CRCM practice question 16 of 35

First National Bank receives a notice from the IRS to begin withholding 28 percent of the interest payments on the money market savings account of Myra Wilcox because of payee underreporting. What is the most proper action for First National Bank to take?

Answer options

A: Send a notice to Ms. Wilcox within 15 days of the receipt of the IRS notice and begin withholding; stop withholding if Ms. Wilcox can prove to the bank that she is not underreporting

B: Begin withholding and send a notice to Ms. Wilcox within 15 days of beginning the withholding; stop withholding only on written notice from the IRS Correct answer

C: Begin withholding with the first payment after 30 days and send a notice to Ms. Wilcox at least 15 days before the first payment from which funds are to be withheld; stop withholding only on written notice from the IRS

D: Send notice to Ms. Wilcox within 15 days of the receipt of the IRS notice and begin backup withholding with the first payment following 30 days after the notice; stop withholding only on written notice from the IRS

Correct Answer:

B. Begin withholding and send a notice to Ms. Wilcox within 15 days of beginning the withholding; stop withholding only on written notice from the IRS

Explanation

An IRS “C-notice” for payee under-reporting requires the payor to (1) begin 28 % backup withholding with the first reportable payment made after the notice is received and (2) notify the customer within 15 calendar days after withholding begins. Withholding can be stopped only when the IRS sends written instructions to do so. These requirements exactly match option B.

Why Incorrect

A. Stop-order can come only from IRS; customer proof is irrelevant.
C. 30-day grace period is allowed only for “B-notices” (missing/incorrect TIN), not for under-reporting “C-notices.”
D. Combines correct 15-day notice with an incorrect 30-day delay before withholding.

References

1. IRS Publication 1281 (Rev. 10-2018), “Under-reporter (C) Notice—What You Must Do,” pp. 6-7.

2. Treas. Reg. §31.3406(d)-5(c).

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