A Government Agency That Works, Part II

By: Brian Anderson
Date: 11/1/2005

My last column discussed the information technology advancements made at the Social Security Administration (SSA), but IRS has made improvements, also. The IRS hasn't improved, for my liking, as much as SSA but there have definitely been improvements. One major improvement was the availability of the Filing Information Returns Electronically (FIRE) system on the Internet. However, in the past, the transmission of a 15 megabyte (zipped) file of information was usually submitted via a dial-up connection, and that was a royal pain in the neck. Not to mention if something happened to the phone line during the middle of a transmission...and did I mention the possible long distance charges?

Now, you can transmit a large file in as little as a few minutes. If this doesn't apply to you, because you're still on dial-up, then your entire business would benefit by upgrading to DSL, cable or Voice-Over-IP for Internet access. DSL, VOIP, SSA, FIRE...can it be long before we all speak in acronyms?

Another problem that payers have run into, calling from around the country, is they've received a tape from the IRS and a penalty letter. I think when they pull the square tape out of the envelope, they wonder why the IRS is sending them a pizza in a box. If you've received one of these notices, don't panic, there are several ways to resolve the issues. The notice is informing you of mismatched Taxpayer Identification Numbers (TINs) and names. The reason you receive these, and what the penalty relates to, is a requirement that you do backup withholding for payments to vendors, interest, dividend, stock, barter, donation or gambling recipients. Yes, if you win too much money at the Thursday night bingo games, you're supposed to receive a W2G form.

The IRS's theory is that before any checks are issued, you are to have procured a W9 stating the individual or firm's name, address, city, state, zip and taxpayer identification number. You are then supposed to verify that the information reported to you is correct. If the information is not verified, or you do not receive the information, you're required to withhold 20% in federal taxes. The government wants to make sure they're getting all of your money...all of the money that they're entitled to...(that doesn't sound right, either)...all the taxes that they're allowed to confiscate. As computer systems improve and communications between governmental agencies improve (this is a good thing) the error reporting cycle in mismatched TINs has dropped from a little over two years to less than one year.

So, what can you do when you receive one of these darling notices? Well, if you don't have a square-tape reader, you do have choices. You should have a copy of the data file that was transmitted to the IRS via telephone, Internet or diskette. You do, don't you? Most accounting packages allow the printing and generation of electronic files, repeatedly. But, once you perform your accounts payable closing, your historical information is zeroed. From this copy, you can then retrieve the name and other information to verify against W9s. The important part of this exercise is to be able to demonstrate due diligence. The best way to illustrate due diligence is to have a published policy for the accounting team to follow and receipts of mailing or some tracking methodology.

While you're in the process of printing your 1099s to paper, you should also print a copy to a file. This gives you a way to look at the data in a textual format. Don't forget to make a second copy of your "IRSTAX.001" file - this is the file that is sent to the IRS. By following this simple rule, you now have two copies of your data. If you outsource your annual processing requirements, your vendor should have your data available to you for at least seven years. That is the number of years you're required to keep information. Often times, you will find that using an outsourced solution for W9, 1099 and W2 processing can relieve your staff of headaches in January and February. Nothing helps morale, during post-holiday season, than by removing the reporting headaches. More often than not, utilizing an outsourced provider can actually reduce your costs and potential liabilities. Providers have the capacity to verify taxpayer identification numbers and social security numbers quickly and inform you in a timely manner.

What to do with your square tape? Perhaps you have a table that rocks and you can use it to stabilize it. If there is a CD burner on practically every electronic device, why can't the IRS generate the name listing onto a CD? If we lived in a world where the government listened to the "little guy," that is what I would shout from the mountain top - or at least from my desktop.

Brian Anderson is the President of Professional Automation Services, Inc. He can be contacted at 866.864.4647, or by email at brian@proautomation.com, or visit www.proautomation.com.