Which regulation does what
IRC 3406(a)(1) requires backup withholding when "(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 is notified payee underreporting, or "(D)" a certification failure on interest and dividends. Each condition has its own regulation: 31.3406(d)-1 for the manner of furnishing a TIN, (d)-5 for IRS notification of an incorrect TIN, (c)-1 for notified underreporting (the C-Notice, covered on the C-Notice guide), and (d)-2 for certification failures. 31.3406(e)-1 states when withholding under each starts and stops, (a)-4 when a payment counts as paid, (g)-1 who is exempt, and (h)-3 what the W-9 must contain and when a payor may rely on it. The regulations still quote a 31 percent rate; the statutory rate has been 24 percent since 2018 and the regulations have not been conformed.
Missing TINs: (d)-1 and (e)-1
"Withholding under section 3406(a)(1)(A) applies to a reportable payment ... if the payee does not furnish the payee's taxpayer identification number to the payor in the manner required by this section" (Treas. Reg. 31.3406(d)-1(a)). For accounts other than pre-1984 interest and dividend accounts, the manner required is a certified TIN on a Form W-9 or substitute. The period is fixed by 31.3406(e)-1(b): the payor "is required to withhold ... at the time the payor pays the reportable payment ... if the payor has not received the payee's taxpayer identification number in the manner required," and "must stop withholding under section 3406(a)(1)(A) within 30 days after the payor receives (i) The payee's taxpayer identification number in the manner required ... or (ii) A statement ... that the payee is not a United States person." There is no notice step: withholding on a missing TIN is required from the first payment, the point Chief Counsel confirmed in PMTA 2023-03 (see the Chief Counsel page). The 60-day "awaiting TIN" exception is in 31.3406(g)-3 and applies to reportable interest and dividend payments and readily tradable instruments, not to nonemployee compensation.
"a payor is required to process the taxpayer identification number or certification within 30 days after the payor receives the taxpayer identification number or certification from the payee ... Thus, the payor may take up to 30 days to treat the taxpayer identification number or a certificate as having been received" (Treas. Reg. 31.3406(e)-1(f)). The stop-withholding clock is 30 days from receipt, and the regulation gives the payor those 30 days to key the W-9.
Incorrect TINs: (d)-5
Treas. Reg. 31.3406(d)-5 (T.D. 8409, as amended by T.D. 9055).
The regulation's overview says it in one paragraph: after a notice "the payor must notify the payee in accordance with paragraph (d) of this section. In addition, under paragraph (e) of this section, the payor must backup withhold on all reportable payments made to such account after the close of the 30th business day after the date that the payor receives the notice and on or before the close of the 30th calendar day after the date that the payor receives from the payee the certification required under paragraph (f)" (Treas. Reg. 31.3406(d)-5(a)). "Business day" is "any day other than a Saturday, Sunday, or legal holiday" (31.3406(d)-5(b)(3)).
Identifying the account. "If no account number or designation is provided in the notice ... the payor must identify, using reasonable care, all accounts of the payee having the same name/TIN combination provided in the notice," and reasonable care is a two-part test: search "the computer or other recordkeeping system that the payor can reasonably associate with the information return that generated the notice," and input "the name/TIN combination provided on the notice" into it (Treas. Reg. 31.3406(d)-5(c)(3)). The exception every payer should know: "A payor may treat an account as not having the incorrect name/TIN combination if the error resulted because the name or taxpayer identification number on such account is not the name or taxpayer identification number that was provided to the payor. This may occur, for example, where a payor transposes numbers in the taxpayer identification number when incorporating it into the payor's business records" (31.3406(d)-5(c)(3)(iii)). That is the regulatory basis for Publication 1281's instruction to compare the listing to your records and send no B-Notice where your own records differ.
"For purposes of this section, the date set forth on the notice from the Internal Revenue Service or broker ... is considered to be the date of receipt of the notice by the payor. However, if the payor demonstrates to the satisfaction of the Internal Revenue Service that the date of actual receipt of the notice is later than the date on the notice, the actual date of receipt is controlling" (Treas. Reg. 31.3406(d)-5(c)(5)). The 15-business-day and 30-business-day clocks run from the printed date unless you can prove otherwise; keep the envelope.
