Episode 46: It’s CP2100 Letter Season!

SPEAKER_00 0:00

Welcome to another episode of Information Return Intelligence, all about 1099s. We do this every week. Yes, there really are things to talk about every week with 1099s. My name is Jason Dinison. Let's get started with this week's episode. This week we're talking about CP2100 letters. It is CP2100 letter season. So we'll talk about what a CP2100 letter is and how you should respond if you get one. Before we get deep into our podcast today, let's have our disclaimers. This is not tax advice. I'm not your accountant. Never make final decisions based on anything you see or hear in this podcast, and always pay your own advisors before you make final decisions about anything. Well, just like it's football season, it is also CP twenty one hundred letter time. That's exciting enough to make us all jump out of our seats with joy. The IRS's official materials say October is when CP2100 letters come out, but in practice for several years now, it's been right around now is when these letters hit mailboxes. So we're gonna define today what CP2100 letters are and how you respond. I like to start at the start, so let's do that. Let's start at the start and go through the 1099 filing process because that helps us understand why you get a CP2100 letter. So you file 1099s with the IRS, and that 1099 is going to show your recipient's name and taxpayer identification number, and the IRS computers are going to try matching up the name and taxpayer ID number combination on the 1099 with a record in their system. And if they can't match things up, then that's where a CP2100 letter comes into play. Whenever there's a mismatch where the IRS can't find any such person or business with that taxpayer ID number in their systems, they send you a CP2100 letter. And the CP2100 letter says there's a problem with these name and tin combinations. The CP2100 letter might just show one person, or it might show countless. I mean it depends on how many 1099s you have filed. If you are a power filer filing thousands and thousands of forms, there could be hundreds or maybe even thousands of names on the CP twenty one hundred letter. By the way, someone asked me one time they were concerned, this was during a presentation I was giving on CP2100 letters, they were concerned because they had never received a CP2100 letter before, and they were worried about that, and I said, That's a good thing that you've never received a CP2100 letter. You only get a CP2100 letter if the IRS has a problem with the name and TIN combination on a 1099 that you filed. If your 1099s match up with what's in the IRS's computers, you won't get a CP2100 letter. CP2100 letters only come out if the IRS has a problem with 1099s that you filed if they can't match things up in their system. So what do you do when you get a CP twenty one hundred letter? The very first thing is you just look at what the letter says as far as the mismatches go and review your records because some of the mismatches might not require any action on your part, or you might just need to do something internally. A common example of this would be maybe you transposed a number, so it's like you're looking at the list, you see someone's name on it, and you're looking at your files, you're looking at their W9, and you realize that you transposed their social security number. You transposed a digit in their social security number, or you misspelled a last name. One example that I experienced this on a 1099 that I filed for one of my clients when I was in tax practice. I misspelled someone's last name. I put I think I put IE and it actually was E I, or maybe it was the other way around. It doesn't matter, I misspelled the last name. If you see clearly what the problem was, then you simply fix it in your records so it doesn't happen again. One key thing to note is you do not send corrected 1099s to the IRS. You simply fix it in your files so you don't make the error again. Now, if you're looking at your files and you can't come up with a reasonable explanation, like, oops, I transposed a number or misspelled someone's name, then you need to send a B notice to whoever it was that you had sent the 1099 to. And before you do that, you have to determine your basis date. Your basis date is the later of the date that's printed on the CP2100 letter or the date you receive it. Now that can sometimes sound confusing to people, but what that means is it's pretty common where you get the mail and it's from the IRS, you open the mail and look at the letter, and the date that's printed on the letter is in the future. That is actually a very common thing. And so you go with whatever is later, the later of the date printed on the letter or the date you got it in the mail. We'll talk about what you do once you know the basis date, but first a word from our sponsor, IOFM. Financial operations professionals, accounts payable, procurement, procurement to pay, accounts receivable, credit and collections, order to cash, whatever your organization calls it, whatever your role. You're facing mounting pressure to improve performance, and despite the challenges you face, there are few reliable, independent, and comprehensive places to turn for help. That's where IOFM comes into play. Join literally thousands of your peers and become an IOFM member today. Check them out at IOFM.com. And now back to the show. Before the break, we talked about determining your basis date. Once you know your