Tuesday, May 31, 2011

IRS Eases Backup Withholding Requirements for Third Party Network Transactions

The IRS has issued a notice that provides interim guidance to third party settlement organizations on backup withholding requirements under Code Sec. 3406 and its accompanying regulations [Notice 2011-42, 2011-23 IRB].

Code Sec. 3406(a)(1) requires certain payors to deduct backup withholding from a “reportable payment,” regardless of any threshold amount otherwise applicable to such payment, if the payee fails to furnish its taxpayer identification number (TIN) or furnishes an incorrect TIN to the payor. A “reportable payment” includes any payment card transaction and any third party network transaction.

Code Sec. 6050W requires information returns to be filed by certain payors with respect to payments made in settlement of payment card transactions and third party payment network transactions. Payments made in settlement of third party network transactions, however, are only required to be reported if the amount to be reported exceeds $20,000, and the aggregate number of transactions exceeds 200 for any payee within a calendar year.

A third party settlement organization (TPSO) is defined in Code Sec. 6050W(b)(3) as “the central organization which has the contractual obligation to make payment to participating payees of third party network transactions.”

The new notice states that a payment made by a TPSO is a reportable payment potentially subject to Code Sec. 3406 backup withholding only if the payee has received payment from that TPSO in more than 200 transactions within a calendar year. The relief provided in Notice 2011-42, 2011-23 IRB, doesn't apply to payment card transactions. Payments made in settlement of payment card transactions do not have a de minimis transaction threshold with respect to the Code Sec. 3406 backup withholding rules.

The regulations under Code Sec. 3406 will be amended to reflect this guidance.

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