Payees Must Respond to
Backup Withholding Notices

Four million taxpayers may soon be asked for correct identification numbers by banks or companies that made interest, dividend or other payments to them during 1990. Failure to provide the numbers can result in a 20 percent backup withholding of federal income on future payments. In some cases, such backup withholding is effective immediately.

"We're in the process of sending lists of incorrect taxpayer numbers to about 270,000 payers," said John Devlin, director of the Internal Revenue Service's information reporting programs. "If the erroneous number came from the income recipient, the payer will send a notice requesting the correct number. Payees who don't return a statement certifying the correct number within 30 days will be subject to backup withholding."

The required number for individuals is the social security number. For businesses, it's the employer identification number issued by the IRS. The notices sent by the payers explain how to certify the correct number as well as how to verify the number with the appropriate federal agency if necessary.

"Married individuals may have neglected to update the Social Security Administration with their new names," Devlin said. "Businesses sometimes get their employer numbers under one name and then use a different trade name. Or taxpayers transpose digits when putting the number on a form. However it happens, we catch the name/number mismatch and notify the payers."

This is the second year of the IRS notification program. It covers the various forms in the 1099 series, which are used to report interest, dividends, broker/barter proceeds, patronage dividends, original issue discounts and miscellaneous payments.

"For some who received a notice last year, this may be the second notification of a client's incorrect number," Devlin said. "If so, backup withholding is to begin immediately and continue until the issuing agency -- Social Security or IRS -- certifies the correct number. It will not be enough for the payee to certify the correctness, as it is with a first notification."

Taxes collected under backup withholding are reported on the Form 1099 issued at the end of the year. The payee gets credit for them when the tax return is filed, just as taxes withheld from wages are credited. The payer does not refund withheld taxes to the payee, even if the payee later makes a proper certification of the correct number.

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