[Federal Register Volume 68, Number 21 (Friday, January 31, 2003)]
[Proposed Rules]
[Pages 4970-4974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2208]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31 and 301

[REG-116641-01]
RIN 1545-BA17


Information Reporting and Backup Withholding for Payment Card 
Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of proposed rulemaking by 
cross-reference to temporary regulations; and notice of public hearing.

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SUMMARY: In the Rules and Regulation section of this issue of the 
Federal Register, the IRS is issuing temporary regulations relating to 
the IRS Taxpayer Identification Number (TIN) Matching Program. The text 
of the temporary regulations published in the Rules and Regulations 
section of this issue of the Federal Register serves as the text of 
this portion of the proposed regulations. This document also contains 
proposed regulations relating to the information reporting 
requirements, information reporting penalties, and backup withholding 
requirements for payment card transactions. These regulations affect 
payors (and their authorized agents) and payees of certain reportable 
payments and provide guidance necessary to comply with the law. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by May 1, 2003. 
Outlines of topics to be discussed at the public hearing scheduled for 
May 21, 2003, must be received by April 30, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-116641-01), 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 4 p.m. to: CC:PA:RU (REG-116641-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit electronic 
comments directly to the IRS Internet site at www.irs.gov/regs. The 
public hearing will be held in room 6718, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Donna 
Welch, (202) 622-4910; concerning submissions of comments, the hearing, 
and/or to be placed on the building access list to attend the hearing, 
Sonya Cruse, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by April 1, 2003. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec.  31.3406(g)-1(f)(3). This information is required in order for a 
Qualified Payment Card Agent (QPCA) to notify a cardholder/payor that a 
merchant/payee is not a qualified payee for purposes of the proposed 
regulations. This information will alert a cardholder/payor that backup 
withholding under 3406 may apply. The collection of information is 
voluntary to obtain a benefit. The likely respondents are business or 
other for-profit institutions.
    Estimated total annual reporting burden: 11,750,000 hours.
    Estimated average annual burden hours per respondent: 5,875 hours.
    Estimated number of respondents: 2,000.
    Estimated annual frequency of responses: monthly.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

1. Summary

    This document contains proposed amendments to 26 CFR part 31 
relating to backup withholding under section 3406 of the Internal 
Revenue Code and proposed amendments to 26 Part 301 relating to waivers 
under section 6724 of information reporting penalties under sections 
6721 and 6722.
    Temporary regulations in the Rules and Regulations portion of this 
issue of the Federal Register provide that, for purposes of the IRS TIN 
Matching Program, the term payor includes an agent designated by the 
payor to participate in TIN matching on behalf of the payor. The text 
of those temporary regulations also serves as the text of proposed 
amendments to Sec.  31.3406(j)-1(a) of the regulations. The preamble to 
the temporary regulations explains the proposed amendments to Sec.  
31.3406(j)-1(a).

2. Information Reporting and Backup Withholding Provisions

    Section 6041(a) requires persons engaged in a trade or business and 
making payment in the course of such trade or business to another 
person of rent, salaries, wages, premiums, annuities, compensations,

[[Page 4971]]

