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.
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).
(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).
(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.
(h) Other definitions and special rules
For purposes of this section--
(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.