What CP539 (to the payee) is
Sent to an individual payee, not to you, when the IRS decides they under-reported interest or dividends. The payee's payers receive the corresponding C-Notice. Payees sometimes forward this to a payer asking what to do.
The deadline
The payee has the response window on the notice to dispute it with the IRS. Nothing for the payer to do beyond following its own C-Notice.
What to do
Tell the payee the withholding is required until the IRS releases it and that the amounts are credited on their return.
The program behind the notice
Backup withholding under IRC 3406 has four triggers. Three of them are the payer's call: a missing TIN, an IRS notice that the TIN is wrong (the CP2100 and B-Notice track), or a payee's failure to certify. The fourth is the IRS's own: a payee who underreported interest or dividends on their return and did not fix it after being told. That is the C-program, and the CP539 is the taxpayer-side notice in it. The payee gets written notice of the underreporting and a chance to respond; if the discrepancy is not resolved, the IRS notifies the payee that backup withholding will apply and sends each payer it knows about a C-Notice (CP543) instructing them to start withholding 24 percent on reportable interest and dividend payments.
The withholding is not a penalty. Every dollar withheld is reported on the payee's Form 1099-INT or 1099-DIV in box 4 and credited against their income tax when they file.
What a payer should tell a payee who forwards it
The payer cannot stop C-program withholding on a payee's say-so. The IRS releases it, either by letter to the payee after the underreporting is resolved (the payee files the missing return or pays the tax, and the IRS confirms there is no longer an underreporting) or because the payee shows that the withholding is causing undue hardship. Release normally takes effect after the IRS's annual review each autumn, so a payee who resolves the issue in March may be withheld on through the year. The exception is a Letter 2027-C or 1979-C, which authorizes the payer to stop within 30 days. A payee who received a CP539 should be told to deal with the IRS directly, that the payer is required to withhold until released, and that the amounts are theirs to claim on the return. The payee-side page covers the B-Notice case, which payees often confuse with this one.
Questions about CP539 (to the payee)
Who receives CP539 (to the payee)?
Payee. Sent to an individual payee, not to you, when the IRS decides they under-reported interest or dividends.
What is the deadline on CP539 (to the payee)?
The payee has the response window on the notice to dispute it with the IRS. Nothing for the payer to do beyond following its own C-Notice.
What should I do when CP539 (to the payee) arrives?
Tell the payee the withholding is required until the IRS releases it and that the amounts are credited on their return.
Is CP539 (to the payee) about my own income tax?
No. This decoder covers information reporting and withholding: the notices a payer, filer or payee sees because of Forms 1099, W-2, 945 and the TINs on them. Individual income-tax notices follow a different track.
Have a different notice? The IRS notice decoder lists all 77 in the order they tend to arrive.