Form 945 – the absolutely essential but little known trick about “backup withholding”…

James Quezada, Simona Quezada (plaintiffs) v. Internal Revenue Service (defendant)

IRS Form 945

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In this Chapter 11 case the IRS won a judgment. The court said to the plaintiffs, the Quezada’s, that “You filed your taxes wrong and it’s still your responsibility to file them right. In fact there’s a ‘do over’ and you didn’t do that, either.”

This situation requires the use of IRS Form 945, a little-known and infrequently invoked remedy that many CPAs and Tax Attorneys even with decades of experience has never seen nor heard of. Follow this link to get a copy of Form 945 and this one about the purpose of form 945.

Form 945 is like the Swiss Army knife of IRS forms being used for Pensions (including distributions from tax-favored retirement plans, for example, section 401(k), section 403(b), and governmental section 457(b) plans), and annuities; Military retirement; Gambling winnings; Indian gaming profits; Voluntary withholding on certain government payments; and, last but not least, Backup withholding.

As an employer of Independent Contractors you have withholding duties under the law.

Every employer is responsible to withhold various amounts of taxes from the payment of wages to their employees. At the same time an employer is not required to withhold federal taxes on payments made to independent contractors. But if an independent contractor fails to provide the IRS with a taxpayer ID number (TIN), the employer is required to withhold 28% of certain taxable payments and the employer is responsible for reporting this “backup withholding” on Form 945 to the IRS.

When an employer fails to withhold taxes and doesn’t file a Form 945 they can still avoid liability as long as it can be shown that the independent contractors reported and paid taxes on the payments they received. The employer complies by obtaining a Form 4669 “Statement of Payments Received” from each independent contractor. By filing the Form 4669 the independent contractors are stating, under penalty of perjury, that they have filed a tax return reporting the payments received from the employer. Basically the IRS needs proof that somebody paid income taxes on the money that changed hands.

So if a taxable entity employs independent contractors, there are 3 things that need to happen: 1.) provide the contractor’s TIN 2.) file Form 945 to report backup withholding on these payments and pay the backup withholding 3.) get a completed Form 4669 from each independent contractor. In the Quezada case, according to the IRS, they did none of these. Three strikes, you’re out.

What does this case prove? It shows that, yet again, interpreting and complying with the tax code is not a place in which one can claim ignorance and expect to not be held accountable. It also clearly illustrates that expert legal and accounting representation is highly advisable when it comes to both business and personal tax problems.

The Tax Resolution Institute is here to help. We are a full service tax and accounting firm that specializes in complex Tax Resolution issues. Contact us at (818) 704-1443 for immediate assistance.

As usual, if you’re either a taxpayer with California state or IRS problems or a tax professional with tax questions we are here to help. Give us a call at (818) 704-1443 or use our handy contact form for taxpayers or tax professionals with tax questions.

*This article is presented for informational purposes only and should never be considered definitive tax or legal advice. Tax matters have serious financial implications and always benefit from expert counsel due to their depth and complexity. If you need expert tax resolution or audit help please contact the Tax Resolution Institute at (818) 704-1443 for immediate assistance.