Final Backup Withholding Regs Cover 'B Notice' Rules Only

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations under section 3406(a)(1)(B) of the Internal Revenue Code of 1986 (the "Code") relating to the requirement to backup withhold on certain reportable payments made to a payee after notification that the payee has provided an incorrect name/taxpayer identification number combination ("name/TIN combination"). These regulations affect payors, brokers, and payees of certain reportable payments and provide guidance necessary to comply with the law.

 DATES: The regulations are effective on September 1, 1990, and generally apply with respect to notices received on or after September 1, 1990.

 FOR FURTHER INFORMATION CONTACT: Renay France of the Office of the Assistant Chief Counsel (Income Tax and Accounting), within the Office of the Chief Counsel, 1111 Constitution Avenue, N.W., Washington, DC 20224, (202-377-7978, not a toll-free call).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

 The collection of information contained in this final regulation has been reviewed and approved by the Office of Management and Budget in accordance with the requirements of the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h)) under control number 1545-0112. The estimated average annual burden per respondent is approximately 30 minutes.

 This estimate is an approximation of the average time expected to be necessary for a collection of information. It is based on such information as is available to the Internal Revenue Service. Individual respondents may require more or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance Officer T:FP, Washington, D.C. 20224, and to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington D.C. 20503

BACKGROUND

 This document contains final regulations to be added to part 31 of title 26 the Code of Federal Regulations ("CFR") under sections 3406(a)(1)(B) of the Code. 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).

 Section 3406(a)(1)(B) of the Code requires payors to backup withhold when the Service or a broker notifies a payor that the payee has provided an incorrect name/TIN combination (hereinafter "B notice withholding"). 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) providing rules for backup withholding under section 3406(a)(1)(B) (the "B notice rules"). Amendments to these temporary regulations were published in the Federal Register on April 11, 1989 (T.D. 8248, 54 FR 14341), September 27, 1990 (T.D. 8309, 55 FR 39399), and September 23, 1991 (T.D. 8365, 56 FR 47904).

 On September 27, 1990, the Service published in the Federal Register proposed regulations (55 FR 39427) that reorganized and restated, in traditional regulation form, the backup withholding rules in the temporary regulations relating to all four triggers under section 3406. The proposed regulations incorporated the substance of the B notice rules in the temporary regulations. Amendments to the proposed regulations were published in the Federal Register on September 23, 1991 (56 FR 47929).

 The Service received many comments concerning the proposed regulations, and a public hearing was held on March 4, 1991. The Service also received comments on the amendments to the proposed regulations published on September 23, 1991, and a public hearing on those amendments was held on November 19, 1991.

 The final regulations in this document contain rules relating only to B notice withholding. These rules were extensively modified by the April 11, 1989, amendments to the temporary regulations. The Service will issue final regulations covering the remainder of the backup withholding rules. Those final regulations will address, among other matters, certain miscellaneous rules that were included in the April 11, 1989, amendments. In particular, the final regulations will continue to allow payees who have religious objections to providing and certifying their taxpayer identification number on Form W-9 to provide instead a signed copy of Form 4029 or Form 8812 containing the information required therein (section 35a.9999-1, A-10). The Service received comments concerning changes made by the April 11, 1989, amendments that provide that (1) a payor may refund amounts withheld under section 3406(a)(1)(C) if the Service directs the payor to do so (section 35a.9999-3, A-38), and (2) a trustee of a grantor trust with 10 or fewer grantors is not treated as a payor (section 35a.9999-3, A-54). Although the Service is reconsidering what the appropriate rules in these two areas should be, any modifications in the final regulations will apply only on a prospective basis.

EXPLANATION OF PROVISIONS

 The final regulations in this document adopt, in substance, the B notice rules contained in the proposed regulations with the changes discussed below.

FIDUCIARY AND NOMINEE ACCOUNTS. Several commentators requested that the final regulations make permanent the exception from B notice withholding for fiduciary and nominee accounts that was provided in the temporary regulations, but was proposed to expire upon issuance of final regulations. The Service adopted this exception because certain payors had indicated that they are likely to receive substantial numbers of B notices with respect to accounts maintained by fiduciaries or nominees even though the proper taxpayer identification number for the ultimate taxpayer had been provided. This could result, for example, because the Service's processing system reads only the first 80 characters of the registration on certain multi-name fiduciary or nominee accounts. The final regulations continue to exclude fiduciary and nominee accounts from B notice procedures and withholding. However, the Service will reconsider this issue in the future as it improves its systems.

 Some commentators argued that the exception should be expanded to include accounts where the only name on the account registration is that of a trust or estate. The final regulations do not make this change because in these cases it is clear that the taxpayer identification number that should be used for information reporting purposes is the taxpayer identification number of the trust or estate (and not the taxpayer identification number of the beneficiaries). See the instructions to Form W-9.

 The final regulations clarify that B notices are not required to be sent to payees of fiduciary and nominee accounts. In addition, under the final regulations, the receipt of a B notice on a fiduciary or nominee account does not count for purposes of the B notice rule where the payor receives B notices with respect to an account twice in three years (the "2/3 rule"). However, the receipt of a B notice with respect to these accounts continues to trigger certain solicitation requirements for purposes of the reasonable cause exception under section 6724. See section 301.6724-1(f)(3).

