[Federal Register Volume 69, Number 133 (Tuesday, July 13, 2004)]
[Rules and Regulations]
[Pages 41938-41943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15751]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31, 301, and 602

[TD 9136]
RIN 1545-BA17


Information Reporting and Backup Withholding for Payment Card 
Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
information reporting requirements, information reporting penalties, 
and backup withholding requirements for payment card transactions. This 
document also contains final regulations relating to the IRS TIN 
Matching Program. The regulations in this document affect payors (and 
their authorized agents) and payees of certain reportable payments and 
provide guidance necessary to comply with the law.

DATES: Effective date: These regulations are effective July 13, 2004.
    Applicability dates: The amendments to Sec.  31.3406(g)-1 are 
applicable for payments made on or after January 1, 2005. The 
amendments to Sec.  301.6724-1 are applicable for information returns 
required to be filed, and information statements required to be 
furnished, after December 31, 2005. Section 31.3406(j)-1(a) and (f) are 
applicable January 31, 2003.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Donna 
Welch, (202) 622-4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has 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)) 
under control number 1545-1819.
    The collection of information is in Sec.  31.3406(g)-1(f)(3). This 
information is necessary to notify a cardholder/payor that a merchant/
payee is not a qualified payee for purposes of the regulations. This 
information will alert a cardholder/payor that backup withholding under 
section 3406 may apply for future reportable payments. 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 per respondent: 5,875 hours.
    Estimated number of respondents: 2,000.
    Estimated annual frequency of responses: monthly.
    Comments concerning the accuracy of this burden and suggestions for 
reducing this burden should be sent to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 
20224, and 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.
    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

    This document contains amendments to 26 CFR part 31 relating to 
backup withholding and the IRS TIN Matching Program under section 3406 
of the Internal Revenue Code (Code). It also contains amendments to 26 
Part 301 relating to waivers under section 6724 of information 
reporting penalties under sections 6721 and 6722.
    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, 
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.
    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

[[Page 41939]]

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)) if (1) the payee fails to 
furnish the payee's TIN to the payor as required or (2) the Secretary 
notifies the payor that the TIN furnished by the payee is incorrect. 
Section 3406(a)(1) also requires withholding in certain other 
situations that are not addressed in these regulations. Section 3406(i) 
provides that the Secretary shall prescribe the regulations necessary 
or appropriate to carry out the purposes of section 3406.
    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) that (1) is issued by a payment 
card organization or one of its members, affiliates, or licensees to a 
cardholder/payor and (2) represents, upon presentation to a merchant/
payee, 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, acting directly or 
indirectly through its members, affiliates, or licensees, for 
effectuating payment between a purchaser and a merchant in a payment 
card transaction.
    Information reporting compliance is difficult in payment card 
transactions because an invoice may not be issued, and the employee 
representing the cardholder/payor in the transaction 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.

The Temporary and Proposed Regulations

    On January 31, 2003, temporary regulations relating to the IRS TIN 
Matching Program were published in the Federal Register (TD 9041; 68 FR 
4922). The temporary regulations permit a payor's authorized agent to 
participate in the IRS TIN Matching Program on behalf of the payor. 
Under the authority of these temporary regulations, the IRS issued Rev. 
Proc. 2003-9 (2003-1 C.B. 516) that allows payors' authorized agents, 
as well as all payors, to participate in the IRS TIN Matching Program.
    A notice of proposed rulemaking (REG-116641-01) cross-referencing 
the temporary regulations was also published in the Federal Register 
(68 FR 4970) for January 31, 2003. The notice of proposed rulemaking 
contained additional proposed rules relating to the information 
reporting and backup withholding requirements for payment card 
transactions effectuated through a Qualified Payment Card Agent (QPCA).
    The proposed regulations provide limited exceptions to the backup 
withholding requirements for payment card transactions. The principal 
exception applies if the payment is made through a QPCA and the payee 
is a qualified payee.
    A payee is qualified for this purpose 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 six-month period 
following the date on which the QPCA first obtained the payee's TIN 
(six-month grace period). 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 proposed regulations provide a second exception for payments to 
persons other than qualified payees. Under this exception, reportable 
payments made through a QPCA are 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.
    In addition, the proposed regulations provide that cardholder/
payors may establish reasonable cause for a failure to include all of 
the information required to be shown on their information returns, or 
for the inclusion of incorrect information, based on reliance on 
merchant/payee TINs supplied through a QPCA.
    The proposed regulations provide that the rules relating to backup 
withholding and information reporting for payment card transactions 
apply during 2004. The temporary rule permitting agents to participate 
in the TIN matching program was effective January 31, 2003.
    A public hearing was held on the proposed regulations on May 2, 
2003. The IRS also received written and electronic comments responding 
to the notice of proposed rulemaking.

