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What Can I Do About Backup Withholding of Income Tax on My Investments? 
 
by kmhagen June 22, 2005

How to Stop Backup Withholding Once It Has Started

If you find that backup withholding taxes are being deducted from your interest, dividends, or other investment income payments, you will need to determine the cause of the withholding and take the necessary action to correct the situation that is causing it.

If the Backup Withholding is Due to an Incorrect Number

The financial institution where you opened your investment account may notify you of the backup withholding requirement.  If so, provide them with the information they request.  If you notice that backup withholding is being deducted from your income payments, but the financial institution has not notified you, ask them for a Form W-9 and provide the missing information or correct the information previously submitted.

If the Backup Withholding Is Due to Under-reporting Investment Income on Your Tax Return

If you have been notified that you under-reported investment income on your tax return, first you will need to determine whether you did, in fact, under-report your income.  If so, you should file an amended income tax return, reporting all the income and the backup taxes that were withheld.  The financial institution should give you an information return for the year, for example, a Form 1099-INT, that shows the income and any backup withholding taxes, reported as “Federal income tax withheld”.

If you should have, but did not file an income tax return, you should file one, reporting all your investment income and the backup taxes that were withheld.  If you are filing past the deadline for the year, you may be subject to a late filing penalty.

Once you have filed a return, or an amended return, if necessary, or if you find that there was, in fact, no under-reporting, you will need to request a determination from the IRS to stop the backup withholding.  You can do this through correspondence with the IRS, showing that at least one of the following situations applies in your case.

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