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Cornell Law Scool -- Reasonable Cause to Abate IRS Penalties

On September 27, 2010 President Obama signed the "Small Business Jobs Act" H.R. 5297 into law. Section 2102 more than doubled the penalties for 1099 Series Forms starting in 2011. This includes late filings, mis-matched TaxID/Name combinations, missing SSNs, failure to e-File, and much more etc). See the new penalties on Page 15 of IRS Publication 1586.

Late Filing Penalties Tax Year 2018
Days Late Current Penalty Current Maximum
 30 days $50 per form $547,000
 60 days $100 per form $1,641,000
After August 1 $270 per form $3,282,500
Intentional Disregard to file $540 per form  No Limit

If you file 1099 forms, there is a good chance you will fall victim to mis-matched Tax ID/Name combinations, and not even know it. You will not be notified by the IRS until the following year. By that time you will have a Tier 3 penalty of $270 per form. For just 10 mis-matched names the penalty will be $2,700.00, for 100 forms $27,000 penalty, and so on. If you are missing Tax-ID numbers, and intentionally decide not to file, there could be a penalty of $540 per form if you are caught, for example in an audit.

With huge Federal Deficits, it's likely the IRS, armed with this higher tax, will step up enforcement. So what is the solution? What can you do if you can't get the information? How can you avoid these insidious, delayed penalties? You can't force the vendor/payee to sign a W-9 form! You can't force the payee to give you the correct Name or Tax ID!

But you may not have to pay it! Don't find out the hard way. Many businesses will pay this new increased penalty tax because they are not aware of the solution.


The solution is to solicit a W-9 form from all payees as described IRS Publication 1586. This simple act will give you the "reasonable cause" defense against the delayed Tier 3 penalty notice, even if the W-9 is not returned, or has incorrect information, but it will not stop IRS penalty notices.

A better solution, that will stop IRS notices, is to run a Bulk Tin/Name match of your 1099 payees on the IRS database. This allows you to concentrate on just the errors and get them fixed. This tells you, in advance, which payees are mis-matches. With our SECURE SERVICE BUREAU, the cost is only $74.00 for up to 10,000 names/TINs. See TinMatch Frequently Asked Questions for how to get started. 1099 Express can also perform "solicitation mailings" for you with the correct statutory language to establish "reasonable cause". Please call 361-884-1500 for details and pricing.

It's best to perform your TinMatch BEFORE filing to the IRS. It can also be done AFTER filing (if you file corrections). It's never too late to perform bulk Tin/Name matching. We supply a list of all your know mis-matches (potential penalties) based on the results from the IRS database.

So, your first step after a Tin/Match is to SOLICIT a W-9 from each mis-matched payee by mail. Or have 1099 Express Service Bureau follow up and do this service for you immediately after your Tin/Match. This will establish REASONABLE CAUSE, and should get you out of any penalty, even if the W-9 is NOT RETURNED by the payee. It is not necessary to have a correct name and correct matching TIN to establish the "reasonable cause" defense against the IRS penalty notices. To better understand what the IRS means by SOLICIT and REASONABLE cause, please read IRS Publication 1586

Here is a direct quote from Publication 1586:

The penalty may be waived by showing the failure(s) was due to reasonable cause and not to willful neglect.


To support the showing that the failure was due to reasonable cause and not willful neglect, the filer must establish that s/he acted in a responsible manner both before and after the failure occurred, and that:
• there were significant mitigating factors (for example, an established history of filing information returns with correct TINs), or
• the failure was due to events beyond the filer’s control (for example, a payee did not provide a correct name/TIN in response to a request for the corrected information).
Acting in a responsible manner includes making an initial solicitation (request) for the payee’s name and TIN and, if required, an annual solicitation. Upon receipt of this information, it must be used on any future information returns filed.


