
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 101(c)(10)]
[CITE: 26USC3406]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                      Subtitle C--Employment Taxes
 
         CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
 
Sec. 3406. Backup withholding


(a) Requirement to deduct and withhold

                           (1) In general

        In the case of any reportable payment, if--
            (A) the payee fails to furnish his TIN to the payor in the 
        manner required,
            (B) the Secretary notifies the payor that the TIN furnished 
        by the payee is incorrect,
            (C) there has been a notified payee underreporting described 
        in subsection (c), or
            (D) there has been a payee certification failure described 
        in subsection (d),

    then the payor shall deduct and withhold from such payment a tax 
    equal to 31 percent of such payment.

    (2) Subparagraphs (C) and (D) of paragraph (1) apply only to 
                       interest and dividend payments

        Subparagraphs (C) and (D) of paragraph (1) shall apply only to 
    reportable interest or dividend payments.

(b) Reportable payment, etc.

    For purposes of this section--

                       (1) Reportable payment

        The term ``reportable payment'' means--
            (A) any reportable interest or dividend payment, and
            (B) any other reportable payment.

             (2) Reportable interest or dividend payment

        (A) In general

            The term ``reportable interest or dividend payment'' means 
        any payment of a kind, and to a payee, required to be shown on a 
        return required under--
                (i) section 6049(a) (relating to payments of interest),
                (ii) section 6042(a) (relating to payments of 
            dividends), or
                (iii) section 6044 (relating to payments of patronage 
            dividends) but only to the extent such payment is in money.

        (B) Special rule for patronage dividends

            For purposes of subparagraphs (C) and (D) of subsection 
        (a)(1), the term ``reportable interest or dividend payment'' 
        shall not include any payment to which section 6044 (relating to 
        patronage dividends) applies unless 50 percent or more of such 
        payment is in money.

                    (3) Other reportable payment

        The term ``other reportable payment'' means any payment of a 
    kind, and to a payee, required to be shown on a return required 
    under--
            (A) section 6041 (relating to certain information at 
        source),
            (B) section 6041A(a) (relating to payments of remuneration 
        for services),
            (C) section 6045 (relating to returns of brokers),
            (D) section 6050A (relating to reporting requirements of 
        certain fishing boat operators), but only to the extent such 
        payment is in money and represents a share of the proceeds of 
        the catch, or
            (E) section 6050N (relating to payments of royalties).

    (4) Whether payment is of reportable kind determined without 
                          regard to minimum amount

        The determination of whether any payment is of a kind required 
    to be shown on a return described in paragraph (2) or (3) shall be 
    made without regard to any minimum amount which must be paid before 
    a return is required.

              (5) Exception for certain small payments

        To the extent provided in regulations, the term ``reportable 
    payment'' shall not include any payment which--
            (A) does not exceed $10, and
            (B) if determined for a 1-year period, would not exceed $10.

    (6) Other reportable payments include payments described in 
            section 6041(a) or 6041A(a) only where aggregate for 
                        calendar year is $600 or more

        Any payment of a kind required to be shown on a return required 
    under section 6041(a) or 6041A(a) which is made during any calendar 
    year shall be treated as a reportable payment only if--
            (A) the aggregate amount of such payment and all previous 
        payments described in such sections by the payor to the payee 
        during such calendar year equals or exceeds $600,
            (B) the payor was required under section 6041(a) or 6041A(a) 
        to file a return for the preceding calendar year with respect to 
        payments to the payee, or
            (C) during the preceding calendar year, the payor made 
        reportable payments to the payee with respect to which amounts 
        were required to be deducted and withheld under subsection (a).

     (7) Exception for certain window payments of interest, etc.

        For purposes of subparagraphs (C) and (D) of subsection (a)(1), 
    the term ``reportable interest or dividend payment'' shall not 
    include any payment--
            (A) in redemption of a coupon on a bearer instrument or in 
        redemption of a United States savings bond, or
            (B) to the extent provided in regulations, of interest on 
        instruments similar to those described in subparagraph (A).

