[Federal Register Volume 67, Number 128 (Wednesday, July 3, 2002)]
[Proposed Rules]
[Pages 44579-44582]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16525]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31 and 301

[REG-116644-01]
RIN 1545-BA18


Receipt of Multiple Notices With Respect to Incorrect Taxpayer 
Identification Numbers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to backup 
withholding. The regulations clarify the method of determining whether 
the payor has received two notices that a payee's taxpayer 
identification number (TIN) is incorrect. If a payor receives two or 
more such notices with respect to the same account during a three-year 
period, the payor must begin backup withholding unless the payee 
provides verification of its correct TIN pursuant to the regulations. 
This document also contains proposed regulations which clarify when an 
information return filer must solicit a payee's TIN following the 
receipt of a penalty notice. In addition, this document provides notice 
of a public hearing on these proposed regulations.

DATES: Written and electronic comments must be received by October 1, 
2002. Requests to speak (with outlines of topics to be discussed) at 
the public hearing scheduled for October 22, 2002, at 10 a.m., must be 
received by October 1, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-116644-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-116644-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically directly to the IRS Internet site at www.irs.gov/regs. 
The

[[Page 44580]]

public hearing will be held in room 4718, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Nancy Rose (202) 622-4910; concerning submissions of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Treena Garrett at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Employment Tax 
Regulations (26 CFR part 31) under section 3406 of the Internal Revenue 
Code (Code), and to the Procedure and Administration Regulations (26 
CFR part 301) under section 6724 of the Code. These proposed amendments 
to the regulations would revise existing Secs. 31.3406(d)-5(d)(2)(ii) 
and (g)(4), and 301.6724-1(f)(2), (f)(3), (f)(5) and (k).
    These proposed regulations address certain issues identified by the 
Commissioner's Information Reporting Program Advisory Committee (IRPAC) 
and take into account comments and information provided by IRPAC 
members.

Section 3406

    Section 3406 imposes a requirement to backup withhold on any 
reportable payment where the Secretary notifies the payor that the TIN 
furnished by the payee is incorrect. After receiving a notice of 
incorrect TIN, the payor must backup withhold on reportable payments 
until the payee furnishes another TIN. However, if the payor receives 
two notices with respect to the same account within a three year 
period, the payor must backup withhold on reportable payments until the 
payor receives a verification of the payee's TIN from the Social 
Security Administration or the IRS.
    The regulations under section 3406 set forth detailed procedures 
for payors to follow after receipt of a notice of incorrect TIN from 
the IRS. When the first such notice is received by the payor, the payor 
must send a notice (commonly referred to as a ``B'' notice) to the 
payee stating that the payee will be subject to backup withholding if 
the payee does not furnish a certified TIN. If a second notice of 
incorrect TIN is received by a payor with respect to the payee's 
account within a three-year period, the payor must send a second ``B'' 
notice to the payee stating that the payee will be subject to backup 
withholding unless the payor receives verification of the payee's TIN 
from the Social Security Administration or IRS.
    If the payor receives two or more notices of incorrect TIN with 
respect to a payee's account within the same calendar year, the 
regulations provide that the multiple notices may be treated as one 
notice for purposes of sending out a first ``B'' notice, and must be 
treated as one notice for purposes of sending out a second B notice. 
However, in some cases, a payor may receive multiple notices of 
incorrect TIN in different calendar years which relate to the same 
payee's account for the same year. This may occur where a payor files 
different types of information returns with respect to the same payee, 
such as a Form 1099-B (gross proceeds reported by brokers) and a Form 
1099-DIV (payment of dividends). Typically these information returns 
all contain the same TIN, following information contained in the 
payor's records. Variations in the processing of such returns by the 
IRS may result in the issuance of incorrect TIN notices at different 
times.
    The regulations currently do not provide that two or more notices 
of incorrect TIN relating to the same payee and the same year, but 
which are received in different calendar years, count as one notice. 
Accordingly, a payor must send a first ``B'' notice to the payee after 
receipt of the first notice of incorrect TIN, and a second ``B'' notice 
after receipt of the second notice of incorrect TIN, even if the second 
notice relates to an information return filed for the same year as the 
first notice. The payee must respond to the second notice by obtaining 
verification of its TIN from the IRS or Social Security Administration.
    To avoid this burden on both payor and payee, the proposed 
amendments to the regulations provide that when a payor receives two or 
more notices of incorrect TIN with respect to the same payee's account 
for the same year, the payor is treated as receiving one notice, 
regardless of the calendar year in which the notices are received.