remunerations, emoluments, or other fixed or determinable gains, 
profits, and income of $600 or more in any one taxable year to file 
information returns with the IRS and to furnish information statements 
to payees. Among other items, the payor must include the payee's name 
and taxpayer identification number (TIN) on the information return and 
the information statement.
    Section 1.6041-3 of the Income Tax Regulations provides that 
information returns are not required for certain payments. Section 
1.6041-3(q)(1) provides that an information return is not required for 
payments made to a corporation. Section 1.6041-3(c) provides that an 
information return is not required for payments of bills for 
merchandise, telegrams, telephone, freight, storage, and similar 
charges.
    Section 6109(a)(1) provides that a person required to make a return 
must include that person's identifying number in the return. Section 
6109(a)(2) provides that a person (the payee) with respect to whom a 
return is required to be made by another person (the payor) or whose 
identifying number is required to be shown on a return of another 
person must furnish to the other person the identifying number 
prescribed for securing the proper identification of the payee. Section 
6109(a)(3) provides that a person (the payor) required to make a return 
with respect to another person (the payee) must ask the other person 
for the identifying number prescribed for securing the proper 
identification of the payee and include that number in the return.
    In general, section 6721(a)(1) imposes a $50 penalty for each 
failure to file an information return on or before the required filing 
date, for any failure to include all of the information required to be 
shown on the return, or for the inclusion of incorrect information.
    Section 6724(a) provides that no penalty will be imposed under 
section 6721 if it is shown that the failure is due to reasonable cause 
and not to willful neglect.
    Section 3406(a)(1) requires a payor to withhold on any reportable 
payment (as defined in section 3406(b)(1)) in certain situations, 
including if (1) the payee fails to furnish his TIN to the payor as 
required or (2) the Secretary notifies the payor that the TIN furnished 
by the payee is incorrect.
    Section 3406(i) provides that the Secretary shall prescribe the 
regulations necessary or appropriate to carry out the purposes of 
section 3406.

3. TIN Matching

    Regulations issued under section 3406(i) (Sec.  31.3406(j)-1 of the 
Employment Tax Regulations) provide that the Commissioner has the 
authority to establish TIN matching programs through revenue procedures 
or other appropriate guidance. Under the regulations, a payor 
participating in a TIN matching program may contact the IRS with 
respect to the TIN furnished by a payee before filing information 
returns for reportable payments. The regulations further provide that 
the IRS will inform the payor whether or not the name/TIN combination 
furnished by the payee matches a name/TIN combination maintained for 
the TIN matching program.
    Pursuant to the authority in Sec.  31.3406(j)-1, the IRS issued 
Rev. Proc. 97-31 (1997-1 C.B. 703) and implemented TIN matching for 
reportable payments by Federal agency payors. The IRS is issuing a 
second TIN matching revenue procedure to expand the scope of the TIN 
Matching Program by allowing all payors (and not merely Federal agency 
payors) to participate in TIN matching for reportable payments. Under 
the authority of the temporary regulations discussed above, payors' 
authorized agents will also be permitted to participate in TIN 
matching.

4. Payment Card Transactions

    A payment card transaction is a transaction in which a cardholder/
payor uses a payment card to purchase goods or services and a merchant 
agrees to accept a payment card as a means of obtaining payment. A 
payment card is a card (or an account) issued by a payment card 
organization, or one of its members or affiliates, to a cardholder/
payor which, upon presentation to a merchant/payee, represents an 
agreement of the cardholder to pay the merchant through the payment 
card organization. A payment card organization is an entity that sets 
the standards and provides the mechanism, either directly or indirectly 
through members and affiliates, for effectuating payment between a 
purchaser and a merchant in a payment card transaction. A payment card 
organization generally provides this mechanism by issuing payment 
cards, enrolling merchants as authorized acceptors of payment cards for 
payment for goods or services, and ensuring the system conducts the 
transactions in accordance with prescribed standards of payment card 
transactions.
    The parties involved in payment card transactions may include the 
cardholder/payor, the merchant/payee, a bank that issues a payment card 
(issuing bank), a merchant/payee's bank (merchant bank, acquiring bank, 
or acquirer), and the payment card organization.
    Cash does not pass directly from the cardholder/payor to the 
merchant/payee for purchases made with a payment card. Rather, in some 
situations, payment is made by a credit from the issuing bank, through 
the payment card organization, to the merchant's bank account. In turn, 
the cardholder pays the issuing bank upon receipt of the payment card 
monthly billing statement. In other situations, payment is made 
directly from the payment card organization to the merchant. In turn, 
the cardholder pays the payment card organization upon receipt of the 
payment card monthly billing statement.