Explanation of Provisions and Summary of Comments

    After consideration of all the comments, the proposed regulations 
relating to the backup withholding requirements for payment card 
transactions effectuated through a QPCA and the reasonable cause 
exception to information reporting penalties are adopted as revised by 
this Treasury decision. The revisions are discussed below. The 
temporary amendments to the regulations relating to the IRS TIN 
Matching Program are also adopted as final regulations and the 
corresponding temporary regulations are removed.

1. Backup Withholding

    Several commentators recommended that the final regulations 
eliminate the qualified payee requirement and provide a complete 
exemption from backup withholding for payment card transactions made 
through a QPCA. One commentator noted that Sec.  31.3406(g)-2(e) of the 
regulations provides that a real estate reporting person is not 
required to backup withhold on a real estate transaction subject to 
reporting under section 6045. As an alternative to backup withholding, 
this commentator suggested that the QPCA should provide a list to the 
IRS of the merchant/payees for whom the QPCA cannot obtain valid TINs. 
The commentator further suggested that the IRS should impose penalties 
on the merchant/payees who fail to furnish valid TINs, rather than 
require backup withholding.
    The regulatory exception for real estate transactions is based on 
section 3406(h)(5)(D), which provides that, except as otherwise 
provided in regulations, a real estate broker (as defined in section 
6045(e)(2)) is not a broker for purposes of section 3406. The Code also 
includes limited grants of regulatory authority to except otherwise 
reportable payments from backup withholding in section 3406(b)(5) 
(relating to payments that do not exceed $10) and in section 3406(g) 
(relating to payments to specified payees). The IRS and the Treasury 
Department do not view these limited grants of regulatory authority as 
authorizing a regulatory exemption for a broad class of transactions, 
which according to the comments involve payments of over $100 billion 
per year, regardless of the payee's identity or compliance with its tax 
obligations. Therefore, the final regulations do not adopt the 
recommendation for a complete exemption from backup withholding for 
payment card transactions made through a QPCA.

[[Page 41940]]

