[Federal Register Volume 76, Number 89 (Monday, May 9, 2011)]
[Proposed Rules]
[Pages 26678-26679]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10758]



Internal Revenue Service

26 CFR Part 31

RIN 1545-BJ98

Withholding on Payments by Government Entities to Persons 
Providing Property or Services

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.


SUMMARY: This document contains proposed regulations relating to 
withholding by government entities on payments to persons providing 
property or services. The proposed regulations reflect changes in the 
law made by the Tax Increase Prevention and Reconciliation Act of 2005 
that require Federal, State, and local government entities to withhold 
income tax when making payments to persons providing property or 
services. These proposed regulations would change the provisions 
related to the effective date of the final regulations concerning these 
withholding requirements that are being issued concurrently with these 
proposed regulations. The guidance affects government entities that are 
required to withhold from payments to persons providing property or 
services and persons receiving the payments.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 8, 2011.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-151687-10), room 
5205, Internal Revenue Service, P.O. Box 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:LPD:PR (REG-
151687-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov/ (IRS REG-151687-10).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
A.G. Kelley, (202) 622-6040; concerning submissions of comments or to 
request a public hearing, Oluwafunmilayo Taylor at (202) 622-7180 (not 
toll-free numbers).



    This document contains proposed amendments to 26 CFR Part 31 under 
section 3402(t) of the Internal Revenue Code (Code). Section 3402(t) of 
the Code was added by section 511 of the Tax Increase Prevention and 
Reconciliation Act of 2005, Public Law 109-222 (TIPRA), 120 Stat. 345, 
which was enacted into law on May 17, 2006. Section 3402(t)(1) provides 
that the Government of the United States, every State, every political 
subdivision thereof, and every instrumentality of the foregoing 
(including multi-State agencies) making any payment to any person 
providing any property or services (including any payment made in 
connection with a government voucher or certificate program which 
functions as a payment for property or services) shall deduct and 
withhold from such payment a tax in an amount equal to 3 percent of 
such payment. Section 3402(t)(2) provides exceptions to withholding 
under section 3402(t).
    Section 1511 of the American Recovery and Reinvestment Act of 2009 
(Pub. L. 111-5), 123 Stat. 115, 355, amended the effective date of 
section 3402(t) withholding. As amended, the statute provides that 
section 3402(t) applies to payments made after December 31, 2011.
    Notice 2010-91, 2010-52 IRB 915, provided interim guidance on the 
application of section 3402(t) to payments by debit cards, credit 
cards, stored value cards, and other payment cards.
    Proposed regulations under sections 3402(t), 3406, 6011, 6051, 
6071, and 6302 of the Code were published in the Federal Register on 
December 5, 2008 (REG-158747-06, 73 FR 74082, 2009-4 IRB 362) (the 
``2008 proposed regulations''). The 2008 proposed regulations proposed 
applying the withholding obligations to payments beginning on January 
1, 2011, but proposed excluding payments made under contracts existing 
on January 1, 2011, unless those contracts were materially modified. 
The final regulations provide an additional one-year extension beyond 
the amended effective date of the statute. Thus, under the final 
regulations, the withholding obligation applies to payments made after 
December 31, 2012, and the exclusion applies to contracts existing on 
December 31, 2012, that are not materially modified on or after 
December 31, 2012. These final regulations under sections 3402(t), 
3406, 6011, 6051, 6071, and 6302 of the Code (REG-158747-06, Treasury 
decision) are being published in the Federal Register concurrently with 
these proposed regulations.
    Several commenters on the 2008 proposed regulations expressed 
concern that the requirement to differentiate between payments subject 
to withholding and payments not subject to withholding based on whether 
the payment was made under a contract existing on December 31, 2011, 
and whether that contract had been materially modified, would be 
burdensome to apply. In response to these concerns, these proposed 
regulations would provide that the exclusion for payments under 
existing contracts that had not been materially modified would 
terminate with payments after December 31, 2013. Thus, these proposed 
regulations would subject payments under all contracts to section 
3402(t) withholding after December 31, 2013, unless another exception 
applied. This rule would avoid the administrative burden of 
distinguishing between payments made under existing contracts and all 
other payments while allowing time to address concerns about applying 
the withholding requirements to existing contracts.

Proposed Effective Date

    These regulations are proposed to apply to payments made after 
December 31, 2011.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined

[[Page 26679]]

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 
this regulation, and because the regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Internal Revenue Code, this regulation has been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are timely submitted to the 
IRS. All comments will be available at http://www.regulations.gov or 
for public inspection and copying upon request. A public hearing will 
be scheduled if requested in writing by any person that timely submits 
written or electronic comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is A.G. Kelley, 
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities). However, other personnel from the IRS and the 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 31

    Employment taxes, Fishing vessels, Gambling, Income taxes, 
Penalties, Pensions, Railroad retirement, Reporting and recordkeeping 
requirements, Social Security, Unemployment compensation.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 31 is proposed to be amended as follows:


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

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

    Par. 2. Section 31.3402(t)-1 is amended by revising paragraph 
(d)(2) to read as follows:

Sec.  31.3402(t)-1  Withholding requirement on certain payments made by 
government entities.

* * * * *
    (d) * * *
    (2) Payments made under a written binding contract that was in 
effect on December 31, 2012, are not subject to the withholding 
requirements of this section for payments made prior to January 1, 
2014. The preceding sentence does not apply to payments made under any 
contract that is materially modified after December 31, 2012. For this 
purpose, a material modification includes only a modification that 
materially affects the property or services to be provided under the 
contract, the terms of payment for the property or services under the 
contract, or the amount payable for the property or services under the 
contract. Notwithstanding the foregoing, a material modification does 
not include a mere renewal of a contract. A material modification also 
does not include a modification to the contract required by applicable 
Federal, State or local law. The amendment to Sec.  31.3402(t)-1(d)(2) 
applies with respect to payments made after December 31, 2012.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-10758 Filed 5-6-11; 8:45 am]