Internal Revenue Code:Sec. 3406. Backup withholding
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle C - Employment Taxes
CHAPTER 24 - COLLECTION OF INCOME TAX AT SOURCE ON WAGES
Statute
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 the product of the fourth lowest rate of tax applicable
under section 1(c) and 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.
Sources
(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, Sec. 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; Pub. L. 107-16, title I, Sec. 101(c)(10), June 7, 2001, 115
Stat. 44.)
Amendment of Section
AMENDMENT OF SECTION
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
Miscellaneous
AMENDMENTS
2001 - Subsec. (a)(1). Pub. L. 107-16, Sec. 101(c)(10), 901,
temporarily substituted ''equal to the product of the fourth lowest
rate of tax applicable under section 1(c) and such payment'' for
''equal to 31 percent of such payment'' in concluding provisions.
See Effective and Termination Dates of 2001 Amendment note below.
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 AND TERMINATION DATES OF 2001 AMENDMENT
Amendment by Pub. L. 107-16 applicable to amounts paid after the
60th day after June 7, 2001, and references to income brackets and
rates of tax in such amendment to be applied without regard to
section 1(i)(1)(D) of this title, see section 101(d)(2) of Pub. L.
107-16, set out as a note under section 1 of this title.
Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or
limitation years beginning after Dec. 31, 2010, and the Internal
Revenue Code of 1986 to be applied and administered to such years
as if such amendment had never been enacted, see section 901 of
Pub. L. 107-16, set out as a note under section 1 of this title.
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 (Sec. 1101-1147 and 1171-1177) or title
XVIII (Sec. 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.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 1, 31, 643, 6682, 6705,
7205, 7431 of this title.
