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IRS Interim Guidance on Payments Subject to Backup Withholding in Payment Card and Third-Party Network Transactions (Form 1099-K Reporting)

May 18, 2011 | No. 2011-240


The IRS today released an advance copy of Notice 2011-42 that provides interim guidance to third-party settlement organizations (TPSOs) (as defined under section 6050W and its accompanying regulations) on backup withholding obligations under section 3406.

Today’s notice establishes that a payment made by a TPSO is a reportable payment potentially subject to section 3406 backup withholding only if the payee has received payments from that TPSO in more than 200 transactions within a calendar year. The monetary threshold of $20,000 found in section 6050W is not considered, however, for purposes of determining a TPSO’s backup withholding obligations. Payments made in settlement of payment card transactions that are potentially subject to section 3406 backup withholding have no limiting threshold.

This interim guidance addresses the concern raised by TPSOs that the approach taken under the section 6050W regulations, to apply the backup withholding rules without regard to the minimum 1099-K reporting thresholds (of more than 200 transactions and more than $20,000 in payments in a calendar year), may create a compliance burden on TPSOs. Without this relief, TPSOs would have been required to obtain taxpayer identification numbers from all payees, even the occasional small volume seller, to avoid the imposition of backup withholding.

The Treasury Department and the IRS intend to amend the existing regulations under section 3406 to reflect the guidance provided in this notice. TPSOs may rely on the interim guidance in this notice until the regulations are amended. Although the reporting of payment card and third-party network transactions applies to reportable payments made beginning January 1 of this year, the backup withholding requirements do not take effect until January 1, 2012.

For an electronic version of today's interim guidance: Notice 2011-42

Notice 2011-42 will appear in Internal Revenue Bulletin 2011-23, dated June 6, 2011.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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