[Federal Register Volume 91, Number 6 (Friday, January 9, 2026)]
[Proposed Rules]
[Pages 934-937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-00254]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-112829-25]
RIN 1545-BR80
Backup Withholding on Third Party Network Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed amendments to the regulations
governing backup withholding. The proposed regulations reflect recent
changes to the statutory law. These changes will affect third party
settlement organizations who make payments in settlement of third party
network transactions.
DATES: Electronic or written comments and requests for a public hearing
must be received by March 10, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at https://www.regulations.gov (indicate IRS and
REG-112829-25) by following the online instructions for submitting
comments. Requests for a public hearing must be submitted as prescribed
in the ``Comments and Requests for a Public Hearing'' section. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comment submitted to
the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-
112829-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Casey Conrad at (202) 317-6844 (not toll-free number); concerning
submission of comments or requests for a hearing, the Publications and
Regulations Section at (202) 317-6901 (not toll-free number) or by
email at [email protected] (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed amendments to the Employment Taxes
and Collection of Income Tax at the Source Regulations (26 CFR part 31)
under section 3406 of the Internal Revenue Code (Code). The proposed
regulations are issued under the authority conferred by section
3406(i), which provides the Secretary of the Treasury or the
Secretary's delegate (Secretary) with authority to ``prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of [section 3406].''
The proposed regulations are also issued pursuant to section
7805(a) of the Code, which authorizes the Secretary to ``prescribe all
needful rules and regulations for the enforcement of [the Code],
including all rules and regulations as may be necessary by reason of
any alteration of law in relation to internal revenue.''
Background
This document contains proposed amendments to regulations impacted
by amendments to sections 6050W and 3406 of the Code made by section
70432 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known
as the One, Big, Beautiful Bill Act (OBBBA).
I. Section 6050W
Section 6050W requires payment settlement entities, including
merchant acquiring entities and third party settlement organizations
(TPSOs), to report certain payments made to participating payees for
reportable payment transactions. Section 6050W(b) requires TPSOs to
file information returns reporting the gross amounts of reportable
payments made in settlement of third party network transactions. As
originally enacted by the Housing Assistance Tax Act of 2008, Public
Law 110-289, 122 Stat. 2908 (July 30, 2008), section 6050W required
TPSOs to file information returns if payments to a payee exceeded
$20,000 and 200 transactions in a calendar year. In 2021, the American
Rescue Plan Act of 2021 (ARPA), Public Law 117-2, 135 Stat. 4 (March
11, 2021), amended section 6050W(e) to lower the TPSO reporting
threshold, requiring reporting by TPSOs when payments to a payee
exceeded $600 in a calendar year, without regard to the number of
transactions. OBBBA section 70432(a) retroactively reverted the
reporting threshold to the pre-ARPA level, requiring reporting by a
TPSO when payments to a payee exceed $20,000 and 200 transactions in a
calendar year. OBBBA section 70432(a)(2) provides that this change
``shall take effect as if included in section 9674 of the American
Rescue Plan Act.'' These payments are reported on a Form 1099-K,
Payment Card and Third Party Network Transactions.
II. Section 3406
Section 3406(a) requires backup withholding for reportable payments
where certain conditions are met. Pursuant to section 3406(b)(3)(F), a
reportable payment includes payments required to be shown on a return
required under section 6050W. Generally, under section 3406(b)(4),
whether a payment is reportable is determined without regard to the
minimum amount that must be paid before a return is required.
OBBBA section 70432(b)(1) amended section 3406(b) by adding a new
paragraph (8) that applies to calendar years beginning after December
31, 2024. Section 3406(b)(8)(A) provides that any payment in settlement
of a third party network transaction required to be shown on a return
required under section 6050W that is made during any calendar year is
treated as a reportable payment only if (1) the aggregate number of
transactions with respect to the participating payee during such
calendar year exceeds the number of transactions specified in section
6050W(e)(2), and (2) the aggregate dollar amount of transactions with
respect to the participating payee during such calendar year exceeds
the dollar amount specified in section 6050W(e)(1) at the time of such
payment.
Section 3406(b)(8)(B) provides that section 3406(b)(8)(A) does not
apply with respect to payments to any participating payee during any
calendar year if one or more payments in settlement of third party
network transactions made by the payor to the participating payee
during the preceding calendar year were reportable payments.
Explanation of Provisions
Because the existing regulations under section 6050W already
reflect the reporting threshold as codified in the OBBBA, the proposed
regulations would not alter the existing text of the regulations under
section 6050W.
The proposed regulations would update the regulations under section
3406 to reflect the statutory changes made to section 3406(b) by the
OBBBA. The proposed regulations would clarify that in the case of
payments made in settlement of third party network transactions, the
amount subject to withholding under section 3406 is determined with
regard to the exception for de minimis payments by TPSOs in section
6050W(e) and the associated regulations. Thus, under the proposed
regulations, a payment would be treated as a reportable payment under
Sec. 31.3406(b)(3)-5(a) only if (1) the
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aggregate number of transactions with respect to the participating
payee during the calendar year exceeds the number of transactions
specified in section 6050W(e)(2) (currently 200); and (2) the aggregate
dollar amount of the current transaction and all previous transactions
to the participating payee during the calendar year exceeds the dollar
amount specified in section 6050W(e)(1) at the time of such payment
(currently $20,000).