PAYMENTS REPORTABLE ON FORM 1099-MISC. Several commentators argued that payments reportable on Form 1099-MISC, such as payments to independent service providers ("1099-MISC payments"), should be exempt from B notice withholding. The commentators indicated that payors of 1099-MISC payments often lack an ongoing, direct relationship with these payees and thus are not in a position to assure that correct name/TIN combinations are provided.

 Commentators suggested that B notice withholding may be especially difficult to administer in the context of 1099-MISC payments to third-party payees under insurance policies or similar arrangements. For example, insurance companies usually maintain their business records on a policyholder basis, rather than on a payee basis. According to the commentators, significant problems thus may occur in coordinating B notice withholding with respect to payments made to the same payee under different policies.

 The final regulations continue to subject accounts making 1099-MISC payments to B notice withholding. The Code specifically requires that backup withholding under section 3406(a)(1)(B) apply to these payments (unlike backup withholding under section 3406(a)(1)(C) or (D), which applies only to reportable interest and dividend payments). Moreover, underreporting of income attributable to these payments continues to be of serious concern to the Service.

 The Service, however, is considering ways in which the concerns of commentators described above with respect to reportable payments to third-party payees under an insurance policy or similar arrangement can be addressed without compromising the integrity of the B notice withholding program. Toward this end, the Service is seeking additional comments on possible approaches with respect to such payments.

CERTAIN EXCEPTIONS CLARIFIED. Some commentators requested that the final regulations clarify that a payor receiving a B notice is not required to notify the payee of an account (or to backup withhold with respect to an account) if the B notice relates to payments that were made to an exempt recipient or that were not, in fact, reportable payments. The final regulations make the requested clarification.

ADDITIONAL RESPONSIBILITIES OF PAYORS THAT ARE ALSO BROKERS. Some commentators asked for clarification of the rules requiring a broker to notify a payor of a readily tradable instrument that the payee is subject to B notice withholding. The final regulations provide that the notification requirement applies if: (1) the broker (in its capacity as payor) receives a B notice for the payee and is required to identify the account as having the incorrect name/TIN combination, (2) the payee acquires through the account a readily tradable instrument with respect to which the broker is not the payor, and (3) the acquisition occurs on any date more than 30 business days after the date that the broker received the B notice (or on any earlier date if the broker so chooses). Under the final regulations, the notification requirement ends simultaneously with the broker's obligation to backup withhold on the account in its capacity as a payor. See also the rules for dormant accounts discussed below.

IDENTIFICATION OF ACCOUNTS SUBJECT TO B NOTICE WITHHOLDING. The rules in the final regulations for identification of accounts subject to B notice withholding where the payor receives the B notice from the Service are essentially unchanged from the proposed and temporary regulations. Accordingly, if the B notice contains an account number or designation, the payor need only determine whether the account or accounts corresponding to that number or designation have the incorrect name/TIN combination. The final regulations clarify that, where the B notice does not contain an account number or designation, the payor satisfies its duty to exercise reasonable care in identifying accounts if the payor searches the computer or record system that it can REASONABLY ASSOCIATE with the information return that generated the B notice. The final regulations also provide that a payor of a readily tradable instrument that receives notice from a broker (rather than the Service) need not determine if other accounts of that payee have the incorrect name/TIN combination.

 The proposed and temporary regulations provide, in effect, that B notice procedures and withholding do not apply if the error in the taxpayer identification number is caused by an error of the payor (for example, because the payor transposed numbers in the taxpayer identification number when incorporating it into its business records). A commentator questioned whether this rule applies when the name on the account registration is wrong for the same reason. The final regulations provide that B notice procedures and withholding do not apply if, due to an error of the payor, the name or taxpayer identification number on such account is not the name or taxpayer identification number that was provided to the payor by the payee.

JOINT ACCOUNTS. A number of commentators raised concerns about the rules in the temporary and proposed regulations concerning the treatment of joint accounts. The temporary and proposed regulations require a payor to treat the first person listed on a joint account as the person subject to backup withholding. Commentators pointed out that this rule is inconsistent with the fact that a payor may use the name of another person on the account for information reporting purposes. Accordingly, the final regulations provide that with respect to a joint account the relevant name/TIN combination for B notice withholding purposes is the name/TIN combination used for information reporting purposes. (This rule is phased in to accommodate payors with systems keyed to the first person on the account.)

 Commentators also suggested deletion of the requirement to continue backup withholding when the name/TIN combination on the B notice initially matches the first person listed on the account, but the order of names on the account is subsequently changed. The commentators explained that this rule is inconsistent with the rule allowing the payee to avoid B notice withholding by recertifying the existing name/TIN combination (subject to the 2/3 rule). The final regulations make the rule concerning a change in the order of names optional.

REQUIREMENTS FOR THE FIRST B NOTICE TO PAYEES. The final regulations continue to provide that the notice to payees must be provided within 15 days of the date that the payor is considered to receive the first B notice from the Service or a broker. The final regulations generally provide that rules governing the delivery of the notice to payees are to be provided by the Service in the Internal Revenue Bulletin. In connection with the issuance of the final regulations, therefore, the Service is issuing Rev. Proc. 92-32, 1992-17 I.R.B. (dated April 27, 1992).