    Several comments criticized the specific rules for determining 
whether a payee is a qualified payee and when backup withholding is 
required with respect to a payee who is not qualified. In general, the 
commentators viewed these rules as incompatible with current business 
practice because they require QPCAs to evaluate the status of payees at 
the time of each transaction and to communicate to cardholders through 
the billing process. The commentators suggested various changes to 
conform the rules to current business practices.
    The IRS and the Treasury Department agree that the rules should 
accommodate current business practices to the extent practicable but 
believe some of the suggestions in the comments go beyond what is 
necessary and provide excessive periods of exemption from backup 
withholding for noncompliant payees. Accordingly, the final regulations 
include a number of new rules to address the commentators' concerns but 
do not adopt all of the specific changes suggested in the comments.
    As suggested in the comments, the final regulations eliminate the 
requirement that QPCAs include information regarding payee status with 
the billing statement furnished to the payor. Instead, the final 
regulations require that the information be furnished within four 
months of the date of the payment and permit the information to be 
furnished as part of a quarterly or other regular report of payee data 
to the cardholder. To eliminate the need to evaluate the status of 
payees at the time of each payment, the final regulations permit QPCAs 
to treat all payments made during a calendar quarter or any shorter 
reporting period as being made on the last day of the period. Thus, for 
a QPCA choosing this treatment, a payee will be treated as a qualified 
payee with respect to all payments during the period if the QPCA 
obtains and verifies the payee's TIN at any time before the end of the 
period. Similarly, payments will be treated as being made on the last 
day of the reporting period for purposes of determining whether they 
are made within the six-month grace period. In this case, however, the 
regulations also provide that the grace period with respect to a payee 
will be treated as beginning not on the date of the first payment to 
the payee but on the first day of the reporting period in which the 
QPCA makes the payment.
    The 60-day exception from backup withholding for payments made to 
persons that are not qualified payees is also modified to reflect the 
new rules for determining payee status and notifying cardholders. The 
exception in the final regulations applies to purchases made no later 
than two months after the last date for providing the first notice 
informing the cardholder that the payee is not a qualified payee.
    One commentator suggested that a QPCA should be allowed to furnish 
information regarding payee status electronically on a secure website. 
The IRS and the Treasury Department are continuing to consider this 
comment and may issue further guidance on this issue.
    Several commentators requested that the final regulations clarify 
that the individual to whom the card is issued is not the cardholder/
payor if another person is responsible for paying the charges on the 
card. The commentators were concerned that employees might be treated 
as cardholders in situations where payment cards are issued to 
employees of the person responsible for paying charges on the card. The 
final regulations provide the requested clarification.
    Several commentators requested that the final regulations clarify 
that a QPCA may act directly or indirectly through its members, 
affiliates, or licensees. The final regulations also provide this 
clarification.
    Several commentators requested clarification of the cardholder/
payor's obligations if the payor receives notification that a payee is 
not a qualified payee. Under the final regulations, backup withholding 
may be required for purchases made more than two months after the last 
date for furnishing the first notification that the payee is not a 
qualified payee. For purchases after that date, the payor must backup 
withhold on any reportable payment unless it has obtained the payee's 
TIN in accordance with the generally applicable rules under section 
3406 or the QPCA has remedied the failure that caused the 
disqualification by obtaining and verifying the payee's TIN. If the 
payor is required to backup withhold and ordinarily uses a payment 
method incompatible with backup withholding, the continued use of that 
payment method will not relieve the payor of its backup withholding 
obligation. (See section 3406(h)(10), which provides payments subject 
to backup withholding are treated as wages paid by an employer to an 
employee; and section 3403, which provides that an employer is liable 
for taxes required to be withheld and deducted.)

2. Effective Dates

    Because the proposed rules relating to backup withholding and 
information reporting for payment card transactions were not finalized 
before the beginning of 2004, their effective dates have been delayed. 
The final rules relating to backup withholding will apply to payments 
made after 2004 and final rules relating to information reporting will 
apply to returns due after 2005. The temporary rule permitting agents 
to participate in the TIN matching program is adopted as a final 
regulation with no change to its effective date of January 31, 2003.
    One payment card organization suggested that the IRS repropose the 
regulations or issue them with an effective date of not less than two 
years after publication. The comment noted that reproposing the 
regulations would provide an opportunity for further study and comment 
and would provide time to test the rules in a pilot program. This 
suggestion was not adopted. The IRS and the Treasury Department 
recognize that providing an opportunity for further comment may result 
in improved rules, but there is no assurance that this will be the 
case. The IRS and the Treasury Department believe that the 
indeterminate benefit suggested in the comment does not outweigh the 
certainty that the suggested delay would deny payors any benefit from 
the backup withholding exception and penalty relief contained in the 
final regulations during the period of the delay.