    The preceding sentence shall not apply for purposes of determining 
    whether there is payee underreporting described in subsection (c).

(c) Notified payee underreporting with respect to interest and dividends

                  (1) Notified payee underreporting

        If--
            (A) the Secretary determines with respect to any payee that 
        there has been payee underreporting,
            (B) at least 4 notices have been mailed by the Secretary to 
        the payee (over a period of at least 120 days) with respect to 
        the underreporting, and
            (C) in the case of any payee who has filed a return for the 
        taxable year, any deficiency of tax attributable to such failure 
        has been assessed,

    the Secretary may notify payors of reportable interest or dividend 
    payments with respect to such payee of the requirement to deduct and 
    withhold under subsection (a)(1)(C) (but not the reasons for the 
    withholding under subsection (a)(1)(C)).

                  (2) Payee underreporting defined

        For purposes of this section, there has been payee 
    underreporting if for any taxable year the Secretary determines 
    that--
            (A) the payee failed to include in his return of tax under 
        chapter 1 for such year any portion of a reportable interest or 
        dividend payment required to be shown on such return, or
            (B) the payee may be required to file a return for such year 
        and to include a reportable interest or dividend payment in such 
        return, but failed to file such return.

      (3) Determination by secretary to stop (or not to start) 
                                 withholding

        (A) In general

            If the Secretary determines that--
                (i) there was no payee underreporting,
                (ii) any payee underreporting has been corrected (and 
            any tax, penalty, or interest with respect to the payee 
            underreporting has been paid),
                (iii) withholding under subsection (a)(1)(C) has caused 
            (or would cause) undue hardship to the payee and it is 
            unlikely that any payee underreporting by such payee will 
            occur again, or
                (iv) there is a bona fide dispute as to whether there 
            has been any payee underreporting,

        then the Secretary shall take the action described in 
        subparagraph (B).

        (B) Secretary to take action to stop (or not to start) 
                withholding

            For purposes of subparagraph (A), if at the time of the 
        Secretary's determination under subparagraph (A)--
                (i) no notice has been given under paragraph (1) to any 
            payor with respect to the underreporting, the Secretary 
            shall not give any such notice, or
                (ii) if such notice has been given, the Secretary 
            shall--
                    (I) provide the payee with a written certification 
                that withholding under subsection (a)(1)(C) is to stop, 
                and
                    (II) notify the applicable payors (and brokers) that 
                such withholding is to stop.

        (C) Time for taking action where notice to payor has been given

            In any case where notice has been given under paragraph (1) 
        to any payor with respect to any underreporting, if the 
        Secretary makes a determination under subparagraph (A) during 
        the 12-month period ending on October 15 of any calendar year--
                (i) except as provided in clause (ii), the Secretary 
            shall take the action described in subparagraph (B)(ii) to 
            bring about the stopping of withholding no later than 
            December 1 of such calendar year, or
                (ii) in the case of--
                    (I) a no payee underreporting determination under 
                clause (i) of subparagraph (A), or
                    (II) a hardship determination under clause (iii) of 
                subparagraph (A),

          such action shall be taken no later than the 45th day after 
            the day on which the Secretary made the determination.

        (D) Opportunity to request determination

            The Secretary shall prescribe procedures under which--
                (i) a payee may request a determination under 
            subparagraph (A), and
                (ii) the payee may provide information with respect to 
            such request.

      (4) Payor notifies payee of withholding because of payee 
                               underreporting

        Any payor required to withhold any tax under subsection 
    (a)(1)(C) shall, at the time such withholding begins, notify the 
    payee of such withholding.

    (5) Payee may be required to notify Secretary who his payors 
                               and brokers are

        For purposes of this section, the Secretary may require any 
    payee of reportable interest or dividend payments who is subject to 
    withholding under subsection (a)(1)(C) to notify the Secretary of--
            (A) all payors from whom the payee receives reportable 
        interest or dividend payments, and
            (B) all brokers with whom the payee has accounts which may 
        involve reportable interest or dividend payments.