 In general, the rules for the first notice under Rev. Proc. 92-32 are the same as those in the temporary and proposed regulations, except for the following changes. First, Rev. Proc. 92-32 allows payors to follow the rules for a substitute notice provided in the temporary regulations (prior or subsequent to amendment by T.D. 8248, T.D. 8309, or T.D. 8365) only with respect to B notices received by payors prior to September 1, 1993. Second, under Rev. Proc. 92-32, a payor is required only to state in a substitute notice the date that the payor will begin backup withholding, rather than the dates that the payor received the B notice and is required to begin backup withholding under the Code. Third, Rev. Proc. 92-32 allows payors in a substitute notice not to give payees whose name has changed the option of providing both surnames (rather than contacting the Social Security Administration or the Service to correct the problem). Fourth, Rev. Proc. 92-32 allows payors to use envelopes marked either "Important Tax Document Enclosed" or "Important Tax Return Document Enclosed" and does not require them to enclose reply envelopes. Fifth, Rev. Proc. 92-32 allows payors to omit or revise material inapplicable (or add information to clarify material applicable) to the payee because of the status of the payee or a permitted practice of the payor.

CERTIFICATION REQUIRED TO PREVENT BACKUP WITHHOLDING FROM STARTING OR TO STOP IT ONCE IT HAS BEGUN. As under the temporary and proposed regulations, a payee who receives a notice from a payor that the payee's name/TIN combination is incorrect is required to provide his name and taxpayer identification number and to certify, under penalties of perjury, that the taxpayer identification number is correct in order to prevent backup withholding from starting or to stop it once it has begun. One commentator asked whether a payee must also certify, under penalties of perjury, that the payee is not subject to backup withholding due to a notified payee underreporting under section 3406(a)(1)(C) of the Code. The final regulations clarify that a payee is not required to make that certification in order to prevent backup withholding under section 3406(a)(1)(B) from starting or to stop it once it has begun. The final regulations also provide that, effective for B notices received by payors after September 1, 1993, providing an awaiting-TIN certificate is not sufficient for these purposes.

CHANGES RELATED TO THE 2/3 RULE. The final regulations retain, with the changes discussed below, the 2/3 rule set forth in the temporary and proposed regulations (as modified by Notice 91-40, 1991-50 I.R.B. 11). Accordingly, the 2/3 rule generally applies to the receipt of two B notices with respect to the same account in any two calendar years during a rolling 3-year calendar period. For example, a B notice received in October 1992 is counted in determining whether the payor received two B notices with respect to the same payee for a 3-year-calendar period ending with 1992 and for another 3-year-calendar period ending with 1994.

 The final regulations continue to provide that notice to payees must be provided within 15 days of the date that the payor is considered to receive the second B notice from the Service or a broker. The final regulations generally provide that rules governing the delivery of the notice to payees are to be provided by the Service in the Internal Revenue Bulletin. Rev. Proc. 92-32 supersedes Rev. Proc. 91-58, 1991-40 I.R.B. 119, and provides these rules.

 In general, the rules under Rev. Proc. 92-32 are the same as under Rev. Proc. 91-58, with the following exceptions. First, Rev. Proc. 92-32 allows payors to follow the procedural rules provided in the temporary regulations (as amended by T.D. 8365) only with respect to B notices received by payors prior to September 1, 1993. Second, Rev. Proc. 92-32 requires a payor to instruct a payee to provide a copy of the notice from the payor to the Social Security Administration. This will allow the Social Security Administration to provide the account number back to the payor on Form SSA-7028. Third, under Rev. Proc. 92-32, certain rules described above for first notices (relating to the date when the payor will commence backup withholding; envelope markings; and omission, revision, or deletion of certain material) also apply to second notices. Fourth, Rev. Proc. 92-32 contains a sample second notice.

NOTIFYING THE SERVICE OF CORRECTED NAME/TIN COMBINATION. The final regulations clarify that there is a 30-day grace period with respect to the requirement that a payor use a corrected name/TIN combination on subsequent information returns.

DORMANT ACCOUNTS. Some commentators questioned whether it is appropriate to require payors to track accounts subject to backup withholding even though no reportable payments have been made to the account for a long time. The final regulations provide that the requirement to backup withhold under the B notice rules (including the 2/3 rule) terminates no later than the close of the third calendar year ending after the date that the last reportable payment was made to the account (or, if later, the close of the third calendar year ending after the date the B notice was received).

OPERATIONAL ISSUES. The Service received several comments raising operational issues relating to the Service's implementation of the B notice withholding. These include comments as to (1) whether B notices could be sent to a designated contact person, and (2) whether the Service could create and recognize an optional dummy number for payors whose computer system cannot process an information return with a missing taxpayer identification number. The final regulations do not address these operational issues. However, the Service is continuing to consider them and will notify payors of any change in its procedures.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also 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 final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION:

 The principal author of these regulations is Renay France of the Office of the Assistant Chief Counsel (Income Tax and Accounting), within the Office of the Chief Counsel, Internal Revenue Service. Other personnel from the Internal Revenue service and the Treasury Department participated in developing these regulations on matters of both substance and style.

