IRS Publication 1281 – In the complex world of tax compliance, businesses and financial institutions must navigate various IRS requirements to avoid penalties and ensure accurate reporting. One critical resource is IRS Publication 1281, which outlines the rules for backup withholding on payments when taxpayer identification numbers (TINs) are missing or incorrect. This guide, officially titled “Backup Withholding for Missing and Incorrect Name/TINs (Including Instructions for Reading Tape Cartridges and CD/DVD Formats),” helps payers understand their obligations under Internal Revenue Code sections like 3406. Whether you’re a small business owner, accountant, or withholding agent, grasping these guidelines is essential for handling Forms 1099, 1042-S, and related notices.
Published in its latest revision in December 2023 (Rev. 12-2023, Catalog Number 63327A), this publication remains a go-to reference as of 2026, with no major updates noted on the IRS website. It covers everything from basic definitions to advanced procedures, including technical instructions for accessing IRS notices in outdated formats like tape cartridges and CDs/DVDs. In this SEO-optimized article, we’ll break down the key elements, procedures, and instructions to help you stay compliant.
What Is Backup Withholding and Why Does It Matter?
Backup withholding, often abbreviated as BWH or BWH-B, is a mechanism the IRS uses to ensure taxes are collected on certain reportable payments when there’s an issue with the payee’s name and TIN combination. A TIN can be a Social Security Number (SSN), Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), or Adoption Taxpayer Identification Number (ATIN). If a TIN is missing, incorrect, or doesn’t match IRS records, payers must withhold a portion of the payment and remit it to the IRS.
This process applies to various payments, such as interest (Form 1099-INT), dividends (1099-DIV), nonemployee compensation (1099-NEC), broker transactions (1099-B), and even gambling winnings (W-2G) under specific conditions. The goal is to prevent underreporting and ensure tax collection at the source. Failure to comply can result in penalties, including $50 for each missing TIN or up to $500 for false statements.
Key triggers for backup withholding include:
- No TIN provided by the payee.
- TIN format errors (e.g., not exactly nine digits or containing letters).
- Mismatches between the name and TIN in IRS databases.
- Underreported interest or dividends.
- For foreign payees, lack of a valid Foreign Tax Identifying Number (FTIN) or Global Intermediary Identification Number (GIIN) under FATCA (Foreign Account Tax Compliance Act).
Exemptions exist for certain payees, such as corporations (for interest and dividends), tax-exempt organizations, governments, and foreign entities with proper documentation like Form W-8 series. Payers use Form W-9 for U.S. persons to certify TINs and claim exemptions.
Current Backup Withholding Rates and Reportable Payments
As of the 2023 revision, the backup withholding rate is 24% for most payments under Chapter 61 of the IRC (effective for payments after December 31, 2017). For withholdable payments to foreign entities under Chapter 4 (FATCA) or certain U.S. persons, it can be 30%. These rates apply to “reportable amounts,” which include:
- Interest and dividends.
- Rents, royalties, and commissions.
- Broker proceeds and barter exchanges.
- Payments to attorneys or for settlements.
However, exclusions apply to real estate transactions, foreclosures, cancelled debts, retirement distributions, and government payments. Payers report withheld amounts on Form 945 and deposit them monthly or semi-weekly, as detailed in Publication 15.
Handling Missing TINs and Incorrect Name/TIN Combinations
IRS Publication 1281 dedicates significant space to procedures for addressing TIN issues, guided by CP2100 or CP2100A notices from the IRS. These notices alert payers to mismatches after the IRS’s TIN matching process, which cross-checks against databases like DM-1 for SSNs/ITINs/ATINs and the EIN-Name Control File.
For Missing TINs:
- Defined as not provided, wrong length, or containing non-numeric characters.
- Start backup withholding immediately on reportable payments.
- Conduct annual solicitations: Initial at account opening, first by December 31 of the year (or January 31 next year), and second the following December 31.
- No “B” notices required; continue withholding until a valid TIN is provided.
- For non-interest/dividend payments, solicit anytime.
For Incorrect Name/TIN Combinations:
- If the notice matches your records, send a First “B” Notice with Form W-9 within 15 business days.
- Begin withholding within 30 business days if no response; stop within 30 calendar days of receiving a certified W-9.
