What This Notice Means
This is the second notice telling you the IRS hasn't received payment of taxes owed on your Form 1040 involving interest or dividend income. If you don't respond by the date on the notice, the IRS will begin, or continue, backup withholding.
What Backup Withholding Is
Backup withholding is when the IRS instructs the payers of certain income, most commonly banks and brokerages paying interest and dividends, to withhold a percentage of tax from your future payments. The rate is set by law and can change with the tax laws. Check your notice and Publication 1335 for the current rate.
Payers keep withholding until the IRS tells them to stop, or until you show them written certification from the IRS that you're no longer subject to it.
That means a chunk of every interest and dividend payment you receive gets taken off the top. It stays that way until the problem is fixed.
What to Do
- Review your filed Form 1040 for interest or dividend income you didn't report.
- File Form 1040-X, Amended U.S. Individual Income Tax Return, for any underreported interest or dividend income.
- Pay all taxes owed on that income. Your IRS online account shows your balance, payoff amount, and payment history.
Do this by the date on your notice. That date is what stands between you and backup withholding.
Where to Start
Pull every Form 1099-INT and 1099-DIV for the year and compare them to your return. Order a wage and income transcript if you don't have all the forms. Small accounts get missed all the time.
IRS Publication 1335, Underreporter Backup Withholding Questions and Answers, covers the rules in more detail.
Going Forward
- File your return on time.
- Report all interest and dividend income.
- Pay all taxes due.
If you received a CP538 and want to stop backup withholding before it starts, call us at (813) 229-7100.