Every organization that does any volume of Form 1099 reporting will eventually receive a B Notice due to circumstances beyond their control. Each year, the IRS sends out B Notices to IRS Form 1099 filers who’ve submitted a name and taxpayer identification number (TIN) combination that doesn’t match the IRS database.
If, for example, a payee changes their name or TIN without notifying the filer, a B Notice will be triggered in the form of IRS Notice CP2100 or CP2100A, and the filer will have a 15-day window to respond to the notices and send updated TIN solicitations.
As any organization that has been through a Form 1099 audit can attest, this is something you want to avoid at all costs. Those organizations generally take their B Notice process seriously in pursuit of that goal, as ignoring these requirements can lead to:
- Significant fines and penalties
- Exposure for backup withholding that should have been applied to payments made to identified recipients
- IRS scrutiny and unwanted audit attention
B Notice Overview
When annual Forms 1099 are filed, the IRS undergoes a process to match the recipient name and TIN information on the Forms 1099 they receive with name and TIN combinations in the IRS taxpayer database.
The IRS relies on this matching process to maintain the integrity of the self-reporting aspect of the US income tax system. When name and TIN combinations don’t match the database, the IRS can’t reconcile the income reported with an individual or non-exempt entity’s US tax return.
Each of these filings may represent lost tax revenue—or, at minimum, tax revenue the IRS can’t track if it isn’t included on a tax return.
B Notice Abatement
IRS Notice 972CG, which outlines accrued penalties, is automatically generated and expected to be sent approximately one year after the receipt of a Notice CP2100 or CP2100A.
It’s critical to follow each step required in IRS Publication 1281—where exact actions and timelines for resolving the notice are specified and updated periodically—and document compliance upon receipt of the CP2100 or CP2100A. These records are essential for requesting abatement for a Notice 972CG penalty.
Filers who follow the required procedures in Publication 1281 shouldn’t pay a 972CG penalty upon receipt of the notice, as it may negate a penalty abatement argument for the filer down the road.
Some filers may receive a small penalty and determine the cost of paying the penalty will be less than the cost of drafting an abatement letter. However, abatement request is a necessary exercise, as paying the penalty rather than arguing for abatement will weaken a payer’s argument in future abatement requests that the filer has a history of compliance.
Penalties for late filing can increase annually and will continue to be adjusted to ensure that filers don’t become more comfortable accepting the penalty rather than completing the required work.
As of 2020, the current penalty stands at $270 per item identified on a Form CP2100 or CP 2100A. The IRS has capped penalty amounts at different points for small businesses—$1.113 million in 2019—and large businesses—$3.339 million in 2019.
If the IRS identifies a penalty for intentional disregard of the reporting requirements, there’s a $550 per item minimum—or 10% of the amount not reported—with no cap.
A Form 927CG penalty should be answered within 45 days. If a filer needs additional time to submit a response, a request should be submitted to the address on the notice.
The IRS generally allows an additional 30- to 60-day extension upon request of the filer without question. If a filer has a legitimate reason for additional time beyond the initial 30-60 days, it may be granted.
This doesn’t mean the IRS would grant a request for additional time for the filer to comply with the B Notice procedures, only that it will grant additional time for the filer to reply to the penalty notice.
To reduce the applied penalty, a payer must establish reasonable cause demonstrating:
- They acted in a reasonable manner.
- There were either significant mitigating factors or events beyond their control.
Both concepts must be supported with evidence rather than simply stated in the abatement request.
To establish a payer acted in a reasonable manner, the payer can document:
- Robust account opening procedures in which the payer obtains Forms W-9 from all payees
- Payer’s validation procedures of information provided on Forms W-9 including use of the IRS TIN matching system
- Compliance with all B Notice provisions documented in IRS Publication 1281
- Implementation of backup withholding on accounts that failed to comply with the TIN request
To establish the significant mitigating factors or events beyond the payer’s control, the payer can document:
- History of compliance with the information reporting, backup withholding, and B notice requirements—the payer has never incurred a penalty for noncompliance
- Statistics that work for the payer—for example, B Notices represent .2% of all Forms 1099 issued for the year
- Names of vendors who provided incorrect information on Forms W-9 or failed to update information in a timely manner
Documentation to prove a filer’s argument also can include:
- Date of the Notice CP2100 receipt
- Confirmation of a records review to identify first and second B Notices
- Document requests, including examples of the requests for first and second B Notices, and their mailing dates to evidence compliance with the 15 business-day window
- Categorization of items identified in the Notice CP2100 and CP2100A that weren’t sent B Notices because they were either exempt recipients, annual-solicitation recipients, or provided an updated TIN after Form 1099 reporting but prior to receipt of the Notice CP2100
- Evidence that error documents have been collected
- Confirmation of backup withholding if valid cure documents weren’t provided
- Overview and outline of procedures to onboard payees to confirm a robust documentation process
B Notice timing, responses, and abatement requests generally don’t change much year over year, so each organization should have these procedures well documented and ready to go upon receipt of a Notice CP2100 or CP2100A, or a 972CG.
Templates should be created with approved messaging to send to B Notice recipients that will request the proper information. The IRS provides a template letter in Publication 1281 that can be useful for this purpose. Templates for 972CG abatement requests also should be created to provide structure to the responses year after year.
Organizations well-practiced in B Notice compliance are better positioned to reduce penalties and fines as well as administrative headaches.
We’re Here to Help
To learn more details about B Notice compliance, please see 14 Questions and Answers About IRS B Notices.
If you have questions about B Notice penalty abatement, contact your Moss Adams professional.