Temporary and Proposed Regs Provide for TIN Matching Program

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document amends section 35a.3406-3 of the Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983 under section 3406 of the Internal Revenue Code of 1986. The new regulations relate to the establishment of a Taxpayer Identification Number (TIN) matching program. These regulations affect payors, brokers, and payees of certain reportable payments and provide guidance necessary to comply with the law. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: March 22, 1994.

 FOR FURTHER INFORMATION CONTACT: Renay France, (202)-622-4910 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains amendments to 26 CFR part 35a. The amendments prescribe regulations under section 3406(i) of the Internal Revenue Code (Code), relating to backup withholding. This provision was added to the Code by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369).

EXPLANATION OF PROVISIONS

 Generally, under the backup withholding provisions of section 3406(a)(1)(A) of the Code and its underlying regulations, a payee is required to furnish a correct TIN at the time a payee establishes a new account with a payor. In general, the term ACCOUNT means any account, instrument, or other relationship with a payor. Backup withholding applies when a reportable payment is made to the account if the payor has not received the TIN by that time. Further, if the TIN that the payee furnishes to a payor is incorrect and the IRS or a broker notifies a payor that the payee's name/TIN combination is incorrect, the payor must send a copy of the notice to the payee pursuant to section 3406(a)(1)(B). If the payee does not provide a certified TIN to the payor within 30 days, the payor must impose backup withholding on all reportable payments thereafter made to the payee's account.

 In addition, if a payor receives 2 notices from the IRS or a broker within 3 calendar years that a payee furnished an incorrect name/TIN combination, the payor must disregard any future TIN certification furnished by the payee, send a notice to the payee, and impose backup withholding on all reportable payments made to the payee's account, until the payor receives the notification from the Social Security Administration (or the IRS) validating a name/TIN combination for the account.

 The purpose of section 3406 is to encourage payees to furnish payors with a correct name/TIN combination to increase the accuracy of TINs on information documents (Forms 1099) filed with the IRS. To further the purpose of section 3406, the IRS is issuing these regulations relating to the implementation of a TIN matching program.

OVERVIEW

 These temporary regulations provide for the establishment of a TIN matching program (the matching program) by the Commissioner. Under the matching program, prior to filing an information return, a payor may contact the IRS concerning the TIN furnished by a payee. Upon receiving the inquiry, the IRS will advise the payor if the name/TIN combination furnished does not match a name/TIN combination maintained by the IRS on a stand-alone dedicated data base. If the name/TIN combination does not match, the payor has the opportunity to contact the payee for correction before filing the information return, thus reducing the likelihood of a notice to start backup withholding and a penalty for filing an incorrect information return. (The data base used for the matching program constitutes a system of records under the Privacy Act of 1974, 5 U.S.C. 552a; notice of the system will be published in the Federal Register.)

 The IRS will initially implement the matching program using a prototype the details of which are set forth in Revenue Procedure 94-24, appearing in the Internal Revenue Bulletin (I.R.B.) dated April 4, 1994. Two hundred payors randomly selected by the IRS may participate in the prototype. The prototype will involve security and audit controls to help ensure that the matching program will be used only for the purpose for which it is intended. For example, each payor using the prototype must submit a written request for authorization of two designated individuals who will have access to the data base. Each payor must agree to safeguard against unauthorized access or use. Upon the IRS's authorization of those designated individual users, the IRS will issue each user a unique identification number and a unique password to access the data base.

 When a payee opens a new account that is likely to give rise to a reportable payment described under section 3406(b)(1) of the Code, a payor participating in the prototype may, but is not required to, contact the IRS by telephone and input the name/TIN combination of the payee. If that name/TIN combination does not match a name/TIN combination maintained by the IRS's prototype data base, the IRS will inform the payor. The payor may then attempt to obtain the correct name/TIN combination from the payee before it files its information return. By doing so, the payor may avoid the potential imposition of backup withholding on the account of the payee, the requirement to send a notice to the payee about the incorrect TIN, and the potential imposition of a penalty under sections 6721 and 6722.

 The purposes of the prototype of the matching program are to (a) measure costs and benefits of the undertaking to the IRS and to payors, and (b) identify and study any problems that might arise during its operation. After collecting and reviewing these facts, the IRS will decide whether to design and implement a permanent TIN matching program.

SECTIONS 3406(a)(1)(B) AND (f) AND 6724(a) OF THE CODE

 The temporary regulations provide that any TIN matching details received by a payor through the matching program will not constitute a notice of an incorrect name/TIN combination (B notice) for purposes of imposing backup withholding. Further, the temporary regulations provide that the decision whether to participate in the matching program and any TIN matching details received through the matching program will not be taken into account in determining whether a payor has exercised reasonable cause under section 6724(a) of the Code with respect to a failure to file a correct information return under section 6721 or to furnish a correct payee statement under section 6722. Thus, a payor need not have contacted the IRS regarding the TIN furnished by a payee to establish a reasonable cause defense to a penalty for filing an information return containing an incorrect TIN. Conversely, a payor who has contacted the IRS regarding the TIN furnished by a payee does not thereby establish a reasonable cause defense to the penalty.

 Under the temporary regulations, the provisions of section 3406(f), relating to confidentiality of information, apply to any matching details received through the matching program. A payor may not take into account any such matching details in determining whether to open or close an account with a payee.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure 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 Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Renay France, Office of the Assistant Chief Counsel (Income Tax and Accounting), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 35A

 Employment taxes, Income taxes, Reporting and recordkeeping requirements.

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

Paragraph 1. The authority citation for part 35a is amended by adding the following entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * section 35a.3406-3 also issued under 26 U.S.C. 3406(i). * * *

Par. 2. Section 35a.3406-3 is added to read as follows:

SECTION 35a.3406-3 TAXPAYER IDENTIFICATION NUMBER (TIN) MATCHING PROGRAM (TEMPORARY).

(a) THE MATCHING PROGRAM. Under section 3406(i), the Commissioner has the authority to establish a Taxpayer Identification Number (TIN) matching program (the matching program). The provisions of this section apply to the matching program. In general, under the matching program, prior to filing an information return with respect to a reportable payment as defined under section 3406(b)(1)(A), a payor of that reportable payment who participates in the matching program may contact the Internal Revenue Service with respect to the TIN furnished by a payee under section 3406(a)(1)(A). Upon receiving the inquiry, the Service advises the payor if the name/TIN combination furnished by the payee does not match a name/TIN combination maintained by the Service's dedicated data base.

(b) NOTICE OF INCORRECT TIN. Any matching details received by a payor through the matching program do not constitute a notice regarding an incorrect name/TIN combination under section 31.3406(d)- 5(c) of this chapter for purposes of imposing backup withholding under section 3406(a)(1)(B).

(c) APPLICATION OF SECTION 3406(f). The provisions of section 3406(f), relating to confidentiality of information, apply to any matching details received by a payor through the matching program. A payor may not take into account any such matching details in determining whether to open or close an account with a payee.

(d) REASONABLE CAUSE. A payor's decision whether to participate in the matching program and any matching details received through the matching program are not taken into account in determining whether a payor has exercised reasonable cause under section 6724(a) with respect to a failure to file a correct information return under section 6721 or to furnish a correct payee statement under section 6722.

(e) DEFINITION OF ACCOUNT. Account means any account, instrument, or other relationship with a payor and with respect to which a payor is likely to pay a reportable payment as defined in section 3406(b)(1).

(f) EFFECTIVE DATE. The provisions of this section are effective on and after March 22, 1994.