- For a second notice within three years, send a Second “B” Notice (no W-9) and require TIN validation (e.g., SSA card for SSN or IRS Letter 147C for EIN).
- Third or subsequent notices: Treat as the first if different; ignore if the same.
- Use the “two-in-three-year” rule to track solicitations.
Additional rules cover joint accounts (use owners’ TINs), deceased payees (verify via obituary), and undeliverable notices (start withholding and retain for three years). Flowcharts in the publication illustrate these steps for quick reference.
For foreign payees, use the W-8 series forms (e.g., W-8BEN for individuals, W-8BEN-E for entities) to avoid withholding. Invalid forms (e.g., missing GIIN or FTIN) trigger 30% withholding on withholdable payments like U.S.-source dividends.
Instructions for Reading Tape Cartridges in IRS Notices
Although digital formats are more common today, Publication 1281 includes legacy instructions for reading CP2100 notices delivered on tape cartridges (for payers with 250+ errors). These are ½-inch chromium dioxide tapes, 3480-compatible, with 18 channels, EBCDIC encoding, odd parity, and 1600 BPI density (up to 37,871 CPI).
Key Specifications:
- Labels: VOL1, HDR1/HDR2 (80 positions; HDR1 file ID: O4061211), EOR1/EOR2, EOF1/EOF2, and tape marks.
- Records: Fixed 208 positions, blocked in groups of 20 (4,160 per block); short records padded with 9s.
- Record Types:
- Payer “A” Record: Includes access key, service center, payer EIN, name, document count, TIN status counts (missing, not issued, incorrect), and tax year.
- Payer “B” Record: Details TIN, status code (1=missing, 2=not issued, 3=incorrect), transmitter control code (TCC), document type (e.g., 71 for 1099-NEC), account number, names, address, city/state/ZIP, TIN indicator (1=EIN, 2=SSN, 0=none), office code, and sequence number.
- Payer “C” Record: Summary counts mirroring the “A” record.
To read: Process sequentially, validate TINs, and flag for 24% withholding if mismatches persist. Submit corrections with transmittal forms and totals. Name compression rules apply (e.g., remove special characters, squeeze blanks).
Instructions for Reading CD/DVD Media in IRS Notices
For medium to large volumes (250-100k records on CD; over 100k on DVD), notices come as encrypted .exe files named “UDnnnn**”. Contact the IRS at (866) 455-7438 with your TIN, name, contact, and PIN (via Form 10301) to obtain the decryption key.
File Structure:
- Files: I40642.UAnnnn (“A” record, 114 characters pipe-delimited), .UBnnnn (“B” record, 222 characters), .UCnnnn (“C” record, 37 characters).
- Delimiter: Pipe symbol (|); import into Excel by setting pipes as delimiters and treating fields as text.
- Content: Similar to tape records but in delimited format (e.g., “A” starts with type “|”, access key; “B” includes TIN, status, etc.).
Decrypt the media, parse the files, and use the data to identify mismatches. Submit an XML manifest with corrections. This format supports easier integration with modern systems compared to tapes.
Frequently Asked Questions About IRS Publication 1281
What is the difference between missing and incorrect TINs?
A missing TIN is absent or invalid in format, triggering immediate withholding. An incorrect TIN matches the format but fails IRS name-matching, requiring “B” notices.
How do I validate a TIN?
Use IRS TIN Matching (Publication 2108A) or request proof like an SSA card or IRS letter.
Are there penalties for non-compliance?
Yes, including fines for failing to withhold or report accurately. Reasonable cause can waive some penalties (see Publication 1586).
What about foreign payees and FATCA?
Foreign entities need valid W-8 forms with GIIN/FTIN; otherwise, 30% withholding applies to U.S.-source income.
For more details, consult the full publication or IRS e-Services for TIN matching.
Staying Compliant with Backup Withholding Rules
IRS Publication 1281 is an invaluable tool for ensuring tax compliance in an era of increasing scrutiny on information reporting. By understanding missing and incorrect TIN procedures, along with technical instructions for legacy formats, payers can minimize risks and avoid costly errors. Always refer to the official IRS PDF for the most accurate details, and consider consulting a tax professional for complex scenarios. Remember, proactive solicitation and accurate record-keeping are key to avoiding backup withholding pitfalls.