Q&A #171 – Can nonprofits rely on Form W-9 information when sending the Form 1099?
Question: I am in the process of filling out and sending Forms 1099 on behalf of a nonprofit organization and I noticed that the information in the Form W-9 we received from one of our contractors does not appear to be correct. The address listed in the Form W-9 does not match with the address shown in our latest invoice from the contractor, and we have not been able to match the contractor’s name and EIN in the taxpayer identification number (TIN) Matching Program. Are we allowed to rely on the Form W-9 as submitted or do we need to take further steps to verify the information?
Answer: When issuing a Form 1099 (e.g., 1099-NEC), an organization is generally entitled to “reasonable reliance” on the information provided by a contractor or vendor in the Form W-9, provided the form was completely filled out, properly signed and dated, and not altered to remove required statements. However, an organization cannot rely on Form W-9 information the organization knows or has reason to know is incorrect. In that case, additional steps should be taken to verify the information.
The Form W-9 contain numerous important pieces of information that are necessary to issue a correct and proper Form 1099, including the payee’s legal business name, type of business entity, the payee’s employer identification number (EIN) or social security number, and information and certifications related to potential tax withholding obligations such as “backup withholding” (this may apply to certain taxpayers such as those who have underreported tax or provided incorrect taxpayer identification numbers in the past) or withholding under the Foreign Account Tax Compliance Act (FATCA) (this may apply to certain payments of U.S. source income to foreign entities.
In general, organizations that timely comply with their obligations to issue Forms 1099 (when applicable) are entitled to “reasonable reliance” on the information provided by a contractor or vendor in their Form W-9. However, the word “reasonable” means that there is some responsibility to examine the form for obvious errors and take steps verify information if the organization knows or has reason to know that it is incorrect.
For example, in the context of the backup withholding rules, the regulations provide that a payor organization is not liable for the tax imposed for failure to implement required backup withholding based on reliance on the information provided by the payee in Form W-9 unless: (1) the form is missing name or TIN information; (2) the form is not signed and dated by the payee; (3) the form is missing a required statement that the payee is not subject to backup withholding; or (4) the payee has deleted language from the Form W-9 certifying/affirming that the statements in the form are correct. See Treas. Reg. § 31.3406(h)-3(e).
Similarly, a payor organization can avoid penalties for filing an incorrect information return if “reasonable cause” is demonstrated. “Reasonable cause” can apply in situations where the error is minor and does not prevent or hinder the IRS from processing the return (such as an inconsequential typo in an address) or where the payor organization relied in good faith on incorrect information, the organization acted responsibly, and the failure was beyond the organization’s control. See Treas. Reg. §§ 301.6721-1(a) and 301.6724-1(a).
Be aware of the TIN Matching Program, a service provided by the IRS to help catch errors prior to filing the Form 1099. Notwithstanding the reasonable reliance rule, using the TIN Matching Program is a helpful way to reduce the chances of incurring penalties for inaccurate Forms 1099, receiving a CP2100 or CP2100A Notice from the IRS, or being forced to implement backup withholding. Note, if your organization discovers an mismatch through the TIN Matching Program, you will need to take additional steps to attempt to verify the information, since relying on Form W-9 information that was flagged as incorrect would not be considered reasonable unless the organization can demonstrate that it acted responsibly to address the discrepancy.
Planning Tip – When hiring a new contractor or vendor, request a Form W-9 prior to paying the first invoice. Make sure to review the information provided therein as soon as possible, and consider sending a courtesy email before the end of the year to make sure the information has not changed. Too many organizations do not look at Forms W-9 received until it is time to issue the Forms 1099. This can lead to problems if errors are discovered, since there may not be sufficient time to address the errors before the Form 1099 filing deadline.
In the event you see an issue with a Form W-9 received by the organization, your first step should be to double-check to make sure you read the information correctly. If you use the TIN Matching Program, try a few variations of any punctuation used in the business name (for example, try leaving out apostrophes and commas or using hyphens instead of slashes) as this is a frequent source of errors. Your next step should be to contact the payee to alert them to the issue and work together to address it, keeping a record of these communications. And make sure to document your findings and attempts to get corrected information.
If the payee is unresponsive or you are unable to resolve the issue, you may need to seek guidance from a qualified professional about whether you meet the standard for “reasonable reliance,” whether more formal communications to the payee are needed, and whether you are obligated to implement backup withholding.
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