Every year, Betterment receives a list from the IRS of customers that may have a discrepancy between the name and/or SSN/TIN on file with the IRS and on file with Betterment. Betterment is required by the IRS to implement backup withholding for such customers if this discrepancy is not resolved. When backup withholding is implemented at Betterment, it is done in compliance with IRS regulations to withhold taxes from payments that require withholding. While backup withholding is on in your account, 24% of every withdrawal will automatically be sent to the IRS. You can view a list of the relevant accounts from which the IRS withholds here.
To resolve backup withholding on your account, please reach out to us here. The information that we request will vary based upon the notices sent by the IRS.
If backup withholding is turned on when a withdrawal is initiated and 24% of your withdrawal is withheld, Betterment is unable to retrieve these funds for you. Withheld funds may only be recovered by a taxpayer during tax filing the following tax year. The amount withheld for federal taxes for these withdrawals will be reported on your 1099-B tax form for the present year by Betterment that will be released in the following tax season.
Generally, when federal taxes are withheld by a financial institution (regardless of whether or not any taxes are actually owed), the difference between taxes owed and taxes withheld will be reconciled via your tax return the following tax year, thus either lessening the amount you need to pay or resulting in an increased tax refund for you.
Thus, the difference would be reconciled during the year’s tax filing period when you either receive a refund or make a payment to the IRS for your previous year’s taxes. To see more details on the IRS’s process regarding such refunds, we suggest reading this IRS resource, section “Credit for backup withholding.”
This explanation is educational only, is not intended as tax advice, and is not a substitute for the tax advice of a qualified tax advisor. You should consult your personal tax advisor to discuss any tax-related concerns.
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