Companies that receive “B” Notice lists from the Internal Revenue Service (IRS) must respond in a timely and appropriate manner to avoid costly penalties. The IRS sends B Notices—technically referred to as CP2100 or CP2100A notices—in the spring and/or fall to payers (companies/organizations) that filed certain 1099 forms containing errors.
“The IRS sends filers a list of 1099 errors that prevented the matching of payee data against IRS records,” explains Marianne Couch, Esq., cofounder of COKALA, a tax advisory services firm. Common errors that will attract a B Notice include mismatches between payee name and TIN (taxpayer identification number), missing TINs, and TINs that were not issued to anyone.
All the 1099 forms that are subject to backup withholding are covered under the B Notice rules, including B, DIV, G, INT, K, MISC, OID, and PATR.
According to Couch, there are several key compliance issues regarding B Notices that payers need to keep in mind:
|There Are Actually Two B Notice Letters|
|First B Notice. First B Notice. “Payers must send the first B Notice and a Form W-9 to a payee with a 1099 error after they’ve received the first CP2100 or CP2100A Notice from the IRS with respect to this payee’s account,” Couch explains. The purpose of this first B Notice is to inform the payee of the problem and ask the payee to send the payer a correct name/TIN combination.“In the first B Notice letter, the language is written by the IRS,” Couch points out. “The payee must respond with a complete, accurate Form W-9 signed under penalty of perjury and that bears a date subsequent to the date on the IRS list.”Second B Notice. Second B Notice. “Payers must send the second B Notice to a payee if they receive a second CP2100 or CP2100A Notice from the IRS within a three-calendar-year period,” Couch says. The text of the Second B Notice is different from that of the first B Notice. If the recipient provided the payer with a social security number, s/he must provide the payer with a copy of his or her social security card that bears the correct name and TIN combination. If the recipient provided the payer with an employer identification number, it must write to the IRS at the address at which the taxpayer files the tax return and request a Letter 147C. Once the payee receives the Letter 147C, it provides a copy of it to the payer.The IRS writes the language for the second B Notice letter. The mailing of the second notice does not include a Form W-9. The payer must receive validation of the payee’s name/TIN combination from SSA or IRS after sending the second B Notice. “The payee must obtain government documentation of the payee’s correct name and TIN, which can be either an SSN (Social Security card number) or EIN (employer identification number per IRS Letter 147C),” Couch points out.|
Following the ‘Two in Three Years’ Rule
Generally, a payer does not have to send a B Notice letter to the same account more than twice within three calendar years. “IRS counts multiple B Notices sent in the same calendar year or relating to a single tax year as one notice,” Couch says. “For example, the Fall 2018 list is related to Tax Year 2017; the Spring 2019 list also relates to Tax Year 2017.”
If a payee on the Fall list whom the payer processed with a first notice letter appears again on the Spring list, the payer can disregard the spring appearance.
“Since the payer just sent the B Notice letter a couple of months prior, and since the list relates to the same tax year, the payer does not need to contact the same payee again, unless this same payee appears again on the Fall 2019 list, which will pertain to the file sent in 2019 for tax year 2018,” Couch explains.
Observing Deadlines for B Notices
“Payers have 15 business days from the date of the CP2100A or CP2100 Notice, or the date their organization received it (whichever is later), to send a B Notice to a payee,” Couch says. “For incorrect TINs, the payer only has to send a B Notice to a payee whose name/TIN combination and account number on the payer’s records agrees with the combination that IRS identified as incorrect.”
Payers do not necessarily need to contact every payee listed on the B Notice list. “However, payers do need to research the list to determine which payees must be contacted and how many times those payees have appeared on the notice,” Couch says.
“Payers that companies do not need to contact include those whose 1099s are processed by a third-party administrator,” Couch points out. “However, payers must make sure their third-party administrators timely and properly process the list, otherwise the payers will be held responsible. Other payees that do not require contact include payees who are fiduciaries, payees whose payments were not reportable on a 1099, and payees for whom there is no record in the system of ever having been paid. Payers also do not need to send B Notice letters if the 1099 error was made on their end—for example, if someone in AP, while keying in the payee information, transposed digits or misspelled the name provided on the Form W-9.”
Keep this in mind: The B Notice list is generally six months to one year behind your tax-year filing. “Assume that information in your files that differs from the information on the list is the correct information,” Couch advises. “You have corrected it between the time you sent the original file and the time the IRS sent the list.”
By processing the B Notice list timely, payers increase their odds of having any filing penalties that arise from inaccurate or incomplete 1099s waived. “Payers should write penalty waiver letters to the IRS explaining their B Notice processing procedures rather than paying the penalty,” Couch explains.
“It is a good idea to call the IRS Enterprise Computing Center at (866) 455-7438 each Spring and Fall to verify whether a B Notice list was sent. The IRS may need authorization from the payer organization in order to provide the payer with the information, but this way you can make sure that any list sent is processed in a timely manner.”
Couch explains that notices proposing penalties for 1099 errors are sent out in August; payer organizations have 45 calendar days from the date on the notice to respond. “Respond with a letter requesting a penalty waiver,” she advises. “This letter must explain all the errors for which penalties are proposed using language from the ‘reasonable cause’ regulations found in IRC § 6724.” She adds that a proposed penalty notice resembles a B Notice list, but payers can tell the difference because the proposed penalty notice proposes an assessment of monetary fines, so there will be a dollar amount referenced in the letter.
Penalties are calculated as follows: $270 per 1099 error; $50 for late-filed 1099s sent within 30 days of the original due date; $100 for late-filed originals sent after 30 days of due date but before August 1. The maximum penalty ceiling is $3,218,500. “The penalty is also $270 for failure to furnish correct payee statements,” Couch says.
Editor’s Note: Marianne Couch, J.D., is a nationally known advisor and author on U.S. federal and state tax information reporting compliance. She recently delivered a webinar for IOFM on CP2100 B Notices and TIN solicitations. More resources to help payers handle B Notices include: IRS Publication 1281, “Backup Withholding for Missing and Incorrect Names/TINS,” http://www.irs.gov/pub/irs-pdf/p1281.pdf and IRS Publication 1586, “Reasonable Cause Regulations and Requirements for Missing and Incorrect Names/TINs,” http://www.irs.gov/pub/irs-pdf/p1586.pdf. For questions about Notice 972CG or the TIN listing, call the Information Returns Branch Centralized Call Site at 1-866-455-7438 (from outside the United States 304-263-8700), Monday through Friday 8:30 to 4:40 PM Eastern time.