    The Secretary may notify any such broker that such payee is subject 
    to withholding under subsection (a)(1)(C).

(d) Interest and dividend backup withholding applies to new accounts and 
        instruments unless payee certifies that he is not subject to 
        such withholding

                           (1) In general

        There is a payee certification failure unless the payee has 
    certified to the payor, under penalty of perjury, that such payee is 
    not subject to withholding under subsection (a)(1)(C).

         (2) Special rules for readily tradable instruments

        (A) In general

            Subsection (a)(1)(D) shall apply to any reportable interest 
        or dividend payment to any payee on any readily tradable 
        instrument if (and only if) the payor was notified by a broker 
        under subparagraph (B) or no certification was provided to the 
        payor by the payee under paragraph (1) and--
                (i) such instrument was acquired directly by the payee 
            from the payor, or
                (ii) such instrument is held by the payor as nominee for 
            the payee.

        (B) Broker notifies payor

            If--
                (i) a payee acquires any readily tradable instrument 
            through a broker, and
                (ii) with respect to such acquisition--
                    (I) the payee fails to furnish his TIN to the broker 
                in the manner required under subsection (a)(1)(A),
                    (II) the Secretary notifies such broker before such 
                acquisition that the TIN furnished by the payee is 
                incorrect,
                    (III) the Secretary notifies such broker before such 
                acquisition that such payee is subject to withholding 
                under subsection (a)(1)(C), or
                    (IV) the payee does not provide a certification to 
                such broker under subparagraph (C),

          such broker shall, within such period as the Secretary may 
            prescribe by regulations (but not later than 15 days after 
            such acquisition), notify the payor that such payee is 
            subject to withholding under subparagraph (A), (B), (C), or 
            (D) of subsection (a)(1), respectively.

        (C) Time for payee to provide certification to broker

            In the case of any readily tradable instrument acquired by a 
        payee through a broker, the certification described in paragraph 
        (1) may be provided by the payee to such broker--
                (i) at any time after the payee's account with the 
            broker was established and before the acquisition of such 
            instrument, or
                (ii) in connection with the acquisition of such 
            instrument.

              (3) Exception for existing accounts, etc.

        This subsection and subsection (a)(1)(D) shall not apply to any 
    reportable interest or dividend payment which is paid or credited--
            (A) in the case of interest or any other amount of a kind 
        reportable under section 6049, with respect to any account 
        (whatever called) established before January 1, 1984, or with 
        respect to any instrument acquired before January 1, 1984,
            (B) in the case of dividends or any other amount reportable 
        under section 6042, on any stock or other instrument acquired 
        before January 1, 1984, or
            (C) in the case of patronage dividends or other amounts of a 
        kind reportable under section 6044, with respect to any 
        membership acquired, or contract entered into, before January 1, 
        1984.

      (4) Exception for readily tradable instruments acquired 
                     through existing brokerage accounts

        Subparagraph (B) of paragraph (2) shall not apply with respect 
    to a readily tradable instrument which was acquired through an 
    account with a broker if--
            (A) such account was established before January 1, 1984, and
            (B) during 1983, such broker bought or sold instruments for 
        the payee (or acted as a nominee for the payee) through such 
        account.

    The preceding sentence shall not apply with respect to any readily 
    tradable instrument acquired through such account after the broker 
    was notified by the Secretary that the payee is subject to 
    withholding under subsection (a)(1)(C).

(e) Period for which withholding is in effect

                     (1) Failure to furnish TIN

        In the case of any failure by a payee to furnish his TIN to a 
    payor in the manner required, subsection (a) shall apply to any 
    reportable payment made by such payor during the period during which 
    the TIN has not been furnished in the manner required. The Secretary 
    may require that a TIN required to be furnished under subsection 
    (a)(1)(A) be provided under penalties of perjury only with respect 
    to interest, dividends, patronage dividends, and amounts subject to 
    broker reporting.