The payee notice. "A payor must send the notice to the payee within 15 business days after the date that the payor receives the notice from the Internal Revenue Service," in the form the IRS prescribes in the Internal Revenue Bulletin, and "A payor who receives, under the same payor taxpayer identification number, two or more notices ... with respect to the same payee's account for the same year, or in the same calendar year, need only send one notice to the payee" (Treas. Reg. 31.3406(d)-5(d)(2)). Grace periods. "A payor may, on an account-by-account basis or in general, choose to begin backup withholding ... at any time during the 30-business-day period," and may "choose to stop backup withholding ... at any time within 30 calendar days after the payor receives from the payee the certification" (31.3406(d)-5(e)(2)). Dormant accounts. The requirement to withhold "terminates no later than the close of the third calendar year ending after the later of (i) The date that the last reportable payment was made to that account; or (ii) The date that the payor received the notice" (31.3406(d)-5(e)(3)).
For an incorrect-TIN notice, "the requirements of this paragraph (f) are not satisfied if a payee provides only an awaiting TIN certification. As a result, a payor must not fail to begin backup withholding ... solely because the payee provided an awaiting TIN certification, or stop it once it has begun solely because the payee provided an awaiting TIN certification" (Treas. Reg. 31.3406(d)-5(f)(2)). "Applied for" on a W-9 does not answer a B-Notice.
What stops it. "a payee ... is required on Form W-9 (or an acceptable substitute form) to (i) Provide the payee's name and taxpayer identification number; and (ii) Certify, under penalties of perjury, that the taxpayer identification number being provided is correct," and "The certification must be made even if the account is a pre-1984 account" (Treas. Reg. 31.3406(d)-5(f)). Afterwards. "the payor must use the name/TIN combination provided on such certification or notification on information returns for the account for which the due date (without regard to extensions) is more than 30 calendar days after the date that the payor receives the certification," and doing so on the first such return satisfies IRC 3406(h)(9) (31.3406(d)-5(h)).
The second notice within three years
"If a payor receives notification ... twice within 3 calendar years, and in each case the payor is required to identify the same account as having the incorrect name/TIN combination, the payor must (i) Disregard any future certifications ... furnished by the payee with respect to the account until the payor receives notice from the Social Security Administration (or the Internal Revenue Service) validating a name/TIN combination ...; (ii) Send the notice described in paragraph (g)(2) of this section to the payee (and not the notice required under paragraph (d) of this section) within 15 business days after the date that the payor receives the second notice; and (iii) Impose backup withholding on the account" from the 31st business day after the second notice until 30 calendar days after the validation arrives (Treas. Reg. 31.3406(d)-5(g)(1) and (3)). "The payor must maintain sufficient records to determine whether the payor has received notices ... twice within 3 calendar years with respect to the same account," which is the regulatory source of the three-year tracking obligation; and "two or more notices ... with respect to the same payee's account for the same year, or in the same calendar year, must treat such notices as one notice" (31.3406(d)-5(g)(1), (g)(4)). The SSA card copy and the Letter 147C are the validations the publication names under (g)(5). The CP2100 guide has the operational version.
The W-9: (h)-3
"The Form W-9 is the form prescribed under section 3406 on which a payee that is a U.S. person certifies, under penalties of perjury, that (i) The taxpayer identification number furnished to the payor is correct ...; (ii) The payee is not subject to withholding due to notified payee underreporting ...; (iii) The payee is an exempt recipient ...; or (iv) The payee is awaiting receipt of a taxpayer identification number" (Treas. Reg. 31.3406(h)-3(a)(1)). "A valid Form W-9 must include the name and taxpayer identification number of the payee" and "the payee must sign under penalties of perjury and date the Form W-9." A payor "may require a payee to furnish a separate Form W-9 for each" account "or one Form W-9 for all the payee's obligations or relationships with the payor." Substitute forms are allowed if "substantially similar," including "the signature card for an account, so long as the certifications are clearly set forth," and a payor "may refuse to accept certifications (including the official Form W-9) that are not made on the form or forms provided by the payor" if it supplies its own form within five business days (31.3406(h)-3(c)(1)). Who signs: anyone authorized under IRC 6061 to 6063 to sign a declaration under penalties of perjury for the payee (31.3406(h)-3(f)). Retention: "3 years from the date the account is opened or the instrument is purchased" (31.3406(h)-3(g)(1)).