Using the IRS Tin/Name matching program is additional positive PROOF that you acted in a responsible manner. Thus, you should be immune from penalties by the IRS definition, assuming you file 1099s timely, and other compliance is met. Keep your 1099 Express mis-match list as proof.

It is not necessary to worry, telephone each person, or repeatedly contact each payee. One SOLICITATION per payee (as explained in Publication 1586) will do it.

If the payee does not respond (or returns the same faulty W-9) you can file your imperfect 1099s as they are to the IRS (even with no SSN), and rely on reasonable cause defense, especially if you have used the IRS Tin/Name matching program. Keep good records for the future. Because the IRS might send a "Notice 972CG, Notice of Proposed Civil Penalty".

If payees return a corrected W-9, then obviously change your records, and file your 1099s with new information.

If you have missing tax ID numbers, you should SOLICIT, as explained above, to get protection from penalties, then file your 1099s with an empty TaxID before the deadline, to avoid late filing penalties and willful disregard problems.

To increase CORRECT W-9 response, you might wish to remind your payees in your solicitation:

1. About the $500 IRS penalty to the Payee for false data (see IRS Form W-9 Page 2).
2. That the Name and TaxID must match the payee's tax return, to avoid the "dba problem".
3. Payees with a NAME CHANGE (from marriage, etc.) must change their NAME at the SSA, if using the new surname.

Some positive side-effects of Tin/Name matching are:

1. You only need to solicit those payees who are mis-matches, saving time and money.
2. You may avoid Backup Withholding if mis-matches are cleaned up, see IRS Publication 1281 backup withholding.
3. Once your payees are correct, the IRS will stop sending the penalty notices.

To start using 1099 Express Secure Service Bureau Tin/Name matching click: TinMatch Frequently Asked Questions

Also See:

Tin Matching General
Tin Matching Frequently Asked Questions
Tin Matching Sample Report

Are you taking advantage of Bulk TIN/NAME Matching Services to Avoid IRS Penalties?

The IRS Bulk TIN/Name Matching program has been a spectacular success. Many companies are using this service to avoid receiving notice from the IRS that the payer may be responsible for backup withholding and/or certain penalties.

When you file Forms 1099-Misc, DIV, INT, B, OID or PATR, the IRS checks each Social Security Number or Company EIN (the Tax ID Number) to see if it matches the Name, according to the IRS database. Each mismatch can result in a $100 Tier 3 penalty. Even if you file with the red, Copy A scanable paper forms, the IRS checks for mis-matches.

Most 1099 files have a mismatch rate of over 20 percent. Mis-matches are more likely with NEW SSNs and names. Even the best of us make accidental typing errors or use the wrong name on the W-9. The IRS treats each mismatch as a missing or incorrect SSN, and assumes the worst (as if someone is cheating, and not reporting that income).

Now, with the Bulk TIN Matching program, you can find and correct these errors before filing to the IRS. As the saying goes "An ounce of prevention is worth a pound of cure". The Bulk TIN Matching Program through the IRS is free of charge to anyone. It takes the IRS one or two months to certify your application, and at least one person must also submit his or hers personal tax returns to the IRS for 3 years, then be approved for a security clearance. You must also have special filtering software to submit the data free of duplicates to the IRS, remove illegal characters, and format the data. If duplicates are present, the IRS will consider this "Phishing" and cancel your ability to perform Bulk Tin/Name matching.

As an alternative to this application process, 1099 Express can provide this service for $74 per file submitted to the IRS. Each file can contain up to 10,000 records. You can take advantage of this service to correct any errors before filing to the IRS or AFTER filing to the IRS and submitting corrections.

For more information, see our Service Bureau. Because your goal is to reduce B-Notices and associated penalties from the IRS, please call our main office at 361 884-1500, or email Sales@1099Express.com It’s simple and easy! Call today! We will show you how to send your files to our Service Bureau with the utmost security. We also format the data to IRS specifications, perform the uploads, downloads, and send you a formatted report via a secure connection.

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