LIST OF SUBJECTS

26 CFR part 31

 Employment taxes, Fishing vessels, Gambling, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and Recordkeeping requirements, Social security, Unemployment compensation.

26 CFR part 35a

 Employment taxes, Income taxes, Reporting and recordkeeping requirements.

26 CFR part 301

 Administrative practice and procedure Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Oil pollution, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, Taxes.

26 CFR part 602

 Reporting and recordkeeping requirements.

Treasury Decision 8409

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR, parts 31, 35a, 301, and 602 are amended as follows:

PART 31 -- EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority for part 31 is amended by adding the following citation:

Authority: * * * 26 U.S.C. 7805 * * * Sec. 31.3406(d)-5 also issued under 26 U.S.C. 3406(i). * * *

Par. 2. Section 31.3406-0 is added to subpart E to read as follows:

SECTION 31.3406-0 OUTLINE OF THE BACKUP WITHHOLDING REGULATIONS.

This section lists the paragraphs contained in section 31.3406(d)-5.

SECTION 31.3406(d)-5 BACKUP WITHHOLDING WHEN THE SERVICE OR A BROKER NOTIFIES THE PAYOR TO WITHHOLD BECAUSE THE PAYEE'S TAXPAYER IDENTIFICATION NUMBER IS INCORRECT.

 (a) Overview.

SECTION 31.3406(d)-5 BACKUP WITHHOLDING WHEN THE SERVICE OR A BROKER NOTIFIES THE PAYOR TO WITHHOLD BECAUSE THE PAYEE'S TAXPAYER IDENTIFICATION NUMBER IS INCORRECT.

(a) OVERVIEW. Backup withholding under section 3406(a)(1)(B) applies to any reportable payment made with respect to an account of a payee if the Internal Revenue Service or a broker notifies a payor under paragraph (c)(1) or (2) of this section that the payee's name and taxpayer identification number combination ("name/TIN combination") is incorrect and the payor is required under paragraph (c)(3) of this section to identify that account as having the same name/TIN combination. After receiving a notice from the Internal Revenue Service or a broker under paragraph (c)(1) or (2) of this section and identifying an account as having the incorrect name/TIN combination under paragraph (c)(3) of this section, the payor must notify the payee in accordance with paragraph (d) of this section. In addition, under paragraph (e) of this section, the payor must backup withhold on all reportable payments made to such account after the close of the 30th business day after the date that the payor receives the notice and on or before the close of the 30th calendar day after the date that the payor receives from the payee the certification required under paragraph (f) of this section. Under paragraph (g) of this section, if a payor receives 2 notices from the Internal Revenue Service or broker within 3 calendar years with respect to a payee's account, the payor must notify the payee in accordance with paragraph (g)(2) (rather than paragraph (d)) of this section. In addition, the payor must backup withhold on all reportable payments made with respect to the account after the close of the 30th business day after the date that the payor receives the second notice and on or before the 30th calendar day after the date that the payor receives notification from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination for the account. Paragraph (h) of this section requires a payor to use a corrected name/TIN combination on subsequent information returns.

(b) DEFINITIONS AND SPECIAL RULES -- (1) DEFINITION OF INCORRECT NAME/TIN COMBINATION. AN incorrect name/TIN combination is a combination of a name and taxpayer identification number provided on an information return with respect to which the Internal Revenue Service determines that the taxpayer identification number provided is not assigned under section 6109 to the name provided.

(2) DEFINITION OF ACCOUNT. The term "account" means any account, instrument, or other relationship with the payor.

(3) DEFINITION OF BUSINESS DAY. The term "business day" means any day other than a Saturday, Sunday, or legal holiday (within the meaning of section 7503).

(4) CERTAIN EXCEPTIONS -- (i) IN GENERAL. This section does not apply with respect to any notice received under paragraph (c)(1) or (2) of this section with respect to payments that --

(A) Were made to a fiduciary or nominee account; or

(B) Were not reportable payments (for example, because the payments were made to an exempt recipient).

See section 301.6724-1(f)(3) of this chapter for certain solicitation rules applicable after receipt of a notice under paragraph (c)(1) or (2) of this section with respect to a fiduciary or nominee account.

(ii) DEFINITION OF FIDUCIARY OR NOMINEE ACCOUNT. A fiduciary or nominee account is an account with respect to which at least one person named in the registration is identified as acting in the capacity as nominee or as administrator, conservator, custodian, receiver, tutor, curator, committee, executor, guardian, trustee, or other fiduciary capacity recognized under governing law.

(c) NOTICE REGARDING AN INCORRECT NAME/TIN COMBINATION -- (1) IN GENERAL. If the Internal Revenue Service notifies a payor that a payee's name/TIN combination is incorrect and that the payor must commence backup withholding as required on reportable payments made with respect to accounts of the payee with the same name/TIN combination, the payor must --

(i) Identify under paragraph (c)(3) of this section any account or accounts of the payee having the same name/TIN combination;

(ii) Except as provided in paragraph (g) of this section, notify the payee and backup withhold on reportable payments made to the account or accounts under the rules of paragraphs (d), (e), and (f) of this section.

