A payee will not give you a TIN: what courts and Counsel have said about paying anyway, withholding, and holding the check

The tax rule, briefly

A reportable payment to a payee who has not furnished a TIN in the manner required is subject to backup withholding at 24 percent from the first dollar (IRC 3406(a)(1)(A)). The payer is liable for the tax it should have withheld whether or not it withheld it (IRC 3403), deposits it on the Form 945 schedule, and reports the payment and the withholding on the 1099 with the TIN box empty. Counsel has added two edges to the rule. Withholding is not elective: “Generally we don’t have voluntary backup withholding,” so a payer that holds the TIN should not withhold (CCA 200940029). And the request can come first: nothing prohibits asking for the TIN before any reportable payment is made (CCA 200040034). The backup withholding guide and the calculator cover the mechanics; this page is about the arguments that follow.

Withholding discharges the debt

The payee’s first argument is that the 24 percent is still owed. The Indiana Court of Appeals rejected it in Conseco Finance Servicing Corp. v. Kimberly Mobile Home Park. A mobile home park sued a lender for $1,200 of lot rent; the lender paid $840 and withheld the rest (30 percent at the time) because the park had never supplied a valid TIN and the IRS had flagged the one it had. The park’s witness said nobody there understood the W-9. The trial court gave the park judgment; the appellate court reversed, holding that rent of $600 or more is reportable, that the statute says the payer “shall deduct and withhold” when the TIN is missing or notified as incorrect, and that the net check plus the withholding credit paid the $1,200 in full. The same logic appears in the Iowa Supreme Court’s Pitz v. U.S. Cellular, where a tower lessee that paid renewal rent net of 24 percent, after the landowners ignored its W-9, was held to have validly exercised its option; the court remarked that payment could reasonably depend on the payee’s cooperation.

Both courts treated the withholding as the payer’s compliance with federal law, not a breach. That is the legal footing of the standard accounts payable position: the invoice is paid in full when the net amount is paid and the tax is deposited, and the vendor’s recourse for the withheld amount is its own tax return.

Holding the payment is the mistake

The opposite instinct, refusing to pay until the W-9 arrives, has gone badly in two courts. In Elmen Holdings v. Martin Marietta Materials a mining lessee owed an annual advance royalty; after the lessor died, the heirs asked for payment and the lessee conditioned it on a W-9 that was never returned. The Fifth Circuit held the lease terminated for nonpayment: the heirs’ email was sufficient notice, and an offer to pay on receipt of a form was not a cure. In Klee v. Americas Best Bottling a defendant’s insurer refused to pay a $400,000 personal injury settlement within New York’s 21-day prompt-payment period until the plaintiff supplied a W-9; judgment was entered against it, and the Appellate Division sustained the judgment because the statute allows no added conditions, injury damages are generally not reportable, and the defendants had not shown a W-9 was needed. Neither case turned on the tax rule, and that is the point: the W-9 is a tax document, and a demand for it does not suspend a contractual or statutory payment deadline. Pay net, on time, and let withholding do the work.

Refusing to deal with a payee who has no number

A payer may make a TIN a condition of the relationship. In Seaworth v. Pearson the Eighth Circuit held that employers who would not hire an applicant who refused on religious grounds to provide a Social Security number did not violate Title VII: the number is required by the IRS, not the employer, and filing information returns without it exposes the employer to penalties under 6721 and 6723, a hardship no accommodation duty overrides. The decision concerns employment, but the reasoning applies with more force to vendors, who have no accommodation claim at all. A vendor onboarding policy that requires a certified TIN before the first purchase order is lawful, and the IRS’s position that a payer may request the number before paying (CCA 200040034) removes the argument that the request is premature.

The one place to be careful is a payment that is not reportable at all. Klee involved excludable personal injury damages; demanding a W-9 for a payment that will never appear on a 1099 has no tax purpose, and a court asked to enforce the demand will say so. The 1099 decision tool answers the reportability question first.

What happens to the withheld money

The amount withheld is tax paid on the payee’s behalf, credited on the payee’s income tax return for the year (3406(h)(10) treats it as wage withholding). The payee gets it back only by filing. Peretz v. United States shows the limit: a nonresident alien whose broker withheld $121,288 on 2005 stock sales that produced a loss first claimed the refund in 2009 and lost it entirely, because backup withholding is a payment, deemed made on April 15 of the following year, not a deposit, and the two-year look-back of 6511 had run. A payer that withholds on a payee who then disappears has done nothing wrong; the money belongs to the Treasury until the payee claims it, and the Form 1099 with the withholding in box 4 is the payee’s only record of it. Chief Counsel noted in 1995 that the payer’s exposure for not withholding is the tax itself under 3403, which is why a payer should never treat the 24 percent as negotiable (PMTA 00035, and see the Chief Counsel page).

Why the record matters for years: Quezada

A missing TIN also decides how long the IRS can come after the payer. In Quezada v. IRS a Texas mason filed Forms 1099 for his subcontractors for 2005 to 2008, many without TINs, withheld nothing and never filed Form 945. The IRS assessed about $1.2 million of backup withholding in 2014. The Fifth Circuit held the assessment time-barred: the Forms 1040 and 1099 contained data sufficient to show the liability and compute it, so the three-year statute ran from their filing even though “the taxpayer is not required to file the precise return prescribed by treasury regulations.” The IRS answered with Action on Decision 2022-01, a nonacquiescence: a blank TIN box does not show whether the payee failed to furnish the number or the filer simply omitted it, so the 1099 neither establishes the liability nor lets the IRS compute it, and Form 945 is the prescribed return. The IRS will follow Quezada only in cases appealable to the Fifth Circuit and “will continue to litigate its position in cases in other circuits.”

Two consequences. Outside Texas, Louisiana and Mississippi, a year with reportable payments to undocumented payees and no Form 945 should be treated as open indefinitely; the way to start the clock is to withhold and file the 945, and the statute page has the deemed-filing dates. Everywhere, the AOD’s own reasoning tells you what the IRS will ask for when it finds a 1099 with no TIN: whether the payee was asked and refused, or whether the number was in your file all along. The solicitation record answers that question, and it is the difference between a withholding liability and a filing error.

What to do

• Make the W-9 a condition of onboarding, before the first payment, with the request dated and kept. The request is lawful at that stage and it is the solicitation the penalty regulations require.
• When the payee will not comply, pay on time and net. Withhold 24 percent, deposit under Form 945, report the payment and the withholding on the 1099 with the TIN blank. Do not hold the check for the form.
• Tell the payee in writing what was withheld and why, and that the amount is claimable on its return. It avoids the Conseco lawsuit and is the second solicitation the regulations expect.
• File the Form 945 for any year with backup withholding, even where the amount is small; it is the return that starts the statute everywhere the IRS does not concede Quezada.
• Check reportability before demanding a W-9 for settlements, refunds and reimbursements; a W-9 demand for a non-reportable payment has no tax basis and, in Klee, no legal one either.

Questions people ask