Section 6724

    Section 6724 provides for a waiver of information reporting 
penalties under sections 6721 through 6723 where the failure giving 
rise to such penalties was due to reasonable cause and not willful 
neglect. Under Sec. 301.6724-1(a) of the regulations, in order to prove 
reasonable cause for a failure, the filer must establish either that 
there are significant mitigating factors with respect to the failure or 
that the failure arose from events beyond the filer's control. In 
addition, the filer must have acted in a responsible manner both before 
and after the failure.
    The regulation provides that certain actions of the payee or 
another person providing necessary information with respect to the 
return may be an event beyond the filer's control. Thus, a payee's 
furnishing of an incorrect TIN to a payor may be an event beyond the 
payor's control. However, the payor must also act in a responsible 
manner with respect to the failure. Section 301.6724-1(f) sets forth 
special rules for acting in a responsible manner with respect to 
incorrect TINs. The filer is required to make an initial solicitation 
for the payee's correct TIN at the time the account is opened, and up 
to two annual solicitations following receipt of penalty notices.
    Under the current regulation, if a filer receives a penalty notice 
with respect to an incorrect payee TIN and a notice of incorrect TIN 
under section 3406(a)(1)(B) during the same calendar year for the same 
payee, the filer will satisfy the section 6724 annual solicitation 
requirements by sending the required ``B'' notice. The filer does not 
have to make another solicitation pursuant to section 6724. However, if 
the filer receives a section 3406(a)(1)(B) notice with respect to a 
payee in one year, and the following year receives a penalty notice 
with respect to the same payee and the same year as the section 
3406(a)(1)(B) notice, the filer must make an annual solicitation 
pursuant to section 6724.
    To avoid this burden, the proposed amendments to the regulations 
provide that if a filer receives a section 3406(a)(1)(B) notice with 
respect to a payee in one year and the following year receives a 
penalty notice with respect to the same payee and the same year as the 
3406(a)(1)(B) notice, the filer is not required to make an annual 
solicitation for the payee's TIN pursuant to section 6724 provided the 
filer has sent the required B notice.

Effective Date of Proposed Regulations

    The provisions of these regulations are proposed to be applicable 
the beginning of the first calendar year that begins after these 
regulations are published in the Federal Register as final regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply

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to these regulations, and because the regulation does not impose a 
collection of information of small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments (a 
signed original and eight (8) copies) that are submitted timely (in the 
manner described in the ADDRESSES portion of this preamble) to the IRS. 
The IRS and the Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. Written 
comments on the proposed regulations are due by October 1, 2002.
    A public hearing has been scheduled for October 22, 2002, beginning 
at 10 a.m. in Room 4718, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. All visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit electronic or written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (a signed original and eight (8) copies) by 
October 1, 2002. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the scheduling of the speakers 
will be prepared after the deadline for reviewing outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Nancy L. 
Rose, Office of Associate Chief Counsel (Procedure and Administration). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Railroad retirement, 
Reporting and recordkeeping requirements, Social security, Unemployment 
compensation.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 31 and 301 are proposed to be amended as 
follows:

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

    1. The authority citation for part 31 continues to read in part as 
follows:

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

    2. Section 31.3406(d)-5 is amended by revising paragraphs 
(d)(2)(ii) and (g)(4) to read as follows:


Sec. 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.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Two or more notices for an account for the same year or 
received in the same 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 with respect to the same payee's account 
for the same year, or in the same calendar year, need only send one 
notice to the payee under this section.
* * * * *
    (g) * * *
    (4) Receipt of two notices for the same year or 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 with respect to the same payee's account for the 
same year, or in the same calendar year, must treat such notices as one 
notice for purposes of this paragraph (g).
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

