Income Tax Fundamentals

Question 1

What is backup withholding? What is its purpose?

Answer 1

Backup withholding was implemented to prevent abusive noncompliance with tax provisions. Backup withholding provides for withholding of taxes from pension income. It also requires withholding on most payments reported in form 1099 such as interest, dividends, and royalties under certain circumstances (e.g., where the taxpayer fails to provide the payor with his tax identification number (Social Security number, for example), or fails to report this type of income on his return).