This paragraph (c)(1) also applies if the payor receives notice from a broker under paragraph (c)(2) of this section.

(2) ADDITIONAL REQUIREMENTS FOR PAYORS THAT ARE ALSO BROKERS -- (i) IN GENERAL. A broker must notify the payor of an instrument of the information required under paragraph (c)(2)(ii) of this section, if --

(A) The broker (in its capacity as a payor) receives a notice from the Internal Revenue Service under paragraph (c)(1) of this section that a payee's name/TIN combination is incorrect and is required to identify an account of the payee pursuant to paragraph (c)(3) of this section as having the name/TIN combination;

(B) The payee acquires through the same account with the broker a readily tradable instrument with respect to which the broker is not the payor; and

(C) The acquisition of such instrument occurs after the close of the 30th business day after the date that the broker receives that notice (or on any earlier date that the broker chooses to begin applying this paragraph (c)(2)).

For purposes of this paragraph (c)(2)(i), with respect to notices under paragraph (c)(1) of this section received on or after September 1, 1992, an acquisition includes a transfer of an instrument out of street name into the name of the registered owner, i.e., the payee.

(ii) REQUIRED INFORMATION. The information required to be provided under this paragraph (c)(2)(ii) is:

(A) The fact that the broker was notified by the Internal Revenue Service that the payee furnished an incorrect name/TIN combination;

(B) The incorrect name/TIN combination; and

(C) The fact that the named payee is subject to backup withholding under section 3406(a)(1)(B).

The broker is required to provide this information to the payor of the instrument in connection with the transfer instructions for the acquisition.

(iii) TERMINATION OF OBLIGATION TO PROVIDE INFORMATION. The obligation of a broker to provide information to payors under this paragraph (c)(2) terminates simultaneously with the termination of the broker's obligation to backup withhold (in its capacity as payor) on reportable payments to the account.

(3) PAYOR IDENTIFICATION OF THE ACCOUNT OR ACCOUNTS OF THE PAYEE THAT HAVE THE INCORRECT TAXPAYER IDENTIFICATION NUMBER -- (i) IN GENERAL. If an account number or designation is provided in the notice received under paragraph (c)(1) of this section, the payor need only identify any account or accounts corresponding to that number or designation that has the same name/TIN combination provided in the notice. If no account number or designation is provided in the notice received under paragraph (c)(1) of this section, the payor must identify, using reasonable care, all accounts of the payee having the same name/TIN combination provided in the notice. If a payor receives notice from a broker under paragraph (c)(2) of this section with respect to the acquisition of a readily tradable instrument, the payor is not required to identify any other account of the payee.

(ii) REASONABLE CARE WHERE NO ACCOUNT NUMBER OR DESIGNATION IS PROVIDED. A payor who satisfies the following two-part facts-and- circumstances test will be considered to have exercised reasonable care for purposes of this paragraph (c)(3).

(A) Part one of the test is satisfied if a payor searches for accounts of the payee on the computer or other recordkeeping system that the payor can reasonably associate with the information return that generated the notice under paragraph (c)(1) of this section. For example, a payor who maintains separate computer or recordkeeping systems for different product lines will have identified and used the appropriate system if the payor searches for accounts of the payee on the computer or recordkeeping system that contains the product line for the type of payments reported on the information return. A payor with the same product line on several nonintegrated computer or record systems will have identified and used the appropriate system if the payor searches for accounts of the payee on any computer or record system that the payor otherwise can reasonably associate with the information return.

(B) Part two of the test is satisfied if the payor inputs the name/TIN combination provided on the notice from the Internal Revenue Service under paragraph (c)(1) of this section into the system that is described in paragraph (c)(3)(ii)(A) of this section. If the system of a payor cannot utilize the name/TIN combination, the payor must input appropriate data or criteria, as determined by the capability of the payor's computer or recordkeeping system.

(iii) NO IDENTIFICATION IF ERROR IS CAUSED BY PAYOR. A payor may treat an account as not having the incorrect name/TIN combination if the error resulted because the name or taxpayer identification number on such account is not the name or taxpayer identification number that was provided to the payor. This may occur, for example, where a payor transposes numbers in the taxpayer identification number when incorporating it into the payor's business records.

(4) SPECIAL RULES FOR JOINT ACCOUNTS -- (i) IN GENERAL. In the case of a joint account, the relevant name/TIN combination for purposes of this section is the name/TIN combination used for information reporting purposes.

(ii) TRANSITIONAL RULE. With respect to notices received under paragraph (c)(1) or (2) of this section prior to September 1, 1993, a payor may treat the name/TIN combination of the first person on a joint account as the relevant name/TIN combination, unless that person is an exempt foreign person and the account registration includes names of persons who are not foreign persons.

(iii) OPTIONAL RULE WHERE NAMES ARE SWITCHED. A payor may backup withhold under this section on reportable payments made to a joint account if the order of the names (or taxpayer identification numbers) on the account is merely changed subsequent to receipt of a notice under paragraph (c)(1) or (2) of this section, provided that the name of the person to which the incorrect name/TIN combination originally applies remains on the account.

