- 1 -
April 18, 1989
TO: TAX MEMBERS NO. 14-89
UNIT INVESTMENT TRUST MEMBERS NO. 22-89
CLOSED-END FUND MEMBERS NO. 18-89
OPERATIONS MEMBERS NO. 15-89
TRANSFER AGENT SHAREHOLDER ADVISORY COMMITTEE NO. 9-89
RE: AMENDMENTS TO BACKUP WITHHOLDING REGULATIONS
__________________________________________________________
The attached temporary regulations amend temporary
regulations issued in November 1987 which (1) provided rules for
imposing backup withholding following receipt of a "B Notice"
from the IRS that payees had provided incorrect taxpayer
identification numbers (TINs) and (2) clarified the due diligence
standard and its exceptions. (See Institute Memorandum to Tax
Members No. 46-87, Unit Investment Trust Members No. 31-87,
Closed-End Fund Members No. 5-87, Operations Members No. 29-87
and Transfer Agent Shareholder Advisory Committee No. 24-87,
dated December 8, 1987). The attached regulations also
incorporate certain changes to the temporary regulations that
were previously announced by the IRS in IRS Notices 88-77 and 88-
89 (See Institute Memoranda to Tax Members No. 37-88, Unit
Investment Trust Members No. 44-88, Closed-End Fund Members No.
35-88, Operations Members No. 21-88 and Transfer Agent
Shareholder Advisory Committee No. 16-88, dated July 7, 1988, and
to Tax Members No. 45-88, Unit Investment Trust Members No. 50-
88, Closed-End Fund Members No. 42-88, Operations Members No. 25-
88 and Transfer Agent Shareholder Advisory Committee No. 20-88,
dated August 5, 1988).
While the attached regulations provide some limited relief
from the backup withholding and due diligence rules, they do not
adequately address comments made by the Institute regarding the
most difficult problems created by these regulations. (See
Institute Memoranda to Tax Committee No. 7-88, Operations
Committee No. 13-88, Closed-End Fund Committee No. 14-88 and
Transfer Agent Shareholder Advisory Committee No. 8-88, dated
April 21, 1988, and to Tax Committee No. 10-88, Unit Investment
Trust Committee No. 14-88, Operations Committee No. 14-88 and
Transfer Agent Shareholder Advisory Committee No. 11-88, dated
- 2 -
May 13, 1988). For example, no relief has been provided either
to permit funds to open accounts without TINs (unless a certified
TIN is received before year-end) or for situations where an
account is opened through a broker and subsequent accounts are
opened without the broker's assistance.
1. Backup Withholding
The amended regulations revise the notice that payors send
to payees to inform the payees that documents in addition to the
Form W-9 may need to be sent to be payor to change a TIN or name
(or both) on an account. Substitute notices drafted to satisfy
the requirements of the original regulations will continue to be
acceptable.
The amended regulations also relax, to some extent, the
original regulations' requirement that payors send B Notices to
payees within 5 business days after being notified of an
incorrect TIN. The Explanation of Provisions issued with the
regulations indicates that the IRS will send notices to payors
approximately 2 or 3 weeks before the date on the notice. The
amended regulations clarify that the date on the notice from the
IRS will be considered the effective date of that notice. If a
payor receives the notice following the date on the notice, the
effective date will be the actual date of receipt. Thus, the IRS
anticipates that payors will have more than, and in any event at
least, 5 business days to send B Notices to payees.
If a payee has several accounts bearing incorrect TINs with
a single payor, the amended regulations remove the requirement
that separate notices be sent for each account and permit the
payor to send a single notice.
The amended regulations also provide that, for purposes of
determining whether a payor has been notified twice within three
calendar years that a payee's TIN is incorrect, only a notice
from the IRS (or a broker) that contains the same payee
information as that on the payee's account is considered a
"first" notice.
2. Due Diligence
The old regulations provided that if a payor of a pre-1984
account who had not satisfied all of the required mailings wanted
to receive administrative relief from the incorrect TIN penalty
for 1988 or subsequent calendar years, a separate mailing must
have been sent by June 30, 1988 to all payees of pre-1984
accounts without certified TINs. The amended regulations provide
that relief may be granted to those payors who failed to mail by
June 30, 1988 to all payees, so long as the failure to mail was
limited to a de minimis number of accounts (i.e., the lesser of
5,000 accounts or one percent of the total number of accounts).
- 3 -
To receive relief in future years, the payor must make a separate
mailing to all such accounts in the following year and
nonseparate mailings in all following years until a certified TIN
is received. The instructions for filing the request for
administrative relief are also clarified by the new regulations.
The amended regulations also clarify that the IRS, in its
administrative discretion, will not enforce the penalty on post-
1983 accounts opened without a certified TIN for a calendar year
if the certified TIN is received after the account is opened and
before December 31 of such year.
Finally, the new regulations provide that if backup
withholding is imposed because of notified payee underreporting
on a payee whose income is so low as not to be subject to tax,
withheld accounts can be refunded to the payee even though, as a
general rule, refunds are permissible only if the withholding is
the result of an error of the payor.
We will keep you informed of developments.
Keith D. Lawson
Assistant General Counsel
Attachment