[Federal Register Volume 68, Number 82 (Tuesday, April 29, 2003)]
[Rules and Regulations]
[Pages 22594-22596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10403]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31 and 301

[TD 9055]
RIN 1545-BA18


Receipt of Multiple Notices With Respect to Incorrect Taxpayer 
Identification Numbers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to backup 
withholding. These 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 regulations which clarify when an 
information return filer must solicit a payee's TIN following the 
receipt of a penalty notice.

DATES: These regulations are effective January 1, 2004.

FOR FURTHER INFORMATION CONTACT: Nancy L. Rose at (202) 622-4910 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains 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 regulations finalize 
proposed amendments to existing Sec. Sec.  31.3406(d)-5(d)(2)(ii) and 
(g)(4), and 301.6724-1(f)(2), (f)(3), (f)(5) and (k). These regulations 
also revise existing Sec.  301.6724(f)(1) and (g)(1) to remove obsolete 
cross-references. A notice of proposed rulemaking (REG-116644-01) was 
published in the Federal Register (67 FR 44579) on July 3, 2002. The 
IRS received written comments responding to the notice of proposed 
rulemaking, but no commentators requested the opportunity to present 
oral comments at a public hearing. A notice cancelling the public 
hearing scheduled for October 22, 2002, was published on October 17, 
2002 (67 FR 64067).

Explanation of Provisions and Summary of Comments

Section 3406

    Section 3406 imposes a requirement to backup withhold on any 
reportable payment if 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,

[[Page 22595]]

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 amendments to the regulations 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 who sends a first ``B'' notice to the payee after 
receipt of the first notice of incorrect TIN would not be required to 
send a second ``B'' notice after receipt of the second notice of 
incorrect TIN if the second notice relates to an information return 
filed for the same year as the first notice.

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.
    Section 301.6724-1(c)(1)(v) of the regulations 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.
    As provided in Sec.  301.6724-1(a), the payor must also act in a 
responsible manner with respect to the failure. That section 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.
    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.
    The amendments to the regulations address the situation where 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 section 
3406(a)(1)(B) notice. The amendments provide that the filer is not 
required to make an annual solicitation for the payee's TIN pursuant to 
section 6724 in this situation, provided the filer has sent the 
required B notice.
    The written comments received expressed the view that the proposed 
regulations clarified the backup withholding rules and reduced the 
regulatory burden associated with backup withholding. No revisions to 
the proposed amendments were suggested by commentators.

Special Analyses

    It has been determined that this Treasury decision 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 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.

Drafting Information

    The principal author of these regulations is Nancy L. Rose of the 
Office of the Associate Chief Counsel (Procedure and Administration), 
Administrative Provisions and Judicial Practice Division.

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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 31 and 301 are amended as follows:

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

0
1. The authority citation for part 31 continues to read in part as 
follows:

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


0
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

0
3. The authority citation for part 301 continues to read in part as 
follows:


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

0
4. Section 301.6724-1 is amended as follows:
0
1. Amending paragraph (f)(1)(ii), fourth sentence, by removing ``(n)'' 
after ``section 6721''.
0
2. Revising paragraphs (f)(2) and (f)(3).
0
3. Amending paragraph (f)(5)(vi), last sentence, by removing the 
language ``paragraph (f)(2)'' and adding ``paragraph (f)(3)'' in its 
place.
0
4. Amending paragraph (g)(1) by removing the language ``as provided 
under section 6724(c)(1)''.

[[Page 22596]]

0
5. 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) of this chapter'' in its place; and by 
removing the language ``(f)(2)'' and adding ``(f)(3)'' in its place.
0
6. 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.
0
7. 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.
0
8. 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.
0
9. Amending paragraph (k), Example 5, final sentence, by removing the 
language ``Sec.  301.6721-1T'' and adding ``Sec.  301.6721-1'' in its 
place.
0
10. Amending paragraph (k), Example 6(ii), sixth sentence, by removing 
the language ``(f)(3)'' and adding the language ``(f)(2)'' in its 
place.
0
11. 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.3406-1(c)(1)'' and adding ``Sec.  
31.3406(d)-5(g)(1)(ii)'' in its place.
0
12. 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 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).
* * * * *

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
    Approved: April 13, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 03-10403 Filed 4-28-03; 8:45 am]
BILLING CODE 4830-01-P