Foundations that receive interests or dividends must certify their correct taxpayer identification number to the bank or other payer on Form W-9, Request for Taxpayer Identification Number and Certification and a failure to generate this information may result in a part of the payment being withheld. The withheld amount is considered as backup withholding. The private foundations are usually exempt from taxes and are not required to pay tax and therefore do not have to generate the above-mentioned information.
If the payer doesn't realize that the foundation is exempt from taxes and withholds a certain amount erroneously as backup withholding, the foundation can claim this amount as credit while filing the Form 990-PF. If this amount is claimed by the foundation while filing Form 990-T, then the foundation cannot claim it again while filing Form 990-PF.
An organization X has obtained a loan from a private foundation Y. X is supposed to pay interest on that loan to Y every month. Y is a tax-exempt private foundation and isn't subjected to any taxes, so Y doesn't have to certify the taxpayer identification number or file Form W-9. Y is a tax-exempt foundation and doesn't have to pay taxes, so it will not have a taxpayer identification number.
If X doesn't realize that Y is a tax-exempt foundation and withholds part of the payments made to Y, this withheld amount is known as backup withholding erroneously withheld. Y can claim this amount as a credit while filing the Form 990-PF return.
Here's how you can report your Backup withholding erroneously withheld in Form 990-PF using ExpressTaxExempt: