Backup Withholding Amendments --Temporary and Proposed Regulations Under Section 3406

 [4830-01]

 ACTION: Temporary regulations.

 SUMMARY: This document contains amendments to section 35a.3406-1 of the Temporary Income Tax Regulations under section 3406 of the Internal Revenue Code of 1986. The amendments relate to the requirement for payors to backup withhold under section 3406(a)(1)(B) on certain reportable payments due to notification of an incorrect taxpayer identification number. These amendments affect payors, brokers, and payees of certain reportable payments and provide guidance necessary to comply with the law. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations cross-referenced in the notice of proposed rulemaking in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: The amendments are effective on and after September 1, 1990.

 FOR FURTHER INFORMATION CONTACT: John M. Coulter, Jr. (202-566-3928, not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains amendments to part 35a of title 26 of the Code of Federal Regulations ("CFR"). The amendments provide guidance relating to the requirement under section 3406(a)(1)(B) of the Internal Revenue Code of 1986 (the "Code") that a payor backup withhold 20 percent from reportable payments due to an incorrect taxpayer identification number ("TIN"). This provision was added to the Code by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369, 371). On November 23, 1987, the Internal Revenue Service published in the Federal Register temporary regulations (26 CFR part 35a. 3406-1, T.D. 8163, 52 FR 44861) concerning the requirement for payors to backup withhold under section 3406(a)(1)(B) on accounts of a payee when notified by the Service that the payee has provided an incorrect TIN (the "B notice rules"). Amendments to these temporary regulations were published in the Federal Register on April 22, 1989 (T.D. 8248, 54 FR 14341), and on September 27, 1990 (T.D. 8309, 55 FR 39399).

EXPLANATION OF PROVISIONS

 On September 27, 1990, the Service published in the Federal Register proposed regulations (55 FR 39427) that incorporated the substance of the B notice rules. The Service has received many comments concerning the B notice rules. The changes in the B notice rules made by this Treasury decision are, in large part, being made in response to those comments. In the process of finalizing the proposed regulations, the Service is also considering other comments concerning the B notice rules.

 Prior to amendment by this Treasury decision, the B notice rules provided that, if a payor has been notified twice within 3 calendar years that a payee has furnished an incorrect TIN on the account with the payor, the payor is required to backup withhold unless the payee provides the Service with a new TIN under a procedure to be specified by revenue procedure and the Service notifies the payor that the newly provided TIN is correct (the "2/3 rule"). Pursuant to an agreement reached with the Social Security Administration ("SSA"), however, the Service is issuing a revenue procedure ( Rev. Proc. 91-58) that provides that, in these circumstances, the payee must contact the SSA with respect to an incorrect social security number ("SSN") or contact the Service with respect to an incorrect employer identification number ("EIN"). The SSA or the Service will, in turn, provide the required notification to the payor. This Treasury decision conforms the temporary and proposed regulations to the procedures agreed to by SSA and the Service.

 Prior to amendment by this Treasury decision, the temporary and proposed regulations provided that a sole proprietor is required to furnish his individual name and his SSN. This rule is revised by this Treasury decision to permit a sole proprietor to furnish his individual name and either his SSN or the EIN for his sole proprietorship. In addition to his individual name, a sole proprietor may also furnish the business name for the sole proprietorship provided that his individual name is listed before the business name. A sole proprietor may not furnish only the business name.

 This Treasury decision makes a minor change to the substitute B notice that payors may send to payees. Previously, the B notice rules required that the substitute B notice inform payees that they are required to contact the SSA or the Service to resolve problems with their TINs and must complete and return to the payor a statement affirming that the payee in fact made the required contact. This Treasury decision gives payors the option to choose not to request payees to complete and return that statement.

 This Treasury decision also makes a technical correction to the effective date of the "B" notice rules of the temporary and proposed regulations so that the rules apply only to notices of an incorrect TIN received by payors and brokers on and after September 1, 1990. This change is made to clarify that informational B notices received prior to September 1, 1990, are not treated as first notices for purposes of the 2/3 rule.

SPECIAL ANALYSES

 These rules are not major rules as defined in Executive Order 12291 because the economic or other consequences are a direct result of a statute. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

 There is a need for immediate guidance with respect to the amendments made in this Treasury decision. For this reason, it is found impracticable and contrary to the public interest to issue this Treasury decision with notice and public procedure under subsection (b) of section 553 of title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.

DRAFTING INFORMATION

 The principal author of these regulations is John M. Coulter, Jr., of the Office of the Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service. However, other personnel from the Internal Revenue Service and the Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 35a

 Employment taxes, Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8365

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 35a is amended as follows:

Part 35a -- TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST AND DIVIDEND TAX COMPLIANCE ACT OF 1983

Par. 1. The authority citation for Part 35a continues to read in part:

Authority: 26 U.S.C. 7805 * * *

Section 35a. 3406-1 [Amended]

Par. 2. Section 35a.3406-1 is amended as follows:

1. Paragraph (a)(1) is amended by removing the words after December 31, 1988,".

2. Paragraph (c)(3) is amended by:

a. Revising paragraph (iii);

b. Redesignating paragraphs (iv) through (viii) as paragraphs (v) through (ix), respectively;

c. Adding a new paragraph (iv); and

d. Revising newly redesignated paragraph (ix).

3. Paragraph (e) is amended by removing the second sentence.

4. Paragraph (f) is amended by revising paragraphs (2)(iii), (iv), and (v), (3), and (4)(ii).

5. Paragraph (h) is revised.

6. Paragraph (j), EXAMPLE 4 is amended by removing the second- to-last sentence and adding the following sentence in its place: "R must continue to backup withhold on the money market account until R receives notification from the Social Security Administration as described in paragraph (h) of this section."

7. A new paragraph (k) is added.

8. The text in the Appendix following the paragraph entitled "What to Do" is revised.

9. The revised and added provisions read as follows:

SECTION 35a.3406-1 IMPOSITION OF BACKUP WITHHOLDING DUE TO NOTIFICATION OF AN INCORRECT TAXPAYER IDENTIFICATION NUMBER.

* * * * *

(c) * * *

(3) * * *

(iii) Informs the payee that --

(A) The payee must on the enclosed Form W-9 (or acceptable substitute form) --

(1) Correct the surname (or business name) or taxpayer identification number (or both) and certify, under penalties of perjury, that the newly provided taxpayer identification number is correct, or

(2) Certify, under penalties of perjury, that the taxpayer identification number originally furnished to the payor is correct and provide that number and the corresponding surname (or business name),

(B) If the taxpayer identification number originally furnished to the payor is correct, the payee must contact the Social Security Administration (or, in the case of an incorrect employer identification number, the Internal Revenue Service Center where the payee is required to file his income tax return) to resolve the problem giving rise to the notification of an incorrect taxpayer identification number, and

(C) If the notification of an incorrect taxpayer identification number is due to a name change by the payee that the payee has not communicated to the Social Security Administration (or, in the case of a change in a business name, to the Internal Revenue Service Center where the payee is required to file his income tax return), the payee must consistently with respect to all accounts with the payor either --

(1) Contact the Social Security Administration (or the Internal Revenue Service Center) to reassign the taxpayer identification number to the new surname (or business name), or

(2) If the payee is unable to contact the Social Security Administration (or the Internal Revenue Service Center) at this time, use both the old and new surnames (or business names) on the enclosed Form W-9 (or acceptable substitute form);

(iv) At the payor's option, inform the payee that, if paragraph (c)(3)(iii)(B) or (C)(1) of this section applies, the payee must provide a statement to the payor that the payee has contacted the Social Security Administration (or the Internal Revenue Service);

* * * * *

(ix) States that the payee must complete and return the enclosed Form W-9 (or acceptable substitute form), and, if necessary, other documents of the payor as described in paragraph (c)(3)(v) of this section, before the time described in paragraph (c)(3)(vii) of this section in order to prevent backup withholding under section 3406(a)(1)(B) from starting, or after the time described in paragraph (c)(3)(vii) of this section to stop backup withholding once it has begun and to avoid the imposition of the penalty for failure to provide a correct taxpayer identification number.

* * * * *

(f) * * *

(2) * * *

(iii) The payor is required to disregard any future taxpayer identification numbers, whether or not certified under penalties of perjury, received from the payee with respect to the account unless the Social Security Administration (or the Internal Revenue Service in the case of an employer identification number) has notified the payor that such taxpayer identification number is correct;

(iv) As a result of providing an incorrect taxpayer identification number, the payor is required under section 3406(a)(1)(B) to begin backup withholding 20 percent of reportable payments made to the account of the payee no later than after the close of the day 30 business days after the date that the payor is notified of the incorrect taxpayer identification number if the Social Security Administration (or the Internal Revenue Service in the case of an employer identification number) has not notified the payor that the Social Security Administration (or the Internal Revenue Service) has validated the taxpayer identification number of the payee as described in paragraph (h) of this section; and

(v) The payee must contact the Social Security Administration (or, in the case of an incorrect employer identification number, the Internal Revenue Service Center where the payee is required to file his income tax return) in order to prevent backup withholding under section 3406(a)(1)(B) from starting or to stop it once it has begun.

