Successfully onboarding a new vendor means more than gathering a few particulars. You need the correct information, and along with validating the vendor, the data needs to be verified. The vendor’s tax identification number, or TIN, is a critical piece of information requiring verification.
Of course, if you do not have a TIN for a vendor and anticipate payments will exceed the payment reporting threshold, you must commence backup withholding on the vendor. Per the IRS, “Most of the time, when a payer makes a payment to a payee who didn’t supply their TIN or supplied an obviously incorrect TIN, the payer must backup withhold when they make the payment.” But, backup withholding involves additional administration activity and cost organizations would prefer to avoid.
At the same time, if you get the wrong TIN, or you somehow get the TIN wrong, come reporting season, the IRS will issue you a CP2100 or CP2100-A, starting the B-notice process. You must then contact the vendor (within 15 days) and request a correct TIN. You must begin backup withholding until the correct TIN is received.
An incorrect TIN will also likely generate a proposed penalty notice, 972-CG. The IRS issues this penalty notice for late 1099 filings and for filing 1099s with missing or incorrect TINs.
IRS penalties became more consequential several years ago than previously. The penalty amounts, formerly a “slap on the wrist,” increased significantly. And the penalty for intentional disregard rose even more, with no maximum limit. The penalties are adjusted for inflation and have increased annually since 2016.
Late penalties are based on when you file the information returns, but bad TINs are penalized even when you file 1099s on time. See the tables on the IRS site for recent and current penalty rates. For more information, including exceptions to penalties, see the current IRS General Instructions for Certain Information Returns.
So, you want to avoid penalties. How can you do that? Through TIN verification.
TIN Verification Process
Several years ago, the IRS introduced its TIN Match program for verification of TINs. Payers can look up individual TIN/vendor name combinations online or submit bulk TIN/name pairings via a batch process. Payers must first register to use IRS e-Services, now through an ID.me third-party account. Verification requires the registrant to provide personal tax information for confirmation.
Many organizations, however, prefer to use third-party services that can handle TIN verifications for you. (VendorInfo’s supplier onboarding portal includes TIN match in its suite of validations and verifications.)
A user or agent submits a vendor name and TIN combination to the IRS TIN Match program and receives back confirmation of whether that name and number combination matches IRS records. The system is not a query for finding out TINs. It will not give back the TIN belonging to a name or a name belonging to a TIN for obvious security reasons. It is a verification system that confirms whether the pair you submit match their records.
A third-party vendor portal will run your vendor names and TINs through the IRS system and return any vendor/number combinations that do not match IRS records. Then, you must contact the vendor for the correct ID. You must backup withhold if you do not receive a valid TIN from the supplier.
The backup withholding rate is 24 percent. It is subject to change.
Summary
In addition to collecting the appropriate tax identification form, companies should verify that the vendor’s name and TIN match the IRS records to ensure correct tax reporting and withholding and avoid unnecessary B-notices and penalties. Third-party services or a vendor portal like VendorInfo will handle TIN verification for you and notify you of mismatches. Without a valid vendor TIN, you should backup withhold.
To learn how VendorInfo handles TIN verification, bank account verification and sanctions list checking for you, contact us.