Ensuring that your business name and Taxpayer Identification Number (TIN) match is essential for maintaining compliance with IRS regulations and avoiding financial penalties. Each year, the Internal Revenue Service (IRS) issues CP2100 Notices to businesses and individuals whose filings contain mismatched TINs and legal names. These discrepancies often lead to backup withholding, where a portion of the merchant’s income, such as payment processing revenue, is withheld at a rate of 24%. This withholding is mandated under IRS Code Section 3406 and is designed to ensure that taxes are collected properly on income that might otherwise go unreported.
Why is Matching Important?
When filing tax documents like the 1099-K, it’s crucial that the Legal Business Name and TIN listed on the form match exactly what is on file with the IRS. The IRS uses these identifiers to ensure the accuracy of the tax information reported by businesses and to match it with what the business reports on its own returns. If there’s a mismatch, the IRS sends a CP2100 Notice, which is essentially a warning that the submitted information does not align with the IRS’s records.
For businesses, this process can result in B-Notices (Backup Withholding Notices) and potential financial withholding if the issue is not resolved in a timely manner. Merchants who receive a CP2100 Notice are required to submit proper documentation to correct the discrepancy, such as a Form W-9, SS-4 Letter, or LTR 147C from the IRS. Failure to do so can result in 24% federal backup withholding on the business’s gross reportable payments. In addition, some states impose their own withholding requirements (e.g., California 7%, Vermont 6.72%, and Maine 5%), further complicating the financial impact of non-compliance.
History of Backup Withholding Law
The concept of backup withholding dates back to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). This law was introduced to prevent tax evasion by ensuring that income not subject to automatic withholding, such as certain payments made to independent contractors or merchants, was reported correctly. Under TEFRA, if a payor (such as a merchant or business) does not provide a correct TIN, the IRS is authorized to require backup withholding as a safeguard against underreporting of taxable income.
The need for accurate reporting has only grown more significant as the IRS has expanded its focus on minimizing tax gaps— the difference between the taxes owed and those actually collected. As part of its efforts, the IRS has emphasized more stringent verification processes for business names and TINs, reinforcing the necessity for businesses to ensure that their information is accurate and up to date.
The Process and Consequences of Non-Compliance
If your business or one of your merchants receives a CP2100 Notice, it triggers the issuance of a B-Notice, which details the steps needed to rectify the mismatch. Depending on whether this is the first or second notice the merchant has received, different documents are required to resolve the issue. For example:
First B-Notice: The merchant must submit a corrected Form W-9, which verifies the correct TIN and Legal Business Name.
Second B-Notice: The IRS will not accept a W-9. Instead, the business must provide an official IRS document such as the SS-4 Letter (confirming EIN issuance) or LTR 147C (issued by the IRS to verify the TIN).
If the mismatch remains unresolved by the specified deadline, the merchant becomes subject to backup withholding, with funds withheld and sent directly to the IRS. Additionally, the business could be fined up to $50 for each incorrect filing and face increased scrutiny from the IRS.
How to Avoid TIN Mismatches
To prevent these issues, it’s vital for businesses to double-check that the TIN and Legal Business Name they provide match exactly what is on file with the IRS. Here are some helpful tips:
- Match TINs and Business Names Precisely: Ensure that the business name used on tax documents mirrors exactly what is registered with the IRS. For example, don’t abbreviate “Corporation” to “Corp” unless that’s exactly how it’s filed with the IRS.
- Use Correct Forms: Always submit accurate W-9 forms for tax reporting purposes. For sole proprietors, verify whether you should use a Social Security Number (SSN) or an Employer Identification Number (EIN) as your TIN.
- Address Notices Promptly: If you or a merchant receive a CP2100 Notice, act quickly to correct the mismatch. Timely responses can prevent the start of backup withholding and avoid penalties.
IRS and State Penalties
In addition to backup withholding, the IRS can impose penalties of $310 per incorrect 1099-K filed. The IRS may impose penalties if a 1099-K form is filed with an incorrect combination of TIN and Legal Business Name, and it is the merchant’s responsibility to resolve this. Many states, such as California and Vermont, have also implemented additional withholding requirements, and other states may follow suit.
Ensuring that your business name and TIN match is critical to avoiding penalties, backup withholding, and other complications with the IRS. By staying compliant with IRS regulations and promptly addressing any discrepancies that arise, businesses can avoid unnecessary financial strain and keep their tax filings in good standing. Following the IRS’s detailed process, responding to CP2100 Notices, and maintaining precise records of business names and TINs are vital steps in safeguarding against potential issues with backup withholding.
For more detailed information on this process, refer to official IRS resources such as Publication 1281 and the Instructions for the Requester of Form W-9 from the IRS website.