(5) DATE OF RECEIPT. For purposes of this section, the date set forth on the notice from the Internal Revenue Service or broker under paragraph (c)(1) or (2) of this section is considered to be the date of receipt of the notice by the payor. However, if the payor demonstrates to the satisfaction of the Internal Revenue Service that the date of actual receipt of the notice is later than the date on the notice, the actual date of receipt is controlling.

(d) NOTICE FROM PAYORS OF BACKUP WITHHOLDING DUE TO AN INCORRECT NAME/TIN COMBINATION -- (1) IN GENERAL. Except as provided in paragraph (g) of this section, if a payor receives notice under paragraph (c)(1) or (2) of this section and is required to identify an account as having the incorrect name/TIN combination under paragraph (c)(3) of this section, the payor must send a copy of the notice (or an acceptable substitute notice) to the payee of the account in accordance with the procedures of paragraph (d)(2) of this section.

(2) PROCEDURES -- (i) IN GENERAL. The notice that a payor must send to a payee under paragraph (d)(1) of this section must comply with such procedural requirements as the Internal Revenue Service provides in the Internal Revenue Bulletin such as to form and manner of delivery. A payor must send the notice to the payee within 15 business days after the date that the payor receives the notice from the Internal Revenue Service or a broker under paragraph (c)(1) or (2) of this section.

(ii) TWO OR MORE NOTICES FOR AN ACCOUNT IN THE SAME CALENDAR YEAR. A payor who receives, under the same payor taxpayer identification number, two or more notices under paragraph (c)(1) or (2) of this section in a calendar year with respect to the same account of a payee need only send one notice to the payee under this section.

(e) PERIOD DURING WHICH BACKUP WITHHOLDING IS REQUIRED DUE TO NOTIFICATION OF AN INCORRECT NAME/TIN COMBINATION -- (1) IN GENERAL. Except as provided in paragraph (g) of this section, if a payor receives a notice under paragraph (c)(1) or (2) of this section and is required to identify an account as having the same name/TIN combination under paragraph (c)(3) of this section, the payor must impose backup withholding on all reportable payments made with respect to the account after the close of the 30th business day after the date the payor receives that notice and on or before the close of the 30th calendar day after the day the payor receives from the payee the certification required under paragraph (f) of this section.

(2) GRACE PERIODS -- (i) STARTING BACKUP WITHHOLDING. A payor may, on an account-by-account basis or in general, choose to begin backup withholding under this paragraph (e) at any time during the 30-business-day period described in paragraph (e)(1) of this section.

(ii) STOPPING BACKUP WITHHOLDING. A payor may, on an account-by- account basis or in general, choose to stop backup withholding under this paragraph (e) at any time within 30 calendar days after the payor receives from the payee the certification required under paragraph (f) of this section.

(3) DORMANT ACCOUNTS. The requirement that a payor backup withhold under this paragraph (e) on reportable payments made with respect to an account terminates no later than the close of the third calendar year ending after the later of --

(i) The date that the last reportable payment was made to that account; or

(ii) The date that the payor received the notice under paragraph (c)(1) or (2) of this section.

(f) MANNER REQUIRED FOR PAYEE TO FURNISH CERTIFIED TAXPAYER IDENTIFICATION NUMBER. (1) Except as provided in paragraph (g) of this section, in order to prevent backup withholding under paragraph (e) of this section from starting, or to stop it once it has begun, a payee with respect to whom the payor has been notified under paragraph (c)(1) or (2) that the payee's name/TIN combination is incorrect is required on Form W-9 (or an acceptable substitute form) to --

(i) Provide the payee's name and taxpayer identification number; and

(ii) Certify, under penalties of perjury, that the taxpayer identification number being provided is correct.

(2) The certification must be made even if the account is a pre- 1984 account and even if the payment to the account is a reportable payment other than interest, dividends, patronage dividends, original issue discount, or proceeds of a sale of a security or commodity. In order to prevent backup withholding under paragraph (e) of this section from starting or to stop it once it has begun, a payee is not required to certify, under penalties of perjury, that the payee is not subject to backup withholding due to notified payee underreporting under section 3406(a)(1)(C). With respect to notices received under paragraph (c)(1) or (2) of this section on or after September 1, 1993, the requirements of this paragraph (f) are not satisfied if a payee provides only an awaiting TIN certification. As a result, a payor must not fail to begin backup withholding under paragraph (e) of this section solely because the payee provided an awaiting TIN certification, or stop it once it has begun solely because the payee provided an awaiting TIN certification.

(g) RECEIPT OF TWO NOTICES WITHIN A 3-YEAR PERIOD -- (1) IN GENERAL. If a payor receives notification under paragraph (c)(1) or (2) of this section twice within 3 calendar years, and in each case the payor is required to identify the same account as having the incorrect name/TIN combination, the payor must --

(i) Disregard any future certifications (described in paragraph (f) of this section) furnished by the payee with respect to the account until the payor receives notice from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination under paragraph (g)(5) of this section;

(ii) Send the notice described in paragraph (g)(2) of this section to the payee (and not the notice required under paragraph (d) of this section) within 15 business days after the date that the payor receives the second notice; and

(iii) Impose backup withholding on the account for the period described in paragraph (g)(3) of this section.