(3) PERIOD DURING WHICH BACKUP WITHHOLDING IS REQUIRED DUE TO A SECOND NOTIFICATION OF AN INCORRECT NUMBER WITHIN 3 YEARS. Upon receiving the second notice of an incorrect taxpayer identification number from the Internal Revenue Service or a broker as described in paragraph (f)(1) of this section, the payor must backup withhold on all reportable payments subject to backup withholding made to the account of the payee after the close of the 30th business day after the day on which the payor receives a notice described in paragraph (b)(1) or (2) of this section and until the payor receives the notification from the Social Security Administration (or the Internal Revenue Service in the case of an incorrect employer identification number) as described in paragraph (h) of this section.

(4) * * *

(ii) STOPPING BACKUP WITHHOLDING. Pursuant to section 3406(e)(5)(B), the payor may, on a payee-by-payee basis or in general, treat the notification from the Social Security Administration (or the Internal Revenue Service in the case of an employer identification number) as described in paragraph (h) of this section as having been received at any time within 30 calendar days after such notification is received. The payor is permitted to stop backup withholding at the time the notice is treated, pursuant to this paragraph (f)(4)(ii), as having been received.

* * * * *

(h) NOTICE FROM THE SOCIAL SECURITY ADMINISTRATION (OR THE INTERNAL REVENUE SERVICE) TO STOP BACKUP WITHHOLDING. A payor who received a notice pursuant to paragraph (f) of this section will be notified by the Social Security Administration (or the Internal Revenue Service in the case of an employer identification number) to stop backup withholding after the Social Security Administration (or the Internal Revenue Service) has validated the taxpayer identification number of the payee. A broker who received a notice pursuant to paragraph (b) of this section will be notified by the Social Security Administration (or the Internal Revenue Service in the case of an employer identification number) that the payee is no longer subject to backup withholding under section 3406(a)(1)(B) and that the broker is no longer required to provide notices to payors under paragraph (b)(2) of this section. A broker who receives a notice under this paragraph (h) from the Social Security Administration (or the Internal Revenue Service) is not required to provide the notice to any payor to which the broker has previously provided the notice required under paragraph (b)(2) of this section. The Social Security Administration (or the Internal Revenue Service) will notify a payor or a broker pursuant to this paragraph by providing an official form which verifies that the payee's taxpayer identification number is correct as associated with the listed surname or business name.

* * * * *

(k) EFFECTIVE DATE. The provisions of this section apply with respect to notices described under paragraph (b)(1) or (2) of this section received by payors or brokers on or after September 1, 1990.

 APPENDIX TO SECTION 35a.3406-1

INSTRUCTIONS FOR NONINDIVIDUALS

For most nonindividuals (such as trusts, estates, partnerships, and similar entities), the taxpayer identification number is the employer identification number (EIN). The EIN on your account may be incorrect because it does not contain the number of the actual owner of the account. For example, an account of an investment club or bowling league should reflect the organization's own EIN and name, rather than the SSN of a member. Please put the name and EIN on the enclosed Form W-9, sign it, and send it to us.

INSTRUCTIONS FOR SOLE PROPRIETORS

A sole proprietor must furnish his INDIVIDUAL name and either his SSN or the EIN for his sole proprietorship. In addition to his individual name, the sole proprietor may also furnish the business name for the sole proprietorship provided that his individual name is listed before the business name. In no event may a sole proprietor furnish only the business name. Please put the individual name and SSN or EIN on the enclosed Form W-9, sign it, and send it to us.

REMEMBER

YOU MUST SEND US A SIGNED FORM W-9 WITHIN 30 CALENDAR DAYS FROM THE DATE SHOWN AT THE TOP OF PAGE 1 even if the name and number (SSN or EIN) on your account with us match the name and number (SSN or EIN) on you social security card or the document issuing you an EIN. If we do not receive your Form W-9 and any other documents that are necessary for us to change the name or TIN (or both) on your account to reflect the name and number on the newly provided Form W-9, we may be required to withhold 20 percent from any reportable payment that we pay to your account until we receive the necessary documents.

[OPTIONAL LANGUAGE: Please complete the form below if you are required to contact SSA or the IRS.

STATEMENT OF SSA OR IRS CONTACT

I hereby state that I have contacted the Social Security Administration concerning my social security number (SSN) or the Internal Revenue Service concerning my employer identification number (EIN) to resolve the problem with my name or number which resulted in my being notified of an incorrect taxpayer identification number.

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