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Information Reporting and Withholding: Reasonable Cause Part II - Can you Request a Waiver?


Contributed by Comply Exchange
May 15, 2019



Who is Impacted

Any U.S. withholding agents and payors that submitted U.S. tax or information returns with a missing or incorrect taxpayer identification number (TIN) may want to consider whether they are in a good position to request a waiver of any potential penalties due to reasonable cause.

What Changed

As a follow up to our recent article on reasonable cause, this article will address reasonable cause relief from penalties for information returns that are filed with missing or incorrect taxpayer identification numbers (TINs).

Missing or Incorrect TINs

TINs can be a Social Security Number (SSN), an Employer Identification Number (EIN), an Individual Taxpayer Identification Number (ITIN), or an Adoption Taxpayer Identification Number (ATIN).  If a payor does not have a payee’s TIN or the TIN is obviously incorrect, then the TIN is considered missing.  An obviously incorrect TIN is one that does not have nine numerical digits or that includes alpha characters.  The IRS considers a name/TIN combination to be incorrect when it does not match or cannot be found in their records.

Notice 972CG, Notice of Proposed Penalty

For information returns filed with missing or incorrect TINs, the IRS will send the filer a Notice 972CG (not to be confused with a CP2100 or 2100A Notice, which is a B Notice, and the topic of our upcoming article!).  This Notice will include a list of the information returns filed with missing or incorrect name/TIN combinations.  Filers that receive a Notice 972CG must respond within 45 calendar days (60 days for non-U.S. filers) from the notice date.  They may request additional time to respond by submitting a written request to the address listed on the notice before the end of the 45 or 60 day period.  If the filer does not respond by the time indicated on the letter, the IRS will deny the waiver request and assess the proposed penalty.

Reasonable Cause

To show that the failure to include a correct TIN was due to reasonable cause and not wilful neglect, payors must establish that:

  • They acted in a responsible manner both before and after the failure occurred (generally, making an initial solicitation or request for the payee’s name and TIN, and if required annual solicitations), and
  • There were significant mitigating factors with respect to the failure (for example, an established history of filing information returns with correct TINs), or
  • The failure was due to events beyond the filer’s control.

Upon receipt of the newly provided TIN, payors must use that TIN on any future information returns.

Manner of TIN solicitations

In order to meet reasonable cause criteria as acting in a responsible manner, payor must solicit the TINs of payee.  The payor must make an initial solicitation at account opening or at the time the payor establishes a relationship with the payee.  Depending on the payee onboarding process, the payor may request this information orally, by written request, or by electronic communication.  The manner in which the payor requests the TIN is specified by the regulations.  As an example, the payer may request a TIN orally for payments to a U.S. person for personal services income, but not for payments of interest or dividend income.  If a payor does not have a correct payee TIN on file after the initial solicitation, then the payor will have to conduct annual solicitations for a correct TIN.  Annual solicitations may be made in one of the following ways:

Annual solicitations by mail.  These solicitations must include three items to the payee:

  • A letter stating that the payee must provide an accurate TIN and that failure to do so may result in a penalty.
  • Form W-9, Request for Taxpayer Identification Number and Certification, as applicable or a substitute document that meets the substitute form requirements specified by the regulations and IRS guidance.
  • A return envelope. 

Annual solicitations by telephone.  These solicitations are available where the payor is allowed to request a TIN orally, and may be conducted by:

  • Calling each payee with a missing or incorrect name/TIN combination and speaking to an adult member of the household, or to an officer of the business or organization.
  • Requesting the payee’s TIN.
  • Informing the payee of the penalty if the TIN is not provided.
  • Maintaining contemporaneous records showing the solicitation was made properly.
  • Providing the records to the IRS, if requested.

Annual solicitations electronically.  These solicitations may be made by establishing an electronic system for payees to receive and respond to solicitations. 

The electronic system must, at a minimum:

  • Confirm that the information received is the information sent, and document all occasions of user access that result in the submission.
  • Be reasonably certain the person accessing the system and submitting the form is the person identified on the Form W-9.
  • Provide the same information as the paper Form W-9.
  • Provide for a penalty of perjury statement.
  • Require as the final entry in the submission, an acceptable form of electronic signature by the payee, whose name is on the Form W-9 and authenticates and verifies the submission.
  • Be able to supply a hard copy of the electronic Form W-9 if requested by the IRS, and

To claim reasonable cause for conducting the required solicitation in the appropriate manner, the payee must have made the solicitation for the tax year that the penalty is being proposed.  An example of this would be where a payor made the initial solicitation during 2017 and included the TIN provided by the payee on its 2017 information return. If the payor can demonstrate that it acted in a responsible manner for 2017, then the IRS may waive the penalty.  

As a reminder, payors must provide a separate written explanation to substantiate reasonable cause for proposed penalties related to late filing and/or failure to file information returns electronically.  Please see our article about reasonable cause for reference.

How to Implement

Where filers have identified a TIN failure, they may want to consider the following:

  • If you provide for an electronic system, consider including automated TIN checking.
  • Does it make sense to use the IRS TIN Matching Program?  This will help to eliminate any TIN issues when filing.
  • Compare the IRS payee listing with your records to determine if the name/TIN combinations agree or disagree with your records. 
  • Identify whether you have completed required initial or annual solicitations.
  • Consider developing name controls on returns submitted electronically.  See IRS Publication 1586 for examples.

Are you considering reasonable cause relief this year?  Let us know what you are thinking in the comment section of LinkedIn or email us!

Resources

Treasury Regulations relating to information reporting penalties for which reasonable cause relief may be available:

  • Failure to file correct information returns, 301.6721-1.
  • Failure to furnish correct payee statements, 301.6722-1.
  • Failure to comply with other information reporting requirements, 301.6723-1.
  • Reasonable cause Other regulations that apply to specific forms may supersede all or parts of these regulations, 301.6724-1.

 

Tags: tax | regulation | penalties | Tax | Regulations | services | Other | business | interest

 

 

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