basis date, what do you do with it? Well, within 15 business days of your basis date, you have to send the B notice. And within 30 business days of your basis date, the recipient has to send a response back to you. So a lot of times these issues will be with your independent contractors that you send 1099 NEC to. To be clear, it could be any 1099 that you've sent, but contractors would be a common spot where this would be something that would happen. So you file a 1099 NEC with your contractor's name and taxpayer identification number on it, and the IRS is not able to match that up with anything in their computers. They're going to send you a CP twenty one hundred letter saying with that contractor that there's a problem. We can't match things up in our system with the name and TIN combination that you put on this person's 1099. So the first thing you'll do is review your records and see if maybe there's an explanation, such as the typo or transposing a number. And if that's the case, then you simply fix it in your system. If you can't explain it in that way, that's where then you determine your basis date, and within 15 business days you send a B notice to that contractor. And then they have 30 business days from your basis date to get a response back to you. So B notices come in two different varieties, just like chocolate and vanilla with ice cream. You have first B notices and second B notices. And the way to define first B notice versus second B notice, I always find that the best way is to define a second B notice. Because if it's not a second B notice, then it's a first B notice. A second B notice means that it's the second time in a three-year period that you have received a CP2100 letter telling you about a name and tin problem for the same person. If that doesn't apply, then it's a first B notice situation. And with first B notices, go to publication 1281 from the IRS. That's where the language comes from. You don't have to create it on your own. You literally copy and paste it. That's what the IRS wants you to do. Copy and paste it out of publication 1281. You'll have to modify it just a little bit. I've always found it doesn't copy and paste very well into a Word document, and there's some formatting stuff that you have to clean up. But you don't have to make up the words. The words are found in publication 1281. You send that along with a W9. And the language of the B notice tells your payee that you were notified by the IRS of a potential error with their name and taxpayer ID number. So please provide us with a new W9 and get it back to us. If it's a second B notice, that is different language, still found in publication 1281, but it's different language. This time around, you're sending the B notice and you're not sending a W9. The reason you don't send a W9 is because this time you have to see proof of the payee's taxpayer ID number. So a copy of their social security card, if it's a social security number issue, or this letter called a 147C from the IRS that proves their EIN. By the way, several episodes ago we did an episode on letter 147C and this new online EIN verification thing that businesses can download off of their online account, and we talked about how you can't use that or you can't accept that in a second B notice situation. And I've checked several times. So at any rate, with second B notices, you send the B notice, but you don't have to send a W9 because your pay has to send you proof of their number this time. Now what happens after the B notice? Well, hopefully your payee replies to you within that 30 business day time frame from your basis date. If they respond with corrected information, you simply update your records and you do future filings correctly with that new information. By the way, you don't have to go back and correct anything that you filed already. You don't file corrected 1099s, you also don't send anything to the IRS. The IRS, in some places, even specifically says don't contact us. They don't want to know, they don't care. I don't know if they don't care. They do care. Here's the thing, they assume the IRS assumes that you are following the B notice process, and so they don't want you to contact them. So you don't need to send them anything saying, hey, we did this. You just update your files. Now, what if the payee doesn't reply to you? Well, if you pay them again, you have to backup withhold on future payments to them. Now, if you don't pay them again, then that doesn't apply. You don't have to do backup withholding if you're not paying them again. But if you do pay them again, you have to do backup withholding. So this is where we'll leave things off on this week's podcast. I think this is a nice overview of what you do with CP2100 letters. There's maybe a little more that we could talk about. There's actually a lot more we could talk about. I have a two-hour webinar that I teach on this. So obviously, that disclaimer of don't make final decisions based on things that you see or hear in this podcast, that would certainly come into play in this week's episode. This was meant to be a nice overview of the subject, but this would at least help steer you down the proper path on dealing with CP2100 letters and B notices. That wraps up another week of Information Return Intelligence, sponsored by IOFM and produced by Dinason Media Ventures. Find all of our podcasts at podcasts.dynasonmedia.com. I'm Jason Dinason, saying so long for another week. Dinason Media Ventures.