On May 17, 2021, The Treasury Inspector General For Tax Administration (TIGTA) published a report titled Backup Withholding Noncompliance and Underreported Employment Taxes Continue to Contribute to Billions of Dollars to the Tax Gap. In it, TIGTA explains that backup withholding noncompliance continues to be an issue for the IRS and has resulted in payors avoiding billions of dollars in withholding each year. One of the main reasons is that payors report large amounts of payments associated with Taxpayer Identification Numbers (TINs) of deceased individuals. Generally, payors should not submit information returns using the TIN of a deceased taxpayer for identification of the payee. Instead, they should report the payments using the TIN of the payee or recipient, who is likely a beneficiary or the estate of the deceased payee. Payors are likely using deceased taxpayer Social Security Numbers (SSNs), because they have not been notified of the death of a payee and they have not been provided an estate Employer Identification Number (EIN) or the SSN of a beneficiary.
TIGTA recommended, and IRS management has agreed, that the IRS should develop processes and procedures to identify and address the reporting of information reporting using a deceased payee TIN, to which IRS management has agreed.
For the full report, please see https://www.treasury.gov/tigta/auditreports/2021reports/202140030fr.pdf
In the meantime, payors should review their own records and be prepared as the IRS enhances their efforts to identify noncompliance in this area. Payors should consider analyzing their own processes and procedures as they relate to collecting information relating to deceased payees. Where they do not have a correct TIN on file, they should not use the SSN of the deceased payee and should increase efforts to collect the estate EIN or other required TIN for information reporting to the IRS. Payors unable to do so should consider whether backup withholding applies and confirm that their processes have been updated in order to apply this withholding.