The payor must maintain sufficient records to determine whether the payor has received notices under paragraph (c)(1) or (2) of this section twice within 3 calendar years with respect to the same account.

(2) NOTICE TO PAYEE WHO HAS PROVIDED TWO INCORRECT NAME/TIN COMBINATIONS WITHIN 3 CALENDAR YEARS. The notice to the payee required by paragraph (g)(1) of this section must comply with such procedural requirements as the Internal Revenue Service provides in the Internal Revenue Bulletin such as to form and manner of delivery.

(3) PERIOD DURING WHICH BACKUP WITHHOLDING IS REQUIRED DUE TO A SECOND NOTICE OF AN INCORRECT NAME/TAXPAYER IDENTIFICATION COMBINATION WITHIN 3 CALENDAR YEARS -- (i) IN GENERAL. If paragraph (g)(1) of this section applies, the payor must backup withhold on all reportable payments made with respect to the account of the payee after the close of the 30th business day after the date that the payor receives the second notice under paragraph (c)(1) or (2) of this section and on or before the close of the 30th calendar day after the date that the payor receives notice from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination under paragraph (g)(5) of this section for the account. However, a payor may choose not to commence backup withholding under this paragraph (g) until January 1, 1992.

(ii) GRACE PERIODS -- (A) STARTING BACKUP WITHHOLDING. A payor may, on an account-by-account basis or in general, choose to begin backup withholding under this paragraph (g) at any time during the 30-business-day period described in paragraph (g)(3)(i) of this section.

(B) STOPPING BACKUP WITHHOLDING. A payor may, on an account-by- account basis or in general, choose to stop backup withholding under this paragraph (g) at any time within 30 calendar days after the date the payor receives notice from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination under paragraph (g)(5) of this section for the account.

(iii) DORMANT ACCOUNTS. The requirement that a payor backup withhold under this paragraph (g) on reportable payments made with respect to an account terminates no later than the close of the third calendar year ending after the later of --

(A) The date that the last reportable payment was made to that account; or

(B) The date that the payor received the second notice under paragraph (c)(1) or (2) of this section.

(4) RECEIPT OF TWO NOTICES IN ONE CALENDAR YEAR. A payor must treat the receipt of two or more notices under paragraph (c)(1) or (2) of this section in a calendar year with respect to an account as the receipt of one notice for purposes of this paragraph (g). The preceding sentence applies only if the two or more notices are received under the same payor taxpayer identification number.

(5) NOTIFICATION FROM THE SOCIAL SECURITY ADMINISTRATION (OR THE INTERNAL REVENUE SERVICE) VALIDATING A NAME/TIN COMBINATION. The Social Security Administration (or the Internal Revenue Service) will notify a payor after it validates a name/TIN combination that the payee provides for an account to which paragraph (g)(1) of this section applies. Notification from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination satisfies the requirements of this paragraph (g)(5) only if it complies with such procedural requirements as the Internal Revenue Service provides in the Internal Revenue Bulletin such as to form and manner of delivery. In order to obtain notification from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination for an account, a payee who receives notice from a payor under paragraph (g)(2) of this section should follow such procedures as the Internal Revenue Service provides in the Internal Revenue Bulletin.

(h) PAYORS MUST USE NEWLY PROVIDED CERTIFIED NUMBER. If a payor receives a certification under paragraph (f) of this section or a notification under paragraph (g)(5) of this section for an account, the payor must use the name/TIN combination provided on such certification or notification on information returns for the account for which the due date (without regard to extensions) is more than 30 calendar days after the date that the payor receives the certification or notification. A payor who uses that name/TIN combination on the first such information return satisfies the requirement of section 3406(h)(9) to provide this information to the Internal Revenue Service. If the payor is not required to file any information returns with respect to the account after the date that the payor receives the certification or notification, a payor is deemed to satisfy the requirements of section 3406(h)(9).

(i) EFFECTIVE DATE. Except as otherwise provided in this section, the provisions of this section are effective with respect to notices received on or after September 1, 1990, under paragraph (c)(1) or (2) of this section.

(j) EXAMPLES. The application of the provisions of this section may be illustrated by the following examples:

EXAMPLE 1. D opened an account with Bank O prior to 1984 and furnished a taxpayer identification number to O at the time he opened the account. O pays interest on the account at the end of each calendar month, and the account is a pre-1984 account. On October 1, 1990, the Internal Revenue Service notifies Bank O that the name/TIN combination provided by D is incorrect. O timely notifies D as required in paragraph (d)(1) of this section. O does not receive the certification required under paragraph (f) of this section from D. O is required to backup withhold 20 percent of all reportable payments made after November 14, 1990 (which is 30 business days after the date the Internal Revenue Service notified O). Therefore, O is not required to backup withhold on the reportable payment made on October 31, 1990, but is required to backup withhold on the reportable payment made on November 30, 1990. O is required to continue to backup withhold under section 3406(a)(1)(B) until O receives the certification required under paragraph (f) of this section from D (or, if earlier, until backup withholding terminates under paragraph (e)(3) of this section).

