Businesses are required to prepare and file a number of information returns with the IRS. Recently the IRS has published an updated Publication 1586, which addresses how payors can prove and claim reasonable cause when they file any information returns (1099, W-2, 1098 etc. forms) with incorrect names or identification numbers on the forms. Reasonable cause is necessary for payors to avoid penalties for reporting inaccurate information.
To establish reasonable cause (and not willful neglect), the filler must establish both that they acted in a responsible manner both before and after the failure occurred and that:
Acting in a responsible manner for missing and incorrect TINs generally includes making an initial solicitation (request) for the payee’s name and TIN and, if required, annual solicitations. The publication addresses various ways payors can solicit TIN information including requesting completed forms W-9.
Mitigating factors or events beyond the filer’s control alone are not sufficient to establish reasonable cause. Upon receipt of a newly provided TIN, it must be used on any future information returns filed. Refer to Treas. Reg. 301.6724-1 for reasonable cause guidelines.
Payors are required to solicit the TINs of payees to meet reasonable cause criteria as acting in a responsible manner to avoid information reporting penalties. Generally, a solicitation is a request made by the payor to a payee to furnish a correct TIN. An initial solicitation for a payee’s correct TIN must be made at the time an account is opened (or a relationship initiated) unless the payor already has the payee’s TiN and uses that TIN for all transactions with the payee. The solicitations maybe made oral or written request or by electronic communications, depending on how the account is opened or relationship established. Where a payee’s TIN is missing or incorrect after the initial solicitation, the payor generally will need to conduct annual solicitations for correct TIN to obtain a waiver for reasonable cause.
You should keep copies and notes to document the request for each W-9, keep a copy of each W-9 on file for each tax year. When possible, we recommend you verify the information provided by employees and payees through the Social Security Administration verification or the verification allowed by “authorized payors of payments subject to backup withholding”. See the two notes below.
Note: Employers may use the Social Security Administration’s (SSA) Social Security Number (SSN) verification systems to verify the employee’s name and SSN, but there is no Internal Revenue Service (IRS) requirement to do so. The option is useful for employers to identify potential discrepancies and correct SSNs before receiving a penalty notice. For more information, go to www.socialsecurity.gov/employer.
Note: TIN Matching is also available as part of the Internet based pre-filing e-services that allows “authorized payors of payments subject to backup withholding” the opportunity to match Form 1099 payee information against IRS records prior to filing information returns. For more information, go to https://www.irs.gov/tax-professionals/taxpayer-identification-number-tin-matching .
For more information and additional details, see publication 1586.