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Onboarding New Vendors – The Consequences of Doing It Wrong

By Carol Kassem, IRSCompliance, Inc.

Onboarding a new vendor is typically a fairly easy process.

You request the name and address of the vendor, Social Security Number (SSN) or Employer Identification Number (EIN) and you are done, right?

But not so quick! The way in which you request certain information about a vendor may not be compliant with IRS requirements. The most important part to the onboarding process is to correctly classify the vendor. Is this a U.S. person or a foreign person? What information do you need to request? How do you make that determination?

IRS requires that you solicit specific documentation from any new vendor to properly confirm the identity of the person or entity to which you are going to make payments. Proper documentation includes IRS Forms W-9, W-8, or 8233. The Form that you solicit will be dependent on the initial information that you have about a vendor — name, U.S. or foreign address, as well as the type of payment that you will be making.

Based on this information that you have, you must solicit the Form that is most appropriate for this new vendor. Given that the information that you have solicited will be used to issue Forms 1099 or 1042-S at yearend to report certain payments to a vendor and the IRS, you need to make every effort to ensure that the information is valid.

So, what happens if the information is not correct?

If you have used incorrect information to report payments at yearend, you may be receiving a notification (CP2100) from the IRS around September of the following year typically referred to as the “B Notice” process. The CP2100 notice will require you to solicit new documentation from vendors so that you will be able to report future payments using corrected information. This notification must never be ignored and is time sensitive with respect to when solicitations are performed.

Consequently, the failures that were included in the B Notice process will ultimately appear on a penalty notice (972CG) from the IRS that will propose to assess your organization penalties for the failures that were reported to the IRS. The penalty for this type of failure is $260 per return — charges that could prove to be catastrophic for many organizations.

What does all of this mean for your organization? In a nutshell, penalties that you may be assessed are the direct result of the validity of the information that you solicited from the vendor at the time that you added the account to your system. This means that you need to take the necessary steps to ensure that you are getting the most accurate information from the vendor. Any organization should implement the following:

  • have written policies and procedures in place that require that all employees who are responsible for onboarding new vendors must follow the same, standard procedures in all cases to minimize reporting failures;
  • have a company policy to review solicited documentation that is returned;
  • if solicitations are required (missing or obviously incorrect TINs), make sure that these mailings are performed timely; and
  • utilize the IRS TIN Matching Program to confirm the validity of TINs.

Onboarding a new vendor is not complicated if you understand the IRS requirements. Just be sure that you are getting the information and documentation that you need to be compliant to avoid significant future penalties.

To see how VendorInfo onboarding solutions can benefit your operations and your company click here to request more information or call (678) 335-5735.

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