[Federal Register Volume 59, Number 55 (Tuesday, March 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6582]


[[Page Unknown]]

[Federal Register: March 22, 1994]


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DEPARTMENT OF THE TREASURY
26 CFR Part 35a

[TD 8523]
RIN 1545-AR68

 

Taxpayer Identification Number (TIN) Matching Program

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document amends 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 * * * Sec. 35a.3406-3 also issued 
under 26 U.S.C. 3406(i). * * *

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


Sec. 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 Sec. 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.

    Dated: January 31, 1994.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved:
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-6582 Filed 3-21-94; 8:45 am]
BILLING CODE 4830-01-U