subject to backup withholding rules. The amounts withheld must then be remitted to the IRS. Take note that some payments to vendors are not reportable and are not subject to backup withholding or annual solicitation requirements. See our blog on backup withholding for more information.
In addition to backup withholding, the IRS requires companies comply with annual solicitation requirements if a W-9 form is not received before payment. A solicitation is a request for a vendor’s correct TIN. The solicitation process should be completed and backup withholding should continue until the vendor provides their TIN. If you cannot show that you followed the annual solicitation requirements the IRS could assess you penalties for filing an information return with a missing or incorrect TIN.
Initial Solicitation – An initial solicitation should be made when a payee first opens an account or when the first payment occurs. A W-9 form is typically used for this request. If the payee does not provide a TIN when you initially ask for it, you must begin backup withholding. To avoid the risk of penalties from not obtaining a W-9 form and the significant administrative burden in backup withholding, companies typically ensure payments are not made until a W-9 is received.
First Annual Solicitation – If the payee does not provide a TIN when you initially ask for it, you must make the first annual solicitation by December 31st of the year in which the account is opened, or the transaction occurred. (for accounts opened before December) For transactions in December, the solicitation must be made by January 31st of the following year.
Second Annual Solicitation – If the payee does not provide a TIN after the first annual solicitation, you must make the second annual solicitation by December 31 of the year following the calendar year in which the account was opened or transaction occurred.
Conclusion – To avoid the administrative burden of backup withholding and annual solicitation requirements as well as the risk of penalties if done wrong, always get a W-9 form before paying your vendors!
What are the first and second annual solicitation requirements when sending out “B” notices?
If you file a 1099 form with a missing or incorrect TIN you may receive an error notice from the IRS also referred to as a CP2100 (large volume filers) or CP2100A (small volume filers) notice. In this notice the IRS may require you to follow additional procedures including sending a “B” notice (backup withholding notice) to your vendor, starting backup withholding, and following annual solicitation requirements. If these procedures are not followed you may be assessed additional IRS penalties.
CP2100(A) notices for a missing TIN: Begin backup withholding on any reportable payment you make and continue backup withholding until you receive a TIN. Remember that in some cases, the TIN must be certified (a signed W-9 form). In order to avoid a penalty for filing an information return that omitted the payee’s TIN, you must make a first annual solicitation for the TIN (generally by December 31 of the year in which the account is opened) and if a TIN is still not received make a second annual solicitation by December 31 of the following year. No annual solicitations are required in the years in which no reported payments are made.
CP2100(A) notices for an incorrect TIN: You must make up to two annual solicitations in response to the CP2100(A) Notice. You must send a B Notice within 15 business days after you receive a CP2100(A) Notice. If you receive a Proposed Penalty Notice (972CG) but not a CP2100(A) Notice, your annual solicitation must be made by December 31st of the year you received the Proposed Penalty Notice (972CG).
However, if you already sent a B Notice in the calendar year in response to a CP2100(A) Notice, you do not have to send another solicitation in response to the proposed penalty notice. If the IRS notifies you in the next calendar year that a TIN is still incorrect, you must make a second annual solicitation within 15 business days after you receive the second CP2100(A) Notice.
What is the relationship between the requirements to make an annual solicitation for a payee’s TIN and the requirements to send a “B” Notice?
Sending a “B” Notice to a payee in response to a CP2100(A) Notice satisfies the annual solicitation requirement to avoid a penalty for filing an information return with an incorrect TIN.
For additional information see Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s) and Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs.