How to Prevent IRS Matching Issues at Collective

IRS matching issues occur when the income reported to the IRS by your clients (via 1099s) doesn't align with the income you report on your tax return. These mismatches typically happen after a business structure change (like forming an LLC or electing S Corp status) if clients don't update your tax ID. 

Collective helps you manage your business transitions to keep your records clean. Here is how you can use the platform and its guidance to prevent matching issues.

Step 1: Ensure Your Clients Have the Correct Tax ID (TIN)

When you form a new LLC, your tax ID (TIN) will change from your Social Security Number (SSN) to your new Employer Identification Number (EIN). Mismatches happen when clients still issue 1099s to your old TIN.

• Action: Immediately provide all clients with an updated Form W-9 listing your new TIN (your LLC's EIN)
• How Collective Helps: Your business formation documents and official EIN are available within your Collective dashboard, making it simple to access the necessary information to complete a new W-9 form for your clients

When You Must Notify Clients About a New Tax ID

A new Tax Identification Number (TIN) is the trigger for notifying clients and submitting a new Form W-9. This rule applies to Collective members in the following situations - when a new tax ID is assigned:

• Sole Proprietor → New LLC (LLC Tier Members) 
• Sole Proprietor → New LLC + S Corp Election (S Corp Tier Members) 

When Notification Is NOT Required:

• Existing Single-Member LLCs who join Collective and remain an LLC retain their original EIN and generally do not need to update clients
• Existing Single-Member LLCs who join Collective and elect S Corp status retain their underlying LLC structure and the same EIN, so a new W-9 is usually not required 

Step 2: Communicate Mid-Year Structure Changes

If you changed your structure mid-year (e.g., from Sole Proprietor to S Corp), you need to ensure all income is reported correctly for the portion of the year it was earned.

• Action: Notify clients promptly about your structure change and confirm they update their payment records before issuing year-end tax forms
• How Collective Helps: Collective guides you through the formation process, highlighting the critical administrative steps, including filing out Form W-9 and establishing a new business bank account tied to your new EIN to ensure tax reporting is clean for your new structure

Step 3: Maintain Clean Banking Records

Using the wrong bank account after a structure change can cause confusion, even if you’ve updated your W-9.

• Action: Establish a new, dedicated business bank account under your new EIN to create a clean break and ensure all transactions flow through accounts properly associated with your LLC EIN
• How Collective Helps: Collective's automatic bookkeeping connects directly to your dedicated business bank and credit card accounts. This ensures that the transactions used to generate your financial statements (P&L, Balance Sheet) and annual tax filings are sourced only from the account tied to your official business structure

Key Takeaways for Collective Members

To learn more, check out our blog IRS Matching Issues: What They Are and How to Avoid Them.

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.