Received a CP2100A Notice from the IRS? Time Is of the Essence
Are you a business owner who recently received a CP2100A Notice from the IRS informing you of discrepancies between information reported to the IRS and the IRS's database? If so, it's time to take action.
While getting a notice from the IRS is never pleasant, ignoring it—or thinking you'll get to it later—can lead to hefty penalties and interest charges. The good news is there are steps you can take right now to reduce your exposure and minimize potential damage. The key is understanding exactly why this notice was issued and proactively addressing the discrepancy as soon as possible since time really is of the essence when responding.
What are IRS CP2100 and CP2100A notices?
IRS CP2100 and 2100A notices are letters the IRS sends to inform payers who issue 1099 forms without a taxpayer identification number (TIN) or where the TIN doesn't match the name in the IRS records.
These incorrect TIN notices can stem from a variety of information returns, including reportable payments on:
Form 1099-NEC Nonemployee Compensation Form
Form 1099-INT Interest Income Form
Form 1099-DIV Dividends and Distributions
Form 1099-MISC Miscellaneous Income
Form 1099-B Proceeds from Broker Transactions
Form 1099-K Payment Card and Third-Party Network Transactions
Form 1099-PATR Taxable Distributions Received from Cooperatives
Form 1099-OID Original Issue Discount Form
Form W-2G Certain Gambling Winnings
CP2100 and 2100A notices will explain why the discrepancy occurred and what steps need to be taken by the taxpayer to resolve the issue. It also informs the issuer that they may need to begin backup withholding.
The two primary differences between the two versions of this notice are the number of errors in the taxpayer's 1099. Generally, the IRS issues a CP2100 notice on CD, DVD or paper when there are numerous TIN matching issues with their 1099s. IRS CP2100A notices are issued on paper when the taxpayer's 1099s contain fewer than 50 errors.
Why is it important to pay attention to CP2100 and CP2100A notices?
The IRS generally gives taxpayers 15 days from the date of the notice to respond and provide any additional information needed to resolve their discrepancies. If you fail to take action within the specified window, you may face stiff penalties.
The penalties vary depending on how many errors there are in your 1099s and the type of errors contained in them. The penalty can be as high as $280 per information return or $570 per information return if the failure is due to intentional disregard, with no maximum penalty
For companies that issue dozens or hundreds of 1099s to independent contractors, that can easily add up to thousands of dollars in penalties.
How to respond to a CP2100 or CP2100A notice
Responding to CP2100 and 2100A TIN matching error notices is labor intensive. You may need to review multiple years of data to determine how to address each incorrect TIN.
If it's a simple mistake—for example, you inadvertently transposed some numbers when entering a taxpayer identification number, that's an easy fix. You just need to enter the correct payee's TIN in your account records and report accurate information the next time you issue information returns.
However, if the fix isn't that simple, you'll need to send IRS B Notices to the payees. However, your required actions depend on whether this is the first B Notice for the payee.
First B notice
If this is the first time a payee has been listed on a CP2100 or CP2100A notice in the past three years, then you need to send the payee a B notice and Form W-9 within 15 business days.
The B Notice is a warning from a payer to a payee to update their tax information on file with the payer because it doesn't match IRS records.
You should update your account records if the payee sends corrected information. However, you don't need to issue a corrected 1099.
If the payee doesn't respond to the B Notice within 30 business days, you must begin backup withholding at a flat 24% rate. If you made a one-time payment to the payee and will never pay them again, you don't have a backup withholding obligation.
Once you're responsible for backup withholding, you'll need to file IRS Form 945, Annual Return of Withheld Federal Income Tax, with the IRS.
After that, if you issue any payments to the payee without backup withholding, you could become secondarily liable for the unwithheld tax. Backup withholding errors can also be costly. For example, if you send $10,000 in reportable payments and neglect to take out backup withholding, you could be subject to a $2,400 assessment for the unwithheld tax plus penalties and interest.
You can find additional instructions for handling backup withholding on payments in IRS Publication 1281.
Second notice
If this is the second time the payee has been listed on CP2100 and CP2100A notices within the past three years, you have 15 business days to send a second B Notice to the payee. However, you don't need to send them a Form W-9.
Instead, the payee is required to certify their TIN. Individuals can do this by providing a copy of their Social Security card or contacting the IRS to get their employer identification number (EIN) validated via a Letter 147C.
You must begin backup withholding if the payee doesn't certify their TIN within 30 business days.
IRS Publication 1281 also includes a B notice template letter to send to payees who need to correct their Form W-9 information or certify their TIN.
How to avoid IRS B Notices
The best way to avoid sending B notices is to follow a few Form 1099 best practices, including requiring W-9s from all payees and utilizing the IRS's free TIN matching service.
CP2100 and CP2100A notices can be scary, but ignoring them will only make the situation worse, so be sure to act promptly to avoid any penalties. If you need help issuing information returns, dealing with incorrect TINs or correcting backup withholding errors, schedule a call with Slate today.