                (2) Notification of incorrect number

        In any case in which the Secretary notifies the payor that the 
    TIN furnished by the payee is incorrect, subsection (a) shall apply 
    to any reportable payment made by such payor--
            (A) after the close of the 30th day after the day on which 
        the payor received such notification, and
            (B) before the payee furnishes another TIN in the manner 
        required.

     (3) Notified payee underreporting described in subsection 
                                     (c)

        (A) In general

            In the case of any notified payee underreporting described 
        in subsection (c), subsection (a) shall apply to any reportable 
        interest or dividend payment made--
                (i) after the close of the 30th day after the day on 
            which the payor received notification from the Secretary of 
            such underreporting, and
                (ii) before the stop date.

        (B) Stop date

            For purposes of this subsection, the term ``stop date'' 
        means the determination effective date or, if later, the earlier 
        of--
                (i) the day on which the payor received notification 
            from the Secretary under subsection (c)(3)(B) to stop 
            withholding, or
                (ii) the day on which the payor receives from the payee 
            a certification provided by the Secretary under subsection 
            (c)(3)(B).

        (C) Determination effective date

            For purposes of this subsection--
            (i) In general

                Except as provided in clause (ii), the determination 
            effective date of any determination under subsection 
            (c)(3)(A) which is made during the 12-month period ending on 
            October 15 of any calendar year shall be the first January 1 
            following such October 15.
            (ii) Determination that there was no underreporting; 
                    hardship

                In the case of any determination under clause (i) or 
            (iii) of subsection (c)(3)(A), the determination effective 
            date shall be the date on which the Secretary's 
            determination is made.

       (4) Failure to provide certification that payee is not 
                           subject to withholding

        (A) In general

            In the case of any payee certification failure described in 
        subsection (d)(1), subsection (a) shall apply to any reportable 
        interest or dividend payment made during the period during which 
        the certification described in subsection (d)(1) has not been 
        furnished to the payor.

        (B) Special rule for readily tradable instruments acquired 
                through broker where notification

            In the case of any readily tradable instrument acquired by 
        the payee through a broker, the period described in subparagraph 
        (A) shall start with payments to the payee made after the close 
        of the 30th day after the payor receives notification from a 
        broker under subsection (d)(2)(B).

                      (5) 30-day grace periods

        (A) Start-up

            If the payor elects the application of this subparagraph 
        with respect to the payee, subsection (a) shall also apply to 
        any reportable payment made during the 30-day period described 
        in paragraph (2)(A), (3)(A), or (4)(B).

        (B) Stopping

            Unless the payor elects not to have this subparagraph apply 
        with respect to the payee, subsection (a) shall also apply to 
        any reportable payment made after the close of the period 
        described in paragraph (1), (2), or (4) (as the case may be) and 
        before the 30th day after the close of such period. A similar 
        rule shall also apply with respect to the period described in 
        paragraph (3)(A) where the stop date is determined under clause 
        (i) or (ii) of paragraph (3)(B).

        (C) Election of shorter grace period

            The payor may elect a period shorter than the grace period 
        set forth in subparagraph (A) or (B), as the case may be.

(f) Confidentiality of information

                           (1) In general

        No person may use any information obtained under this section 
    (including any failure to certify under subsection (d)) except for 
    purposes of meeting any requirement under this section or (subject 
    to the safeguards set forth in section 6103) for purposes permitted 
    under section 6103.

                         (2) Cross reference

            For provision providing for civil damages for violation of 
        paragraph (1), see section 7431.

(g) Exceptions

                   (1) Payments to certain payees

        Subsection (a) shall not apply to any payment made to--
            (A) any organization or governmental unit described in 
        subparagraph (B), (C), (D), (E), or (F) of section 6049(b)(4), 
        or
            (B) any other person specified in regulations.

        (2) Amounts for which withholding otherwise required

        Subsection (a) shall not apply to any amount for which 
    withholding is otherwise required by this title.

                 (3) Exemption while waiting for TIN

        The Secretary shall prescribe regulations for exemptions from 
    the tax imposed by subsection (a) during the period during which a 
    person is waiting for receipt of a TIN.