Other Guidance

    The IRS is also issuing two revenue procedures to implement the 
rules contained in the final regulations. The first of these revenue 
procedures sets forth the requirements that a payment card organization 
must satisfy to obtain an IRS determination that it is a QPCA. The 
revenue procedure also provides that a QPCA may act on behalf of a 
cardholder/payor for purposes of soliciting, collecting, and validating 
the names/TINs of the merchant/payees and on behalf of a merchant/payee 
for purposes of furnishing the payee's name and TIN to the cardholder/
payor.
    The second revenue procedure provides an optional procedure for 
payors and their authorized agents to use in determining whether 
payment card transactions are reportable under section 6041 or section 
6041A and are reportable payments for purposes of the IRS TIN Matching 
Program. In general, this revenue procedure classifies businesses by 
Merchant Category Codes (MCCs), or other equivalent Industry Codes, 
according to whether they predominantly furnish services (for which 
payments are reportable) or predominantly provide goods (for which 
payments are not reportable). Under the

[[Page 41941]]

revenue procedure, payment card organizations would be permitted to 
assign MCCs, or other equivalent Industry Codes, to payees and payors 
would be permitted to rely on the assigned codes for information 
reporting and TIN matching purposes.

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.
    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 
payment card organizations and financial institutions that issue 
payment cards. Most payment card organizations and payment card issuers 
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) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

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.

26 CFR Part 301

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

26 CFR Part 602

    Reporting and recordkeeping.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 31, 301, and 602 are amended as follows:

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

0
Paragraph 1. The authority citation for part 31 is amended by removing 
the entry for section 31.3406(j)-1T to read in part as follows:

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

0
Par. 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, 2005, the organization is a Qualified Payment 
Card Agent (QPCA), and--
    (i) The payee is a qualified payee (as defined in paragraph 
(f)(2)(vi) of this section) with respect to the payment; or
    (ii) The cardholder/payor made the purchase to which the payment 
relates no later than two months after the last date prescribed under 
paragraph (f)(3) of this section for furnishing the QPCA's first 
notification to the cardholder/payor that the payee is 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, affiliates, or licensees, 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, affiliates, or licensees, for effectuating payment 
between a purchaser and a merchant in a payment card transaction. A 
payment card organization acting directly or indirectly through its 
members, affiliates, or licensees 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) Cardholder/payor defined. For purposes of this section, a 
cardholder/payor is the person that agrees to make payments through the 
payment card organization. Thus, in the case of a payment card issued 
to an employee of a person that agrees to make payments through the 
payment card organization, the employer rather than the employee is the 
cardholder/payor.
    (v) 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).
    (vi) 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 the QPCA makes 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 QPCA makes the payment during the six-month period 
beginning on the date on which the QPCA first makes a payment to the 
payee.
    (3) Notification of payee status. In the case of a payment to a 
payee other than a qualified payee as defined in paragraph (f)(2)(vi) 
of this section with respect to the payment, the QPCA acting directly 
or indirectly through its members, affiliates, or licensees must notify 
the payor that the payee is not a qualified payee. The notification 
must be furnished during the four-month period beginning on the date on 
which the QPCA makes the payment. Notification may be provided in a 
quarterly or other regular report of payee data to the cardholder/payor 
and may consist of an asterisk, footnote, or other mark next to the 
payee's name, with the text of the notification at the bottom of the 
page or at the end of the list of payee data. 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.

[[Page 41942]]

    (4) Time of payment. A QPCA that makes reports to cardholders on 
the basis of a calendar quarter or any shorter period (the reporting 
period) may choose to treat all payments made during the reporting 
period as being made on the last day of the period for purposes of 
paragraphs (f)(2)(vi) and (f)(3) of this section. If the QPCA treats 
payments as being made on the last day of a reporting period, the six-
month period in paragraph (f)(2)(vi) of this section and the four-month 
period in paragraph (f)(3) of this section are treated as beginning on 
the first day of the reporting period in which the QPCA makes the 
payment that would otherwise begin the six-month or four-month period.
    (5) Examples. The following examples illustrate the rules of this 
section. For purposes of the examples, assume that Q meets all 
requirements and fulfills all duties necessary to obtain a QPCA 
determination from the IRS. The examples are as follows:

    Example 1. (i) Q, a QPCA, enrolls Merchant X on January 20, 
2005, to accept the Q payment card as a means for obtaining payment. 
(The results in this example are the same whether the acts 
attributed to Q are performed by Q itself or by a member, affiliate, 
or licensee of Q.) At the time of enrollment, Q obtains Merchant X's 
taxpayer identification number (TIN). Merchant X is a sole 
proprietor engaged in the trade or business of repairing automobiles 
and trucks. Q's first payment to Merchant X for purchases through 
the payment card is made on January 31, 2005.
    (ii) On March 1, 2005, Q issues a Q payment card to Customer A 
to use for the purchase of goods or services in the course of its 
trade or business from merchants that accept the Q payment card. 
During 2005, Customer A uses Q payment card to purchase repairs to 
A's vehicles from Merchant X on April 29, 2005, July 29, 2005, and 
December 19, 2005. Q makes payments for the repairs on May 2, 2005, 
August 1, 2005, and December 20, 2005. Q provides reports of payee 
data to each of its cardholders, including Customer A, on the 15th 
of April, July, October, and January for the quarter ending on the 
last day of the preceding month, but does not choose to treat 
payments as being made on the last day of the quarter for purposes 
of paragraphs (f)(2)(vi) and (f)(3) of this section.
    (iii) On March 15, 2005, Q attempts to validate Merchant X's 
name/TIN through the IRS TIN Matching Program. On March 20, 2005, 
the IRS notifies Q that the name/TIN furnished by Merchant X does 
not match IRS data. On June 15, 2005, and September 15, 2005, Q 
makes further unsuccessful attempts to validate Merchant X's name/
TIN through the IRS TIN Matching Program.
    (iv) Under paragraph (f)(2)(vi)(B) of this section, Merchant X 
is treated as a qualified payee for the six-month period beginning 
on January 31, 2005 (the date of Q's first payment to Merchant X), 
and ending on July 30, 2005. Accordingly, the payment on May 2, 
2005, is a payment to a qualified payee and, under paragraph 
(f)(1)(i) of this section, is not subject to backup withholding.
    (v) Q has not validated Merchant X's TIN at the time of the 
payments on August 1, 2005, and December 20, 2005. Accordingly, 
under paragraph (f)(3) of this section, Q must notify Customer A 
within four months of each of these payments that Merchant X is not 
a qualified payee with respect to the payments. In the case of the 
August 1 payment, the notification must be furnished no later than 
November 30, 2005. Q may provide the notification in its quarterly 
report of payee data for the July-September quarter furnished on 
October 15, 2005.
    (vi) Although Merchant X is not a qualified payee with respect 
to the payments on August 1, 2005, and December 20, 2005, paragraph 
(f)(1)(ii) of this section provides that backup withholding is not 
required for purchases made no later than two months after the last 
date prescribed for furnishing the first notification that Merchant 
X is not a qualified payee. The last date for furnishing the first 
notification is November 30, 2005, and the two-month period expires 
on January 30, 2006. Because the payments relate to purchases on 
July 29, 2005, and December 19, 2005, backup withholding is not 
required with respect to either payment. Backup withholding may be 
required with respect to any payment Customer A makes through the Q 
payment card for purchases from Merchant X after January 30, 2006, 
unless Q has previously succeeded in validating Merchant X's TIN.
    Example 2. (i) Assume the same facts as in example (1) except 
that Q chooses to treat payments as being made on the last day of 
the quarter for purposes of paragraphs (f)(2)(vi) and (f)(3) of this 
section.
    (ii) The payment Q makes on January 31, 2005, is treated under 
paragraph (f)(4) of this section as being made on March 31, 2005. 
Similarly, the payments made on May 2, 2005, August 1, 2005, and 
December 20, 2005, are treated as being made on June 30, 2005, 
September 30, 2005, and December 31, 2005.
    (iii) Under paragraphs (f)(2)(vi)(B) and (f)(4) of this section, 
Merchant X is treated as a qualified payee for the six-month period 
beginning on January 1, 2005 (the beginning of the reporting period 
during which Q makes the first payment to Merchant X), and ending on 
June 30, 2005. Accordingly, the payment treated as made on June 30, 
2005, is a payment to a qualified payee and, under paragraph 
(f)(1)(i) of this section, is not subject to backup withholding.
    (iv) Q has not validated Merchant X's TIN at the time of the 
payments that are treated as being made on September 30, 2005, and 
December 31, 2005. Accordingly, under paragraphs (f)(3) and (f)(4) 
of this section, Q must notify Customer A within four months of the 
beginning of each reporting period during which Q makes these 
payments that Merchant X is not a qualified payee with respect to 
the payments. In the case of the September 30 payment, the 
notification must be furnished no later than October 31, 2005. Q may 
provide the notification in its quarterly report of payee data for 
the July-September quarter furnished on October 15, 2005.
    (v) Although Merchant X is not a qualified payee with respect to 
the payments that are treated as being made on September 30, 2005, 
and December 31, 2005, paragraph (f)(1)(ii) of this section provides 
that backup withholding is not required for purchases made no later 
than two months after the last date prescribed for furnishing the 
first notification that Merchant X is not a qualified payee. The 
last date for furnishing the first notification is October 31, 2005, 
and the two-month period expires on December 31, 2005. Because the 
payments relate to purchases on July 29, 2005, and December 19, 
2005, backup withholding is not required with respect to either 
payment. Backup withholding may be required with respect to any 
payment Customer A makes through the Q payment card for purchases 
from Merchant X after December 31, 2005, unless Q has previously 
succeeded in validating Merchant X's TIN.


