Tax information reporting is complex, and potentially costly errors lurk in every 1099 form transmitted to the IRS.
Reporting inaccuracies can lead to B notices (CP2100) from the IRS, which require time and effort to address, and can trigger customer or vendor income being subject to 24 percent backup withholding. Errors can also result in expensive IRS penalties (972CG), amounting to $260 per form, with a cap of about $3.2 million for large businesses.
The most common vector for 1099 reporting errors is matching recipient and payee names with Tax Identification Numbers (TINs). If the name and TIN reported on a 1099 form do not match what’s in the IRS database, an error occurs. One missing or incorrect digit on a form can lead to an incorrect filing and trigger withholding and potential penalties.
What is TIN matching?
The IRS gives payers of certain types of transactions the ability to prevent these errors upfront by performing name and TIN matches against its database. Matching names and TINs before filing tax forms enables payers to take action before a filing error occurs. There are two types of TIN matching the IRS allows:
- Bulk TIN Matching matches many records against the IRS’s database at one time. The payer uploads .txt files composed of up to 100,000 name/TIN combinations and receives a response from IRS within 24 hours on the status of the uploaded records.
- Interactive TIN Matching enables payers to quickly verify that information is correct, usually for individual or small groups of forms. The payer can submit up to 25 name/TIN combinations at a time, and the IRS system responds within five seconds.
While bulk TIN matching is useful for checking records just before or during reporting season, interactive TIN matching can be incorporated into upstream processes prior to reporting season. With it, payers can check for name/TIN consistency during the customer and vendor onboarding process, meaning they can correct errors one at a time rather than getting hit with a load of bulk-matching corrections.
TIN matching form eligibility
Not all 1099 forms are eligible for TIN matching. The forms that are eligible are those that are subject to backup withholding. They include:
- Real Estate Brokers and Barter Exchange Transactions (1099-B)
- Dividends and Distributions (1099-DIV)
- Interest Income (1099-INT)
- Merchant Card Third Party Network Payments (1099-K)
- Miscellaneous Income (1099-MISC)
- Original Issue Discount (1099-OID)
- Taxable Distributions Received from Cooperatives (1099-PATR)
How the IRS handles TIN matching
The IRS requires an e-services ID for TIN matching issued through IRS.gov, and obtaining one isn’t a simple process. For some organizations, there is inherent risk in even obtaining and using at TIN matching ID.
On December 10, 2017, the IRS changed the registration process for acquiring a TIN matching ID. Both new and existing users now have to register (or re-register) and provide additional information, including a personal mobile phone number and one of the following financial account numbers: credit card, mortgage loan, home equity line of credit or auto loan.
The log-in process also changed to require two-factor authentication, which sends a security code to a personal mobile device. That code is necessary for login. As such, the TIN matching ID is associated with the individual employee who enters personal information, not with the payer company itself.
The IRS’s stricter access rules present some potential problems for organizations that utilize TIN matching services:
- Employees now have to provide personal information to the IRS to conduct TIN matching, which they might be hesitant or unwilling to do, and inherently involves some security risk.
- The two-factor authentication process limits the number of people within an organization who are able to log into the TIN matching system. As a result, a payer might not be able to proactively TIN match across the organization during vendor or customer onboarding, which eliminates one of the major advantages of interactive TIN matching.
How Sovos can solve ID issues
As a third-party reporting solution provider, Sovos can solve ID issues for payers. Sovos clients access the IRS TIN matching system through a Sovos ID rather than through their own. As such, Sovos completes the entire process of obtaining an ID, and clients log into the IRS database through a Sovos solution.
With Sovos acting as a third-party ID provider, payers can access the IRS TIN matching system without requiring employees to enter their own personal information. A third-party ID also eliminates problems stemming from two-factor authentication. Using a Sovos ID, an organization’s employees no longer need to use two-factor authentication to enter the TIN matching system.
As such, organizations can scale interactive TIN matching to as many employees as necessary at any time. The ability to scale means that payers can TIN match during customer and vendor onboarding, thereby eliminating reporting errors before they occur. Only with third-party ID access can organizations reap the full benefits of interactive TIN matching … and only Sovos offers third-party ID access as part of a 1099 reporting solution.
TIN matching is essential to avoiding and eliminating errors in the 1099 reporting process, but fully realizing the advantages of interactive TIN matching requires some help.