"A payor is not liable for the tax imposed under section 3406 if the payor's failure to deduct and withhold the tax is due to reasonable reliance ... on a Form W-9 (or other acceptable substitute)," and the payor can rely on it unless the form lacks the name and TIN, "is not signed and dated by the payee," omits a required underreporting statement, or the payee "has deleted the jurat" (Treas. Reg. 31.3406(h)-3(e)). A complete, signed W-9 is a defence to the 24% itself, not only to the penalty.
Exempt recipients: (g)-1
"A payor of any reportable payment ... must not withhold under section 3406 if the payee is (i) An organization exempt from taxation under section 501(a) or an individual retirement account; (ii) The United States or any wholly owned agency or instrumentality thereof; (iii) A state, the District of Columbia, a possession of the United States, any political subdivision ...; (iv) A foreign government ...; or (v) An international organization" (Treas. Reg. 31.3406(g)-1(a)(1)), a list the regulation says "does not prescribe an exclusive list": corporations and the other payees exempt under the reporting sections (IRC 6049 and the regulations) are exempt from withholding on the payments they are exempt from reporting on. A payor "may require a payee, otherwise not required to file a certificate regarding its exempt status, to file a certificate and may treat a payee who fails to file the certificate as a person who is not an exempt recipient" (31.3406(g)-1(b)), and an exempt-recipient certificate "is valid only if it contains the payee's taxpayer identification number" (31.3406(h)-3(c)(2)). The reporting tool handles the corporate and attorney exceptions that interact with this.
When a payment is paid: (a)-4
"the payor must withhold at the time it makes the payment to the payee or to the payee's account that is subject to withholding. Amounts are considered paid when they are credited to the account of, or made available to, the payee" (Treas. Reg. 31.3406(a)-4(a)(1)). For a payer of nonemployee compensation this fixes which payments fall after the 30th business day: a check dated and mailed on day 29 is paid; an invoice approved on day 29 and paid on day 35 is withheld on. For broker transactions the obligation "arises on the date the sale is entered on the books of the broker" (31.3406(a)-4(b)).
Rules the publication does not state
- The notice date is the receipt date unless you prove later actual receipt (31.3406(d)-5(c)(5)). Publication 1281 counts from the notice date without saying why.
- A payor-caused transcription error is not a notified mismatch for that account (31.3406(d)-5(c)(3)(iii)); correct your records and send nothing.
- Thirty days to process a W-9 before it counts as received (31.3406(e)-1(f)).
- Dormant accounts stop requiring withholding at the close of the third calendar year after the later of the last payment or the notice (31.3406(d)-5(e)(3)).
- Reasonable reliance on a W-9 relieves the payor of the tax under IRC 3406 (31.3406(h)-3(e)), separately from the penalty safe harbor in 301.6724-1(g).
- Payors may refuse a payee's own W-9 and insist on their substitute, if they supply it within five business days (31.3406(h)-3(c)(1)).
- Two notices in one year are one notice for the three-year count (31.3406(d)-5(g)(4)).
Questions people ask
The regulation says 31 percent. Which rate applies?
The statutory rate in IRC 3406(a)(1), which the Tax Cuts and Jobs Act tied to the fourth lowest income tax rate, 24 percent since 2018. The regulations predate the change and were never conformed; the IRM and Publication 1281 use 24 percent.
We received the CP2100 ten days after its date. When do the 15 business days start?
From the printed date, unless you can show the IRS the actual receipt was later (31.3406(d)-5(c)(5)). Keep the envelope with the postmark; the B-Notice deadline calculator counts from either date.
Can a payee stop withholding with a W-9 that says "applied for"?
Not after an incorrect-TIN notice; the regulation says an awaiting-TIN certification does not satisfy paragraph (f) (31.3406(d)-5(f)(2)). For a brand-new interest or dividend account the 60-day rule in 31.3406(g)-3 is a separate matter.
Does a payee's exempt status have to be certified?
Not always; the payor may treat a payee as exempt under the reporting rules without a certificate, but may demand one and treat a payee who refuses as not exempt (31.3406(g)-1(b)). A certificate claiming exemption must carry the payee's TIN.