[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[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 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) i
