Have you just received an IRS Notice CP2100 or CP2100A because of some discrepancies on your 1099 filing? Also known as an IRS B Notice, the IRS notifies the 1099 filer that a name and taxpayer identification number (TIN) don’t match the IRS database and need correction.
Failure to comply and rectify the 1099 filing can result in withholdings, penalties, or audits. To ensure your business is correctly reporting your 1099 and to avoid such attention from the IRS, we’ll explain how to handle an IRS B Notice, address any common issues with B Notices, and help you avoid them in the future.
What is an IRS B Notice?
First, take a breath. These are common notices, and businesses that report a decent volume of Form 1099 will eventually get a B Notice purely due to circumstances you can’t control, like a payee changing their legal name without notifying you. As long as you don’t ignore it, B Notices are manageable. They, unfortunately, just create more work for you.
When you file a Form 1099, the IRS validates whether the name and TIN for an individual are correct and match the IRS database. When a mismatch occurs, the IRS will send a Notice CP2100 or CP2100A, usually around September or October, to ensure you correct in time for tax returns. The IRS can’t match the reported income to the individual’s tax return without the correction. Unfortunately, if a mistake is found, even if it isn’t within your control, it will become your responsibility as the filer to fix it.
If you have more than fifty errors in Form 1099, you’ll receive a Notice CP2100. This may include a CD or DVD listing all the errors, such as missing TINs or mismatched entries. Less than fifty errors, the filer will receive a paper Notice CP2100A.
Related Link: New Form 1099-NEC: How to Prepare
What to Do if You Receive a B Notice
If you receive a B Notice, you’ll need to complete several tasks within the specified timeline:
Identify all payees with incorrect information listed on the B Notice.
- Contact the payee within 15 business days from receiving the B Notice or the date on the notice (whichever is later).
- Update your system with the corrected information for the following Form 1099 reporting cycle.
- Apply backup withholdings to payments made to the payee more than 30 business days from the date of the B Notice if you didn’t receive documentation to fix the B Notice before the date.
Follow the IRS Publication 1281 for a detailed timeline and actions required. This includes a template letter to send to your payees to get the corrected information.
If this is the first time an incorrect name and TIN for an individual has been identified within the last three years, that payee will need to complete a valid Form W-9 and submit it to the filer to avoid backup withholding. If the payee submits the same name and TIN that was reported as invalid in the B notice, the filer can accept the form and submit it.
If an individual has been identified twice in B Notices within three calendar years, they are subject to backup withholding, and a Form W-9 from the payee won’t stop it. To avoid backup withholding, you need to collect a social security card from the individual or an IRS Letter 147C from non-individuals. You’ll need to keep track of this because of the IRS rules.
Worried you’re not addressing everything in your B Notice? Contact Parachor Consulting to leverage their corporate tax expertise.
Related Link: Learn Your Tax Liability & How to Calculate It
Penalties for Not Complying with the B Notice Procedure
The IRS is not to be trifled with, and you should do everything you can to comply with the B Notice process. If you fail to fix B Notice errors within the allotted timeframe, the IRS can charge a $270 penalty for each mismatched name and TIN, which will be sent about a year later in an IRS Notice 972CG.
To avoid an IRS Notice 972CG, you should follow IRS Publication 1281 precisely.
Two Methods for Reducing B Notices
While some circumstances are unavoidable and out of your control, there are two methods for reducing the chances of getting a B Notice:
- Robust Payee Documentation Process: Form W-9 isn’t required for all payees subject to a 1099-MISC or 1099-NEC. But having all payees complete a Form W-9 is an easy way to validate if their information is correct and provides adequate documentation for a penalty-abatement request.
- TIN-Matching System: This is a free IRS service that can validate your payees by running their name and TIN through the IRS database. You’ll need to register with the e-service to validate your payee’s information.
Special Circumstances for Payees on the B Notice
There are a few rules a filer must comply with for special circumstances such as:
- One-Time Payees: The filer must send them the B Notice letter notifying them of the mistake, but the filer does not need to do a backup withholding because there are no future payments.
- Exempt Payees: The filer doesn’t need to send a B Notice letter notifying them of the mistake for exempt payees. But the filer should make a record of the exemption for penalty abatement.
- Foreign Payees: Foreign payees should complete a Form W-8, and the filer should submit an IRS Form 1042-S for these payments instead of a Form 1099. IRS Publication 515 has more information about documenting payments to foreign payees.
Bottom Line: Don’t Ignore B Notices
To avoid penalties, it’s essential to comply with all B Notices you receive. If you are worried about accurately recording and validating your 1099 payees, you should consider leveraging an accounting agency that specializes in handling 1099 employees.
Parachor Consulting offers tax consulting services with extensive expertise in small to medium-size enterprise needs. Our tax experts will ensure reduced IRS B Notices so that you can focus on your business.
Want professional help filing your Form 1099? Contact Parachor Consulting to minimize your chances of incurring a B Notice.
Related Link: What is the Payroll Tax Deferral? (CARES Act Guide)