What is IRS Backup Withholding?

When it applies, backup withholding requires a payer to withhold tax from income not otherwise subject to withholding. You may be subject to backup withholding if:

• You don't give the payer your TIN in the required manner.
• The IRS notifies the payer that the TIN you gave is incorrect.
• The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.
• You fail to certify that you're not subject to backup withholding for underreporting of interest and dividends.

The Internal Revenue Service (IRS) creates backup withholding notices (also known as “B” notices) based on the provider’s tax identification number (TIN) or TIN owner name combination from the previous tax year. If an insurance company’s files do not match what the IRS has on file for a TIN or TIN owner name, the TIN/TIN owner name is put on the B Notice file. A TIN can be a Social Security number (SSN) or an Employer Identification Number (EIN).

Form 1099-MISC is the tax form that shows payments that an insurance company issues normally to a provider, vendor or independent contractor holder. If applicable, it shows any federal income taxes withholding amounts for each TIN. Most Insurance companies will mail the Form 1099-MISC forms to providers at the end or beginning of the year.

If your office receives a B-Notice from an Insurance company, it is because the IRS has sent notification that the name and TIN combination (your SSN or EIN) on file for that company doesn’t match their records. The IRS considers a record as incorrect if either the name or TIN shown on an account doesn’t match the name and TIN combination in their files, or the files of the Social Security Administration (SSA).

Unfortunately, if this isn’t corrected in a timely manner, the law requires the company to withhold federal backup income taxes at the rate of 28 percent, and if applicable state backup withholding income taxes.