IRS Issues Notice Warning Businesses about Backup Withholding

September 01, 2014 by Karen Reed, EA
warning sign

In August the IRS issued Notice 1430, “Don’t Get Caught in Backup Withholding.” The notice is a warning to all businesses, big and small, that if the name and taxpayer ID number provided to a payment card processor or third party settlement organization doesn’t matches IRS records, the payments received by the business will be subject to 28% withholding by the payment processor or settlement organization.

The situation arises when the IRS is unable to match a Form 1099-K with a specific taxpayer or business in its records. When this happens, the IRS requires the payment card processor or third party settlement organization to withhold 28% from each payment transaction until the situation is remedied.

Businesses that find themselves subject to backup withholding can rectify the problem by contacting their payment card processor or third party settlement organization and verifying that the information on file matches the name and taxpayer identification number on the business’s income tax return. Monies already withheld as withholdings are claimed when the income tax return is filed for that tax year. Notice 1430 also notes that funds withheld from partnerships and subchapter S corporations are refundable only by the partners and shareholders on their individual income tax returns and not by the partnership or S Corporation.



Karen Reed, EA


During her years as an audit representative for TaxAudit, Karen successfully defended the company’s members throughout the entire federal and state audit processes, handled cases assigned to US Tax Court, and developed procedures to make the audit process easier for taxpayers. Karen attributes a great deal of her tax acumen to the six tax seasons she spent as a return reviewer, analyzing thousands of returns. Responding in writing to questions from taxpayers, she became familiar with the common mistakes self-preparers make. Karen was previously the manager of the Tax Education and Research Department and the Director of Communications at TaxAudit. Her tax advice has been featured in U.S. News and World Report, the Los Angeles Times, the Chicago Tribune, and other publications.


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