10/16/2018
***** IMPORTANT *****
Be sure you request W-9's from all payees or you could lose your deduction!!! Call us if you have any questions.
Internal Revenue Agents, recently received an employment tax refresher week-long course.
At the course they were given a new directive: If a payment required a 1099, and a W-9 cannot be presented during the audit by the payor, assess a 28% to 31% backup withholding tax, or give the taxpayer the option of having the expense disallowed. Of course FTB has had a statute for many year allowing them to toss out expenses for which a 1099 was required but not issued.
Backup withholding is authorized by Regs and statute as follows:
Regulations Section § 31.3406(a)-1 Backup withholding requirement on reportable payments.
(a)Overview. Under section 3406, a payor must deduct and withhold 31 percent of a reportable payment if a condition for withholding exists. Reportable payments mean interest and dividend payments (as defined in section 3406(b)(2)) and other reportable payments (as defined in section 3406(b)(3)). The conditions described in paragraph (b)(1) of this section apply to all reportable payments, including reportable interest and dividend payments. The conditions described inparagraph (b)(2) of this section apply only to reportable interest and dividend payments.
(b)Conditions that invoke the backup withholding requirement -
(1)Conditions applicable to all reportable payments. A payor of a reportable paymentmust deduct and withhold under section 3406 if -
(i) The payee of the reportable payment does not furnish the payee's taxpayer identification number to the payor, as required in section 3406(a)(1)(A) and § 31.3406(d)-1; or
(ii) The Internal Revenue Service or a broker notifies the payor that the taxpayer identification number furnished by its payee for a reportable payment is incorrect, as described in section 3406(a)(1)(B) and § 31.3406(d)-5.
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IRC § 3406 - Backup withholding
(a)REQUIREMENT TO DEDUCT AND WITHHOLD
(1)IN GENERAL. In the case of any reportable payment, if—
(A)
the payee fails to furnish his TIN to the payor in the manner required,
(B)
the Secretary notifies the payor that the TIN furnished by the payee is incorrect,
(C)
there has been a notified payee underreporting described in subsection (c), or
(D)
there has been a payee certification failure described in subsection (d),
then the payor shall deduct and withhold from such payment a tax equal to the product of the fourth lowest rate of tax applicable under section 1(c) and such payment.
(2)SUBPARAGRAPHS (C) AND (D) OF PARAGRAPH (1) APPLY ONLY TO INTEREST AND DIVIDEND PAYMENTS
Subparagraphs (C) and (D) of paragraph (1) shall apply only to reportable interest or dividend payments.
(b)REPORTABLE PAYMENT, ETC.For purposes of this section—
(1)REPORTABLE PAYMENTThe term “reportable payment” means—
(A)
any reportable interest or dividend payment, and
(B)
any other reportable payment.
(2)REPORTABLE INTEREST OR DIVIDEND PAYMENT
(A)In generalThe term “reportable interest or dividend payment” means any payment of a kind, and to a payee, required to be shown on a return required under—
(i)
section 6049(a) (relating to payments of interest),
(ii)
section 6042(a) (relating to payments of dividends), or
(iii)
section 6044 (relating to payments of patronage dividends) but only to the extent such payment is in money.
(B)Special rule for patronage dividends
For purposes of subparagraphs (C) and (D) of subsection (a)(1), the term “reportable interest or dividend payment” shall not include any payment to which section 6044 (relating to patronage dividends) applies unless 50 percent or more of such payment is in money.
(3)OTHER REPORTABLE PAYMENTThe term “other reportable payment” means any payment of a kind, and to a payee, required to be shown on a return required under—
(A)
section 6041 (relating to certain information at source),
(B)
section 6041A(a) (relating to payments of remuneration for services),
(C)
section 6045 (relating to returns of brokers),
(D)
section 6050A (relating to reporting requirements of certain fishing boat operators), but only to the extent such payment is in money and represents a share of the proceeds of the catch,
(E)
section 6050N (relating to payments of royalties), or
(F)
section 6050W (relating to returns relating to payments made in settlement of paymentcard transactions).