5. Information Reporting and Backup Withholding Difficulties for 
Payment Card Transactions

    Information reporting compliance is difficult in payment card 
transactions because an invoice may not be issued, and the employee of 
the cardholder/payor may not request and obtain the name/TIN 
combination of the merchant/payee at the time of the transaction. In 
addition, backup withholding may be difficult because a merchant 
receives payment from the payment card organization within a few days 
after the transaction, but the cardholder does not pay the payment card 
organization until after it receives a payment card monthly billing 
statement from the payment card organization.
    Because of these difficulties, representatives of the payment card 
industry and the Information Reporting Program Advisory Committee 
(IRPAC) have proposed that the IRS allow a payment card organization to 
act on behalf of a cardholder/payor for purposes of soliciting, 
collecting, and validating the names/TINs of the merchant/payees 
through TIN matching. In addition, they suggest that the payment card 
organization be allowed to inform the cardholder about a merchant's 
corporate status.
    The IRS is issuing a proposed revenue procedure that would allow a 
payment card organization to obtain an IRS determination that it is a 
Qualified Payment Card Agent (QPCA). The proposed procedure would 
permit a QPCA to act on behalf of a payor for purposes of soliciting, 
collecting, and validating merchants' names/TINs, and providing 
merchants' corporate status. To obtain a QPCA determination, the 
payment card organization would be required, among other things, to

[[Page 4972]]

demonstrate the reliability of its data by participating in the IRS TIN 
Matching Program and matching its merchant name/TIN data with IRS name/
TIN data.
    Certain payment card industry representatives have suggested that, 
for payments made through a QPCA, the information provided to the 
cardholder/payor should be sufficiently reliable that backup 
withholding should not apply. In addition, they have suggested that a 
cardholder/payor who files incorrect information returns should be 
considered to meet the reasonable cause requirements for a waiver under 
section 6724 if the cardholder/payor relied on payee information 
provided by a QPCA.
    The IRS and the Treasury Department agree that QPCAs, by obtaining 
TINs and participating in the IRS TIN Matching Program, can enhance the 
accuracy of information reporting by the cardholder/payors. 
Accordingly, the IRS and the Treasury Department agree that a limited 
exception to the backup withholding requirements is appropriate if 
cardholder/payors rely on a QPCA to solicit, collect, and validate 
merchant/payees' TINs. In addition, the IRS and the Treasury Department 
agree that cardholder/payors may establish reasonable cause based on 
reliance on merchant/payees' TINs supplied through a QPCA.

Explanation of Provisions

1. Backup Withholding

    The proposed regulations provide that backup withholding does not 
apply to payment card transactions if the reportable payments are made 
through a QPCA and the payee is a qualified payee. The proposed 
regulations provide that a payee is qualified if, at the time of the 
payment, the QPCA has validated the payee's TIN through the IRS TIN 
Matching Program or if the payment is made during the 6-month period 
following the date on which the QPCA first obtained the payee's TIN.
    The proposed regulations provide that reportable payments made 
through a QPCA are also exempt from backup withholding if the payment 
is made within 60 days after the date of the first payment with respect 
to which the QPCA is required to provide notification to the payor that 
the payee is not a qualified payee. Under the proposed regulations, a 
QPCA must notify a cardholder/payor of any merchant/payees that are not 
qualified payees. The notice must appear on the billing information for 
the payment. The regulations clarify that this notification does not 
constitute notice by the IRS that the payee's TIN is incorrect for 
purposes of backup withholding.

2. Waiver Under Section 6724 for Reasonable Cause

    The proposed regulations provide that a cardholder/payor may 
establish reasonable cause based on its reliance on a QPCA. Under the 
proposed regulations, special solicitation rules will apply if the 
cardholder/payor relies on a QPCA. Under those rules, a cardholder/
payor is not required to make the initial solicitation of a payee's TIN 
at the time of the transaction and generally is not required to 
undertake the first and second annual solicitations. Under the proposed 
regulations, a cardholder/payor that relies on a QPCA is required to 
solicit a payee's TIN only if the QPCA fails to provide, within a 
specified period, a TIN that the cardholder/payor believes in good 
faith to be the payee's correct TIN.