EXAMPLE 2. Assume the same facts as in EXAMPLE 1 except that D furnishes a new taxpayer identification number to O on November 1, 1990, but does not certify, under penalties of perjury, that it is his correct taxpayer identification number as required under paragraph (f) of this section. Even though the account is a pre-1984 account, O is required to withhold 20 percent of all reportable payments made after November 14, 1990 (which is 30 business days after the date the Internal Revenue Service notified O), and before the date O receives the certification required under paragraph (f) of this section from D.

EXAMPLE 3. Assume the same facts as in EXAMPLE 2 except that D provides O with the certification required under paragraph (f) of this section on November 20, 1990. D elects pursuant to paragraph (e)(2)(ii) of this section to treat the certification as received on November 20, 1990. Even though D did not provide the certification to O within 30 business days after the Internal Revenue Service notified O that D provided an incorrect taxpayer identification number, O is not required to backup withhold under section 3406(a)(1)(B) because O did not make any reportable payment to D after 30 business days after notification of an incorrect name/TIN combination and before O received D's certification under paragraph (f) of this section (or, if earlier, until backup withholding terminates under paragraph (e)(3) of this section).

EXAMPLE 4. Individual F has two post-1983 accounts with Bank R that pay reportable interest: a savings account and a money market account. The money market account was opened in 1986, and the savings account was opened on February 1, 1991. R treats each of these accounts as a separate account on its books and records for business purposes. On October 1, 1990, the Internal Revenue Service notified R pursuant to paragraph (c)(1) of this section that F furnished an incorrect name/TIN combination with respect to the money market account. R timely sends F the notice required under paragraph (d) of this section and receives the certification required under paragraph (f) of this section from F on November 1, 1990. On October 1, 1991, the Internal Revenue Service again notifies R that F furnished an incorrect name/TIN combination with respect to the money market account. Further, R determines from its business records that two notifications of an incorrect name/TIN combination have been received with respect to the money market account within 3 calendar years. R must send F the notice required under paragraph (g)(2) of this section and must commence backup withholding on reportable interest paid on the money market account pursuant to paragraph (g)(3) of this section after November 14, 1991, which is 30 business days after R received the second notice. R must continue to backup withhold under paragraph (g) of this section on the money market account until R receives notification from the Social Security Administration as described in paragraph (g)(5) of this section (or, if earlier, until backup withholding terminates under paragraph (g)(3)(iii) of this section). R is not required to backup withhold on the savings account unless and until it receives notice under paragraph (c)(1) or (2) of this section with respect to the savings account.

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

Par. 4. The authority citation for part 35a is amended in part by removing the language "section 35a.3406-1 also issued under 26 U.S.C. 3406(a), (b), (e), (g), (h), and (i); 26 U.S.C. 6109; 26 U.S.C. 6676; and 26 U.S.C. 6721;" to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. Section 35a.3406-1 is removed.

PART 301 -- PROCEDURE AND ADMINISTRATION

Par. 6. The authority citation for part 301 continues to read in part:

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

Par. 7. Section 301.6724-1 is amended as follows:

1. Paragraph (f)(1)(ii) is amended by removing the language "and section 35a.3406-1(c) and (f) of this chapter issued under the Interest and Dividend Tax Compliance Act of 1983".

2. Paragraph (f)(2) is revised to read as set forth below.

3. Paragraph (f)(3) is amended by removing the language "section 35a.3406-1(a)(3)(x) of this chapter" and adding in lieu thereof "section 31.3406(d)-5(b)(4)(i)(A) of this chapter".

4. Paragraph (g) is amended by adding the language "as in effect on December 31, 1989" after "section 35a.9999-1 of this chapter et seq.".

5. Paragraph (h)(2)(i) is amended by adding the language "as in effect on December 31, 1989" after "section 35a.9999-1 of this chapter".

Revised paragraph (f)(2) of section 301.6724-1 reads as follows:

SECTION 301.6724-1 REASONABLE CAUSE.

* * * *

(f) * * *

(2) MANNER OF MAKING ANNUAL SOLICITATION IF NOTIFIED PURSUANT TO SECTION 3406(a)(1)(B). A filer that has been notified of an incorrect name/TIN combination pursuant to section 3406(a)(1)(B) (except filers to which section 31.3406(d)-5(b)(4)(i)(A) of this chapter applies) will satisfy the solicitation requirement of this paragraph (f) only if it makes a solicitation in the manner and within the time period required under section 31.3406(d)-5(d)(2)(i) or (g)(1)(ii) of this chapter, whichever applies. Section 31.3406(d)-5(d)(2)(i) and (g)(1)(ii) of this chapter generally requires the filer to notify a payee that the payee's account contains an incorrect taxpayer identification number within 15 business days after the date of the notice from the Internal Revenue Service or a broker.

* * * *

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. Section 602.101(c) is amended by removing the entry in the table for "35a.3406-1" and adding the entry "31.3406(d)-5 . . . 1545-0112".