Sec.  31.3406(j)-1T  [Removed]

0
Par. 3. Section 31.3406(j)-1T is removed.
0
Par. 4. Section 31.3406(j)-1 is amended by revising paragraphs (a) and 
(f) to read as follows:


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

    (a) The matching program. Under section 3406(i), the Commissioner 
has the authority to establish Taxpayer Identification Number (TIN) 
matching programs. The Commissioner may prescribe in a revenue 
procedure (see Sec.  601.601(d)(2) of this chapter) or other 
appropriate guidance the scope and the terms and conditions of 
participating in any TIN matching program. In general, under a matching 
program, prior to filing information returns with respect to reportable 
payments as defined in section 3406(b)(1), a payor of those reportable 
payments who is entitled to participate in the matching program may 
contact the Internal Revenue Service (IRS) with respect to the TIN 
furnished by a payee who has received or is likely to receive a 
reportable payment. The IRS will inform the payor whether or not a 
name/TIN combination furnished by the payee matches a name/TIN 
combination maintained in the data base utilized for the particular 
matching program. For purposes of this section, the term payor includes 
an agent designated by the payor to participate in TIN matching on the 
payor's behalf.
* * * * *
    (f) Effective date. The last sentence in paragraph (a) of this 
section is applicable on January 31, 2003. All other provisions of this 
section are applicable on and after June 18, 1997.

[[Page 41943]]

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 5. The authority citation for part 301 continues to read in part 
as follows:

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


0
Par. 6. Section 301.6724-1 is amended by:
0
1. Revising the introductory language of paragraph (c)(6).
0
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)(v) 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, 
2005, 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, 
2005, 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) 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.
* * * * *

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

0
Par. 7. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 8. In Sec.  602.101, paragraph (b) is amended by revising the 
entry for 31.3406(g)-1 in the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described         control
                                                                 No.
------------------------------------------------------------------------
 
                                * * * * *
31.3406(g)-1...............................................    1545-0096
                                                               1545-0112
                                                               1545-1819
 
                                * * * * *
------------------------------------------------------------------------


Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved by: July 1, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-15751 Filed 7-12-04; 8:45 am]
BILLING CODE 4830-01-P