    3. The authority citation for part 301 continues to read in part as 
follows:

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

    4. Section 301.6724-1 is amended as follows:
    1. Revising paragraphs (f)(2) and (f)(3).
    2. Amending paragraph (f)(5)(vi), last sentence, by removing the 
language ``paragraph (f)(2)'' and adding ``paragraph (f)(3)'' in its 
place.
    3. Amending paragraph (k), Example 3(ii), second sentence, by 
removing the language ``Sec. 35a.3406-1(c)(1) of this paragraph'' and 
adding ``Sec. 31.3406(d)-5(d)(2)(i)'' in its place; and by removing the 
language ``(f)(2)'' and adding ``(f)(3)'' in its place.
    4. Amending paragraph (k), Example 3(ii), fifth sentence, by 
removing the language ``Sec. 301.6721-1T'' and adding ``Sec. 301.6721-
1'' in its place.
    5. Amending paragraph (k), Example 3(iii), fifth sentence, by 
removing the language ``Sec. 35a.3406-1(c)(1)'' and adding 
``Sec. 31.3406(d)-5(d)(2)(i)'' in its place.
    6. Amending paragraph (k), Example 3(iii), last sentence, by 
removing the language ``Sec. 301.6721-1T'' and adding ``Sec. 301.6721-
1'' in its place.
    7. Amending paragraph (k), Example 5, final sentence, by removing 
the language ``Sec. 301.6721-1T'' and adding ``Sec. 301.6721-1'' in its 
place.
    8. Amending paragraph (k), Example 6(ii), sixth sentence, by 
removing the language ``(f)(3)'' and adding the language ``(f)(2)'' in 
its place.
    9. Amending paragraph (k), Example 7(ii), fourth sentence, by 
removing the language ``(f)(2)'' and adding ``(f)(3)'' in its place; 
and by removing the language ``Sec. 35a.3406(c)(1)'' and adding 
``Sec. 31.3406(d)-5(g)(1)(ii)'' in its place.
    10. Amending paragraph (k), Example 7(ii), fifth sentence, by 
removing the language ``Sec. 35a.3406-1(c)(1)'' and adding 
``Sec. 31.3406(d)-5(g)(1)(ii)'' in its place.
    The revisions read as follows:


Sec. 301.6724-1  Reasonable cause.

* * * * *
    (f) * * *
    (2) Manner of making annual solicitation if notified pursuant to 
section 6721. A filer that has been notified of an incorrect TIN by a 
penalty notice or other notification pursuant to section 6721 may 
satisfy the solicitation requirement of this paragraph (f) either by 
mail, in the manner set forth in paragraph (e)(2)(i) of this section; 
by telephone, in the manner set forth in paragraph (e)(2)(ii) of this 
section; or by requesting the TIN in person.
    (3) Coordination with solicitations under section 3406(a)(1)(b). 
(i) A filer that has been notified of an incorrect TIN pursuant to 
section 3406(a)(1)(B) (except filers to which Sec. 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

[[Page 44582]]

Sec. 31.3406(d)-5(d)(2)(i) or (g)(1)(ii) of this chapter, whichever 
applies.
    (ii) A filer that has been notified of an incorrect TIN by a notice 
pursuant to section 6721 (except filers to which Sec. 31.3406(d)-
5(b)(4)(i)(A) of this chapter applies) is not required to make the 
annual solicitation of this paragraph (f) if--
    (A) The filer has received an effective notice pursuant to section 
3406(a)(1)(B) with respect to the same payee, either during the same 
calendar year or for information returns filed for the same year; and
    (B) The filer makes a solicitation in the manner and within the 
time period required under Sec. 31.3406(d)-5(d)(2)(i) or (g)(1)(ii) of 
this chapter, whichever applies, before the filer is required to make 
the annual solicitation of this paragraph (f).
    (iii) A filer that has been notified of an incorrect TIN by a 
notice pursuant to section 6721 with respect to a fiduciary or nominee 
account to which Sec. 31.3406(d)-5(b)(4)(i)(A) of this chapter applies 
is required to make the annual solicitation of this paragraph (f).
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-16525 Filed 7-2-02; 8:45 am]
BILLING CODE 4830-01-P