The proposed regulations would also clarify that the amount subject
to withholding is the entire amount of the transaction that causes
either the total number of transactions to exceed the number of
transactions specified in section 6050W(e)(2), or the entire amount of
the transaction that causes the total dollar amount paid to the payee
to exceed the dollar amount specified in section 6050W(e)(1) at the
time of such payment, whichever occurs later, and the amount of any
subsequent transactions made to the payee during the calendar year.
Finally, the proposed regulations would clarify that the exception
in proposed Sec. 31.3406(b)(3)-5(b)(2) would not apply with respect to
payments to any participating payee during any calendar year if one or
more payments in settlement of third party network transactions made by
the payor to the participating payee during the preceding calendar year
were reportable payments.
Proposed Applicability Date
These regulations are proposed to apply with respect to payments
made in calendar years beginning after December 31, 2024.
Effect on Other Documents
Notice 2023-10, 2023-3 I.R.B. 403, Notice 2023-74, 2023-51 I.R.B.
1484, and Notice 2024-85, 2024-51 I.R.B. 1349 are inconsistent with the
statutory revisions and are obsoleted as of January 9, 2026.
Special Analyses
I. Regulatory Planning and Review
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and the Office of
Management and Budget (OMB) regarding review of tax regulations.
Therefore, a regulatory impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the OMB
before collecting information from the public, whether that collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit. 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 OMB.
The collection of information in these proposed regulations relates
to recordkeeping and information reporting with respect to backup
withholding in proposed Sec. 31.3406(b)(3)-5. The collected
information will be used by the payor to determine whether payments to
the payee exceed a threshold that would require backup withholding and
the issuance of an information return. The burden for these
requirements is included with the Form and Instructions for Form 945,
Annual Return of Withheld Federal Income Tax. The Form 945 and
Instructions for Form 945 are approved under OMB control number 1545-
0029 and the associated burden is included in the estimates shown in
the Instructions for Form 941. The Form 941 and its instructions are in
the process of being updated, and any decrease in burden associated
with the statutory changes to section 3406 will be reflected in those
instructions.
III. Regulatory Flexibility Act
It is hereby certified that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter
6). The proposed rule would affect any entity required to file
information returns reporting payments of third party network
transactions. The proposed regulation could affect a substantial number
of small entities; however, the economic impact of the proposed
regulations is not likely to be significant because the proposed
regulations would not impose any new requirements on small entities.
Rather, the proposed rules would clarify the threshold at which
entities are required to backup withhold for reportable payments where
certain conditions are met. Because the threshold to backup withhold
would increase under the proposed rules, the proposed rules would
reduce the frequency with which entities must backup withhold. Thus,
the economic impact of these proposed regulations is not likely to be
significant.
Notwithstanding this certification, the Treasury Department and the
IRS welcome comments on the impact of these proposed regulations on
small entities.
IV. Submission to Small Business Administration
Pursuant to section 7805(f), this notice of proposed rulemaking has
been submitted to the Chief Counsel for the Office of Advocacy of the
Small Business Administration for comment on its impact on small
business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These proposed regulations do not include any Federal
mandate that may result in expenditures by State, local, or Tribal
governments, or by the private sector, in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. These proposed regulations do not
have federalism implications, do not impose substantial direct
compliance costs on State and local governments, and do not preempt
State law within the meaning of the Executive Order.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the Treasury Department and the IRS as prescribed in this preamble
under the ADDRESSES heading. The Treasury Department and the IRS
request comments on all aspects of the proposed rules. Any electronic
and paper comments submitted will be available at https://www.regulations.gov or upon request. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn.
A public hearing will be scheduled if requested in writing by any
person that timely submits written comments. If a public hearing is
scheduled, notice of
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the date, time, and place for the public hearing will be published in
the Federal Register.
Statement of Availability of IRS Documents
IRS Revenue Rulings, Revenue Procedures, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.
Drafting Information
The principal author of these proposed regulations is the Office of
Associate Chief Counsel (Procedure and Administration). However, other
personnel from the Treasury Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping, Social Security, Unemployment
compensation.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 31 as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
0
Paragraph 1. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Sections 31.3406(a)-1 through 31.3406(i)-1 also issued under 26
U.S.C. 3406(i).
* * * * *
0
Par. 2. Section 31.3406(a)-1 is amended by revising paragraphs (a) and
(c), and adding paragraph (e) to read as follows:
Sec. 31.3406(a)-1 Backup withholding requirements on reportable
payments.
(a) Overview. Under section 3406 of the Internal Revenue Code
(Code), a payor must deduct and withhold an amount equal to the product
of the fourth lowest rate of tax applicable under section 1(c) of the
Code and a reportable payment if a condition for withholding exists.