(h) Other definitions and special rules

    For purposes of this section--

                   (1) Obviously incorrect number

        A person shall be treated as failing to furnish his TIN if the 
    TIN furnished does not contain the proper number of digits.

                (2) Payee furnishes 2 incorrect TINs

        If the payee furnishes the payor 2 incorrect TINs in any 3-year 
    period, the payor shall, after receiving notice of the second 
    incorrect TIN, treat the payee as not having furnished another TIN 
    under subsection (e)(2)(B) until the day on which the payor receives 
    notification from the Secretary that a correct TIN has been 
    furnished.

                          (3) Joint payees

        Except to the extent otherwise provided in regulations, any 
    payment to joint payees shall be treated as if all the payment were 
    made to the first person listed in the payment.

                          (4) Payor defined

        The term ``payor'' means, with respect to any reportable 
    payment, a person required to file a return described in paragraph 
    (2) or (3) of subsection (b) with respect to such payment.

                             (5) Broker

        (A) In general

            The term ``broker'' has the meaning given to such term by 
        section 6045(c)(1).

        (B) Only 1 broker per acquisition

            If, but for this subparagraph, there would be more than 1 
        broker with respect to any acquisition, only the broker having 
        the closest contact with the payee shall be treated as the 
        broker.

        (C) Payor not treated as broker

            In the case of any instrument, such term shall not include 
        any person who is the payor with respect to such instrument.

        (D) Real estate broker not treated as a broker

            Except as provided by regulations, such term shall not 
        include any real estate broker (as defined in section 
        6045(e)(2)).

                   (6) Readily tradable instrument

        The term ``readily tradable instrument'' means--
            (A) any instrument which is part of an issue any portion of 
        which is traded on an established securities market (within the 
        meaning of section 453(f)(5)), and
            (B) except as otherwise provided in regulations prescribed 
        by the Secretary, any instrument which is regularly quoted by 
        brokers or dealers making a market.

                     (7) Original issue discount

        To the extent provided in regulations, rules similar to the 
    rules of paragraph (6) of section 6049(d) shall apply.

                 (8) Requirement of notice to payee

        Whenever the Secretary notifies a payor under paragraph (1)(B) 
    of subsection (a) that the TIN furnished by any payee is incorrect, 
    the Secretary shall at the same time furnish a copy of such notice 
    to the payor, and the payor shall promptly furnish such copy to the 
    payee.

               (9) Requirement of notice to Secretary

        If the Secretary notifies a payor under paragraph (1)(B) of 
    subsection (a) that the TIN furnished by any payee is incorrect and 
    such payee subsequently furnishes another TIN to the payor, the 
    payor shall promptly notify the Secretary of the other TIN so 
    furnished.

                (10) Coordination with other sections

        For purposes of section 31, this chapter (other than section 
    3402(n)), and so much of subtitle F (other than section 7205) as 
    relates to this chapter, payments which are subject to withholding 
    under this section shall be treated as if they were wages paid by an 
    employer to an employee (and amounts deducted and withheld under 
    this section shall be treated as if deducted and withheld under 
    section 3402).

(i) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section.

(Added Pub. L. 98-67, title I, Sec. 104(a), Aug. 5, 1983, 97 Stat. 371; 
amended Pub. L. 98-369, div. A, title I, Sec. 152(a), title VII, 
Sec. 722(h)(1), (2), July 18, 1984, 98 Stat. 691, 975; Pub. L. 99-514, 
title XV, Secs. 1521(b), 1523(b)(1), title XVIII, Sec. 1899A(46), Oct. 
22, 1986, 100 Stat. 2746, 2748, 2961; Pub. L. 100-647, title I, 
Sec. 1018(u)(44), Nov. 10, 1988, 102 Stat. 3592; Pub. L. 102-486, title 
XIX, Sec. 1935(a), Oct. 24, 1992, 106 Stat. 3032.)