3. Effective Dates

    Section 31.3406(j)-1(a) and (f) are applicable January 31 2003. The 
amendments of Sec.  31.3406(g)-1 are proposed to be applicable for 
payments on or after January 1, 2004. The amendments of Sec.  301.6724-
1 are proposed to be applicable for information returns required to be 
filed, and information statements required to be furnished, after 
December 31, 2004. The amendments to Sec. Sec.  31.3406(g)-1 and 
301.6724-1 will not be applicable until they are finalized.

Special Analyses

    It has been determined that these proposed regulations are not a 
significant regulatory action as defined in Executive Order 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) does not apply to these regulations.
    It is hereby certified pursuant to the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) that the collection of information contained in 
these regulations will not have a significant economic impact on a 
substantial number of small entities. The reporting burden affects 
financial institution members of the payment card network that are 
affiliates of QPCAs. Most of these financial institution members are 
large businesses. To the extent that small financial institutions have 
a reporting burden, the burden is expected to be insignificant. 
Accordingly, a Regulatory Flexibility Analysis is not required.
    Pursuant to section 7805(f), this notice of proposed rulemaking 
will be submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments that 
are submitted timely to the IRS. The IRS and the Treasury Department 
specifically request comments on the clarity of the proposed 
regulations and how they can be made easier to understand. All comments 
will be available for public inspection and copying.
    A public hearing has been scheduled for May 21, 2003, beginning at 
10 a.m. in room 6718 of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be 
permitted 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 section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight copies 
by April 30, 2003. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the schedule of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of the regulations is Donna Welch, Office of 
Associate Chief Counsel (Procedure and Administration), Administrative 
Provisions and Judicial Practice Division. However, other personnel 
from the IRS and the Treasury Department participated in the 
development of the regulations.

List of Subjects

26 CFR Part 31

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

[[Page 4973]]

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 THE 
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(g)-1 is amended by adding paragraph (f) to read 
as follows:


Sec.  31.3406(g)-1  Exceptions for payments to certain payees and 
certain other payments.

* * * * *
    (f) Special rule for certain payment card transactions--(1) In 
general. No withholding under section 3406 is required for a reportable 
payment made through a payment card organization if the payment is made 
on or after January 1, 2004, the organization is a Qualified Payment 
Card Agent (QPCA), and--
    (i) The payee is a qualified payee (as defined in paragraph 
(f)(2)(v) of this section) with respect to the payment; or
    (ii) The payment is made during the 60-day period following the 
date on which the payor made the first payment with respect to which 
the QPCA is required under paragraph (f)(3) of this section to provide 
notification that the payee is a not a qualified payee.
    (2) Definitions--(i) Payment card defined. For purposes of this 
section, a payment card is a card (or an account) issued by a payment 
card organization, or one of its members or affiliates, to a 
cardholder/payor which, upon presentation to a merchant/payee, 
represents an agreement of the cardholder to pay the merchant through 
the payment card organization.
    (ii) Payment card organization defined. For purposes of this 
section, a payment card organization is an entity that sets the 
standards and provides the mechanism, either directly or indirectly 
through members and affiliates, for effectuating payment between a 
purchaser and a merchant in a payment card transaction. A payment card 
organization generally provides such a payment mechanism by issuing 
payment cards, enrolling merchants as authorized acceptors of payment 
cards for payment for goods or services, and ensuring the system 
conducts the transactions in accordance with prescribed standards for 
payment card transactions.
    (iii) Payment card transaction defined. For purposes of this 
section, a payment card transaction is a transaction in which a 
cardholder/payor uses a payment card to purchase goods or services and 
a merchant agrees to accept a payment card as a means of obtaining 
payment.
    (iv) Qualified Payment Card Agent (QPCA) defined. For purposes of 
this section, a Qualified Payment Card Agent (QPCA) is a payment card 
organization that has a current QPCA determination from the Internal 
Revenue Service (IRS) under applicable procedures (see Sec.  
601.601(d)(2) of this chapter).
    (v) Qualified payee defined. For purposes of this section, a payee 
is a qualified payee with respect to a reportable payment if--
    (A) At the time of the payment, the QPCA has obtained the payee's 
TIN and the payee's TIN has been validated through the IRS TIN Matching 
Program; or
    (B) The payment is made during the 6-month period following the 
date on which the QPCA first obtained the payee's TIN.
    (3) Notification of payee status. In the case of a reportable 
payment to a payee other than a qualified payee (as defined in 
paragraph (f)(2)(v) of this section) with respect to the payment, the 
QPCA must notify the payor on the billing information for the payment 
that the payee is not a qualified payee. The notification must appear 
on the face of the bill in print size no smaller than the print size 
used for the charge amount relating to the purchase from the payee. 
Notification may consist of an asterisk, footnote, or other mark next 
to the payee's name or the charge, with the text of the notification at 
the bottom of the page or at the end of the list of charges. 
Notification by the QPCA that a payee is not a qualified payee does not 
constitute notice by the IRS that the payee's TIN is incorrect for 
purposes of section 3406(a)(1)(B) and Sec.  31.3406(d)-5.
    3. In Sec.  31.3406(j)-1, paragraphs (a) and (f) are revised to 
read as follows:


Sec.  31.3406(j)-1  Taxpayer Identification Number (TIN) matching 
program.

    (a) [Section 31.3406(j)-1(a) is the same as Sec.  31.3406(j)-1T(a) 
published elsewhere in this issue of the Federal Register.]
* * * * *
    (f) [Section 31.3406(j)-1(f) is the same as Sec.  31.3406(j)-1T(f) 
published elsewhere in this issue of the Federal Register.]

PART 301--PROCEDURE AND ADMINISTRATION

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

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

    5. Section 301.6724-1 is amended by:
    1. Revising the introductory language of paragraph (c)(6).
    2. Adding paragraphs (e)(1)(vi)(H) and (f)(5)(vii).
    The revision and additions read as follows:


Sec.  301.6724-1  Reasonable cause.

* * * * *
    (c) * * *
    (6) Actions of the payee or any other person. In order to establish 
reasonable cause under paragraph (c)(1) of this section due to the 
actions of the payee or any other person, such as a broker as defined 
in section 6045(c) or a Qualified Payment Card Agent (QPCA) as defined 
in Sec.  31.3406(g)-1(f)(2)(iv) of this chapter, providing information 
with respect to the return or payee statement, the filer must show 
either--
* * * * *
    (e) * * *
    (1) * * *
    (vi) * * *
    (H) In the case of information returns required to be filed, and 
information statements required to be furnished, after December 31, 
2004, the filer--
    (1) Satisfies the solicitation requirements of paragraphs (e)(1)(i) 
and (ii) of this section with respect to a payment made through a QPCA 
if the filer relies in good faith on the QPCA to solicit, record, 
validate, and furnish the payee's TIN; and
    (2) Satisfies the solicitation requirement of paragraph (e)(1)(iii) 
of this section with respect to such a payment if, on or before 
December 31 of the year immediately succeeding the calendar year in 
which the payment is made, the filer undertakes a solicitation of the 
payee's TIN or receives from the QPCA a TIN that the filer believes in 
good faith to be the payee's correct TIN.
* * * * *
    (f) * * *
    (5) * * *
    (vii) In the case of information returns required to be filed, and 
information statements required to be furnished, after December 31, 
2004, the filer--
    (A) Satisfies the solicitation requirement of paragraph (f)(1)(i) 
of this section with respect to a payment made through a QPCA if the 
filer relies in good faith on the QPCA to solicit, record, validate, 
and furnish the payee's TIN; and
    (B) Satisfies the solicitation requirement of paragraph (f)(1)(ii) 
or (iii)

[[Page 4974]]

of this section, whichever is applicable, with respect to such a 
payment if, after the date the filer is notified that the account of 
the payee contains an incorrect TIN and on or before the date by which 
the applicable requirement must be satisfied, the filer solicits the 
payee's correct TIN in a manner that satisfies the applicable 
requirement or receives from the QPCA a TIN that the filer believes in 
good faith to be the payee's correct TIN.
* * * * *

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
[FR Doc. 03-2208 Filed 1-30-03; 8:45 am]
BILLING CODE 4830-01-U