Your Responsibilities in Handling a Payee's TIN

The purpose for obtaining a TIN from the payee is to have a number to put on the 1099 form. The 1099 form is what a payor uses to report to the IRS the amount of interest paid to a particular payee. The IRS uses the TIN on the 1099 form to pull together the payee’s tax return and all other 1099 forms from other payors relating to the payee. The IRS can then determine whether the payee reported all interest income on his or her return. Obviously, it is important to the IRS that 1099 forms carry the correct TIN for the particular payee to which they relate.

It goes without saying that the TIN supplied to you by the payee is the TIN you should put on Form 1099. If it isn’t—if somehow between the time the payee supplied you with the number and the time you prepare your 1099 forms you mix up the number in some way—you will probably be liable for the penalty for failing to furnish the correct TIN on your 1099. Both the due diligence standard and the reasonable cause standard specify how carefully and how quickly you must handle the payee’s TIN.

Under the due diligence standard, the payor is liable for the penalty unless the payor exercised that degree of care in processing the taxpayer identification number and name and in furnishing it on the information return (Form 1099) that a reasonably prudent payor would use in the course of the payor’s business in handling account information, such as account numbers and account balances. [26 CFR 35a.9999-3, Q&A 51] Under the reasonable cause standard, the payor must act as would a reasonably prudent person under the circumstances in the course of its business in determining its filing obligations and in handling account information, such as account numbers and balances. [26 CFR 301.6724-1(d)(1)(i)] In other words, under either standard you will, in general, need to be as careful with a payee’s name and TIN as a reasonable financial institution would be in handling general account information. If not, you will be liable for the penalty for including an incorrect TIN on the 1099 form.

The regulations also spell out how quickly you must process a TIN. A payee might provide you with a new TIN after you are notified that the payee previously supplied an incorrect TIN. The payee would do this to prevent backup withholding from starting—or to stop it if it has already begun. The rules determine how quickly you must act to stop backup withholding or to prevent it from starting. The rules also dictate how quickly you must act to include the new TIN on future 1099 forms you file.

For purposes of preventing backup withholding from starting—or stopping it once it has begun—you can consider the TIN to have been received at any time within 30 calendar days after you actually receive it. [26 CFR 31.3406(e)-1(f)] So when, as we’ll see later, a rule says that you must stop backup withholding when you receive a certified TIN from the payee, you have 30 calendar days after the actual day of receipt in which to do so. [26 CFR 31.3406(e)-1(b)(2)] Of course, you are free to consider the TIN received at any time during this 30-day period; you do not have to wait until the 30th day to consider it received.

For purposes of including the new TIN on future 1099s: You must include the new TIN on any 1099 which is due (without regard to extensions) more than 30 calendar days after the date you received the new certified TIN if the TIN is provided in response to a “B-notice” (one of two types of notices from the IRS informing you of an incorrect payee TIN—the other is a “penalty notice”). [26 CFR 31.3406(d)-5(h)] For example, suppose you receive a B-notice and, in response, make the proper mailing to the payee. The payee subsequently provides you with a new certified TIN. The B-notice regulations say that if the due date of the next 1099 you file on the account is more than 30 calendar days away, you must include the new TIN on the 1099. If the due date is 30 calendar days or less away, you need not include the new TIN—i.e., you will not be penalized if you include the old TIN.

However, there doesn’t appear to be a 30-day grace period if the payee supplies the TIN in response to a “penalty notice” (the other type of notice from the IRS of an incorrect TIN). The regulations discussing penalty notices state you must include the new TIN on any 1099s you file after receiving the new TIN. [26 CFR 301.6724-1(e)(1)(iv)] The regulations make no mention of the 30-day grace period provided in the context of stopping backup withholding or receiving a new TIN in response to a B-notice mailing. Our guess is that this is an oversight by the IRS and that you would be allowed 30 calendar days in this context as well. We cannot think of any rationale for allowing the grace period in some circumstances and not in others.