IRS Revises SSN Verification Procedures to Avoid Backup Withholding
Author: Rena Pirsos, XpertHR Legal Editor
August 11, 2014
Under newly revised procedures announced by the Internal Revenue Service (IRS) in Revenue Procedure 2014-43, an independent contractor may stop or prevent backup withholding on reportable payments made by an employer if the independent contractor validates his or her Social Security Number (SSN) by presenting a Social Security card to the employer. The new procedures, which took effect on August 1, apply when an employer receives a second B notice from the IRS.
An employer (a.k.a. a service recipient in this context) must backup withhold income taxes from payments made to an independent contractor at the fourth lowest income tax rate in effect if it receives a notice from the IRS, called a B notice, that the independent contractor's name and SSN do not match.
Under Treasury Regulations 31.3406(d)-5(d) and 31.3406(d)-5(f), an employer that receives a B notice from the IRS regarding an independent contractor must send it to the independent contractor. If the independent contractor responds to the first B notice by certifying his or her SSN on a signed Form W-9, Request for Taxpayer Identification Number and Certification, the employer is not required to backup withhold.
If the employer receives a second B notice from the IRS within three years from the date of the first B notice, it must send the B notice to the independent contractor. However, an SSN certified on Form W-9 is not sufficient to stop or avoid backup withholding. Instead, after the second B notice, the employer must receive validation of the independent contractor's name and TIN (Taxpayer Identification Number) combination from the Social Security Administration (SSA) or the IRS.
Through August 1, 2014, an independent contractor who needed to validate his or her SSN to an employer could present a printout from one of the SSA's local offices. The SSA, however, discontinued providing SSN printouts on August 1, 2014. Under the new procedure, the independent contractor may provide the employer with a copy of his or her Social Security card showing the correct name and SSN.
An employer may rely upon the Social Security card, and is not required to backup withhold, only if the name and SSN combination on the card differs from the name and SSN combination that appears on the second B notice, or if there is a date appearing on the Social Security card that is no earlier than six months prior to the date of the second B notice. The employer must use the correct name and SSN combination on all future information returns (e.g., Forms 1099) and statements pertaining to the independent contractor.
If the independent contractor does not have a Social Security card, he or she must apply for a new or replacement card by completing and filing Form SS-5, Application for a Social Security Card, with the SSA. If the independent contractor's name and SSN combination is not current or correct, he or she should update his or her records with the SSA.
In light of the new procedures, the IRS will update Pub. 1281, Backup Withholding on Missing and Incorrect Name/TINs. An employer should use the language that will be provided in updated Pub. 1281 to instruct the independent contractor regarding the revised procedures for validating his or her SSN after receiving a second B notice.