In IR-2018-205 the IRS urges small businesses and other payers to review the recently revised Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), which now reflects the drop (28% to 24%) in the backup withholding tax rate made by the Tax Cuts and Jobs Act (TCJA). The 24% rate was effective as of January 1, 2018.

Background

Backup withholding generally applies when a taxpayer fails to supply his or her correct taxpayer identification number (TIN) to a payer. But it can also apply if payees underreport interest or dividends on their income tax returns or fail to certify that they're not subject to backup withholding for underreporting of interest or dividends

Backup withholding

If applicable, a payer must withhold backup withholding tax from payments to the payee that would not otherwise be subject to withholding, such as gambling winnings on which tax has not been withheld, in addition to most kinds of payments reported on Form 1099, including: interest payments; dividends; rents, profits and other income; commissions, fees or other payment for work as an independent contractor; payments by brokers and in barter exchange transactions; payment card and third-party network transactions; and royalties. A payer must show any backup withholding on the payee's information return (e.g., Form 1099).

To end backup withholding, a payee must first correct any issues that caused the backup withholding. (See the Backup Withholding page, Publication 505, Tax Withholding and Estimated Tax and Publication 1335, Backup Withholding Questions and Answers.) The payee may claim a credit for backup withholding when filing the appropriate year's income tax return.

To report backup withholding, payers must use Form 945, Annual Return of Withheld Federal Income Tax, filing the form with the IRS by January 31, 2019 for the 2018 tax year. (See Publication 15, Employer's Tax Guide.)

Publication 1281

The revised Publication 1281 provides a series of 34 frequently asked questions (FAQs), including:

• What should a payer do with a backup withholding notice if the payer no longer does business with the payee? (Question 20)
• Should a payer backup withhold on a nonresident alien payee? (Question 22)
• What amount is subject to backup withholding with respect to security sales made through margin accounts? (Question 33)
• How should a payer treat erroneously withheld tax? (Question 34)

The revised publication provides detailed instructions for addressing: missing TINs and incorrect name/TIN combinations; when to send first and second withholding notices (referred to as "B" notices") and when following up with third and subsequent notices is necessary; and how the IRS matching process works to match name/TIN combinations on information returns with those provided on income tax returns.

In addition, Publication 1281 provides two flowcharts to help payers address incorrect names/TINs and missing TINs; sample first and second B notices; and IRS Instructions for the Requester of Form W-9, Form W-9, and the Form W-8 series and instructions.

Ernst & Young LLP insights

In addition to reviewing processes for compliance with the federal information reporting and backup tax requirements, businesses should also review state rules keeping in mind that most impose their own unique mandates.

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