Reportable payments mean interest and dividend payments (as defined in
section 3406(b)(2)) and other reportable payments (as defined in
section 3406(b)(3)). The conditions described in paragraph (b)(1) of
this section apply to all reportable payments, including reportable
interest and dividend payments. The conditions described in paragraph
(b)(2) of this section apply only to reportable interest and dividend
payments.
* * * * *
(c) Exceptions. The requirement to withhold does not apply to
certain de minimis payments as described in Sec. Sec. 31.3406(b)(3)-
1(a)(3), 31.3406(b)(3)-5(b)(2), and 31.3406(b)(4)-1 or to payments
exempt from withholding under Sec. Sec. 31.3406(g)-1 through
31.3406(g)-3.
* * * * *
(e) Applicability date. The provisions of this section apply with
respect to payments made in calendar years beginning after December 31,
2024.
0
Par. 3. Section 31.3406(b)(3)-5 is amended by revising paragraphs (b)
and (e) to read as follows:
Sec. 31.3406(b)(3)-5 Reportable payments of payment card and third
party network transactions.
* * * * *
(b) Amount subject to backup withholding--(1) In general. The
amount described in paragraph (a) of this section that is subject to
withholding under section 3406 is the amount subject to reporting under
section 6050W.
(2) Third party network transactions. In the case of payments made
in settlement of third party network transactions, the amount subject
to withholding under section 3406 is determined with regard to the
exception for de minimis payments by third party settlement
organizations in section 6050W(e). A payment is treated as a reportable
payment under paragraph (a) of this section only if, during the
calendar year, the aggregate number of transactions with respect to the
participating payee exceeds the number of transactions specified in
section 6050W(e)(2) and the aggregate amount of all reportable payment
transactions with respect to such participating payee exceeds the
dollar amount specified in section 6050W(e)(1). The amount subject to
withholding is the entire amount of the transaction that causes either
the total number of transactions to exceed the number of transactions
specified in section 6050W(e)(2), or the entire amount of the
transaction that causes the total amount paid to the participating
payee to exceed the dollar amount specified in section 6050W(e)(1) at
the time of such payment, whichever occurs later, and the amount of any
subsequent transactions made to the participating payee during the
calendar year.
(3) Exception. Paragraph (b)(2) of this section does not apply with
respect to payments to any participating payee during any calendar year
if one or more payments in settlement of third party network
transactions made by the payor to the participating payee during the
preceding calendar year were reportable payments.
(4) Examples. The provisions of paragraph (b) of this section are
illustrated by the following examples:
(i) Example 1. Platform A is a third party settlement organization
(as defined in Sec. 1.6050W-1(c)(2) of this chapter) and Y is a
participating payee (as defined in Sec. 1.6050W-1(a)(5)(i)(B) of this
chapter). A complies with all the requirements to solicit a taxpayer
identification number (TIN) from Y, but Y does not provide its TIN to
A. During calendar year 2026, A makes 201 payments in settlement of
third party network transactions that total $20,000.01. A must backup
withhold under paragraph (b)(2) of this section on the entire amount of
the 201st transaction because that transaction caused Y to exceed the
de minimis reporting threshold for calendar year 2026 of 200
transactions and $20,000 in gross payments.
(ii) Example 2. The facts are the same as in paragraph (b)(4)(i) of
this section (Example 1). During calendar year 2027, A makes 199
payments in settlement of third party network transactions that total
$18,000.00. A must backup withhold on each payment made to Y in
settlement of a third party network transaction during 2027 under
paragraph (b)(3) of this section because one or more payments in
settlement of third party network transactions made by A to Y during
the preceding calendar year (2026) were reportable payments.
(iii) Example 3. The facts are the same as in paragraph (b)(4)(ii)
of this section (Example 2). During calendar year 2028, A makes four
payments in settlement of third party network transactions that total
$2,000.00. A must backup withhold on each payment made in settlement of
a third party network transaction during 2028 under paragraph (b)(3) of
this section because one or more payments in settlement of third party
network transactions made by A to Y during the preceding calendar year
(2027) were reportable payments.
(iv) Example 4. The facts are the same as in paragraph (b)(4)(iii)
of this section (Example 3). During calendar year 2029, A made no
payments in settlement of third party network transactions, and during
calendar year 2030, A makes 199 payments in settlement of third party
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network transactions that total $18,000.00. A is not required to backup
withhold on any payment made in settlement of third party network
transactions during calendar year 2030 because A did not make any
reportable payments to Y during the preceding calendar year (2029), and
A did not make payments in settlement of third party network
transactions that exceed the de minimis reporting threshold.
* * * * *
(e) Applicability date. The provisions of this section apply with
respect to payments made in calendar years beginning after December 31,
2024.
Frank J. Bisignano,
Chief Executive Officer.
[FR Doc. 2026-00254 Filed 1-8-26; 8:45 am]
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