Verifying taxpayer identification numbers (TINs) is a critical part of complying with tax regulations. In this guide, we’ll explore the WHAT, WHEN, WHY, HOW and WHO of TIN verifications. This includes the different types of TINs, importance of TIN verification, process(es) for verifying TINs, common pitfalls and best practices.
By the end of this document, you’ll understand the difference between a manual and automatic TIN verification process, and hopefully, have some ideas as to which is best for your team.
There are several types of TINs, including:
The important thing to note is that each TIN is tied to a registered, approved entity - regardless of whether that entity is a person or a business. Ensuring that the TIN and the associated name are linked in the IRS database is an important element of the TIN verification process.
Verifying TINs is important for several reasons, including:
Businesses inherently understand why it’s important to remain tax compliant, but not all businesses are aware of the benefits of TIN verification, an optional, but highly recommended element of risk management and cost avoidance (which will be explained more in the below section on Common TIN Verification Mistakes & How to Avoid Them).
There are many different processes currently used to verify TINs. What is best for your business will depend on many factors, including but not limited to: industry, scale of TIN verifications, data handling requirements, team size and technical ability, budget, and time requirements.
While each company must ultimately determine when to perform TIN verifications based on the unique needs of their business, we have found that the most conservative approach is to verify TINs at the time of contractor, supplier or user onboarding. This serves to verify the identity of your future partner and ensure that you have the correct information to pay them appropriately. It also prevents the need to collect the information later on, making for a smoother tax season 😉
That said, there is a cost to TIN verification whether it’s internal time and resources, or budget for a TIN verification service. Many large companies (especially those in the contract management or marketplace spaces) have found that the upfront cost of TIN verifications is more than offset by the avoidance of fines and additional compliance burden (due to incorrect or incomplete tax payer information) at the time of tax filing. However, knowing that not all users that register will meet the minimum thresholds for 1099 filing (1099-NEC, 1099-K, 1099-MISC, 1099-INT, etc) some large companies, such as banks, prefer only to validate those users that meet minimum thresholds requiring the issuance of a 1099 tax form.
Take a look at the common TIN verification mistakes below to help determine if and when you should be performing your TIN verifications.
The following are common mistakes businesses make when verifying TINs and related impact:
Tax form submissions with incorrect, missing or wrongly formatted TINs (or TIN/Name combinations) may result in penalties to the business and delayed tax returns for contractors, suppliers or users. Specifically,
You can avoid incorrect TIN verifications by adopting the following practices within your tax filing process:
Tax form submissions with incorrect, missing or wrongly formatted information may result in penalties to the business and delayed tax returns for contractors, suppliers or users:
Further, failing to verify TIN/Name combinations at the time on onboarding contractors/vendors could expose the business to potential fraud or identity theft risks
To prevent penalties, tax reporting overhead and data security risks, verify all TINs at the time of contractor, supplier or user onboarding via one of the following routes:
Waiting until the last minute doesn’t leave time for handling any unanticipated issues that may arise. The IRS TIN Matching Program and Information Returns Intake System (IRIS) are bombarded with requests during tax season, which often leads to outages and delays in processing of TIN verifications. TIN verifications may result in a non-match, requiring the business to correct information from contractors, suppliers or users (during an already busy period).
You don’t want to pay unanticipated fines to the IRS, so start early by verifying all TINs at the time of contractor, supplier or user onboarding and/or with a monthly bulk verification. Bulk uploads can be supported with any of the following solutions:
At this point, you may have more questions than you started with, especially if you are new to TIN verifications and/or just now starting to research outside solutions. While the below table is by no means exhaustive, we wanted to provide you a high-level look at how Abound and some of the most common alternatives in industry with the intention of giving you are starting point on your search:
No matter where your TIN verification journey might take you, remember these best practices as you build and/or continue to iterate on your existing processes:
To ensure that you are verifying TINs correctly, consider implementing the following best practices:
If you are interested in having a conversation about using Abound for your TIN verifications, you can connect with us by emailing partner@withabound.com, or sign up for our service to get started ASAP
Good luck and may this tax season be your best tax season yet!