                               Amendments

    1992--Subsec. (a)(1). Pub. L. 102-486, in closing provisions, 
substituted ``31 percent'' for ``20 percent''.
    1988--Subsec. (h)(5)(D). Pub. L. 100-647 inserted period at end of 
subpar. (D).
    1986--Subsec. (b)(3)(E). Pub. L. 99-514, Sec. 1523(b)(1), added 
subpar. (E).
    Subsec. (b)(6). Pub. L. 99-514, Sec. 1899A(46), substituted 
``6041A(a)'' for ``6041(A)(a)'' in heading.
    Subsec. (h)(5)(D). Pub. L. 99-514, Sec. 1521(b), added subpar. (D).
    1984--Subsec. (c)(1). Pub. L. 98-369, Sec. 722(h)(2), substituted 
``(but not the reasons for the withholding under subsection (a)(1)(C))'' 
for ``(but not the reasons therefor)''.
    Subsec. (d)(2)(A). Pub. L. 98-369, Sec. 722(h)(1)(A), inserted ``the 
payor was notified by a broker under subparagraph (B) or'' after ``if 
(and only if)'' in provisions preceding cl. (i), struck out cl. (i) 
which read as follows: ``the payor was notified by a broker under 
subparagraph (B),'' and redesignated cls. (ii) and (iii) as (i) and 
(ii), respectively.
    Subsec. (d)(2)(B). Pub. L. 98-369, Sec. 722(h)(1)(B), in amending 
subpar. (B) generally, reenacted cl. (i), in cl. (ii) inserted ``with 
respect to such acquisition--'', added subcls. (I) and (II), 
redesignated former subcls. (I) and (II) as (III) and (IV), 
respectively, and in subcl. (III) substituted ``the Secretary notifies 
such broker'' for ``such broker is notified by the Secretary'', and in 
provisions following cl. (ii) substituted ``shall within such period as 
the Secretary may prescribe by regulations (but not later than 15 days 
after such acquisition), notify the payor that such payee is subject to 
withholding under subparagraph (A), (B), (C) or (D) of subsection 
(a)(1),'' for ``within 15 days after the date of the acquisition notify 
the payor that such payee is subject to withholding under subsection 
(a)(1)(D) (or subsection (a)(1)(C) in the case of a notification 
described in clause (ii)(II).''
    Subsec. (e)(1). Pub. L. 98-369, Sec. 152(a), inserted provision that 
the Secretary may require that a TIN required to be furnished under 
subsection (a)(1)(A) be provided under penalties of perjury only with 
respect to interest, dividends, patronage dividends, and amounts subject 
to broker reporting.


                    Effective Date of 1992 Amendment

    Section 1935(b) of Pub. L. 102-486 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to amounts 
paid after December 31, 1992.''


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Amendment by section 1521(b) of Pub. L. 99-514 applicable to real 
estate transactions closing after Dec. 31, 1986, see section 1521(c) of 
Pub. L. 99-514, set out as a note under section 6045 of this title.
    Amendment by section 1523(b)(1) of Pub. L. 99-514 applicable to 
payments made after Dec. 31, 1986, see section 1523(d) of Pub. L. 99-
514, set out as an Effective Date note under section 6050N of this 
title.


                    Effective Date of 1984 Amendment

    Section 152(b) of Pub. L. 98-369 provided that: ``The amendment made 
by this section [amending this section] shall take effect on the date of 
the enactment of this Act [July 18, 1984].''
    Amendment by section 722(h)(1), (2) of Pub. L. 98-369 applicable as 
if included in amendments made by Interest and Dividend Tax Compliance 
Act of 1983, Pub. L. 98-67, see section 722(h)(5)(A) of Pub. L. 98-369, 
set out as a note under section 643 of this title.


                             Effective Date

    Section applicable with respect to payments made after Dec. 31, 
1983, see section 110(a) of Pub. L. 98-67, set out as an Effective Date 
of 1983 Amendment note under section 31 of this title.


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 1, 31, 643, 6682, 6705, 
7205, 7431 of this title.
