Conclusion: Backup Withholding Interest Bearing Accounts

At account opening, payors of interest should obtain from the payee: (1) a TIN, certified under penalties of perjury as the payee’s correct TIN, and (2) a certification under penalties of perjury that the payee is not subject to backup withholding due to payee underreporting. By doing so, the payor will avoid having to impose backup withholding against the account. The payor will also have satisfied the “due diligence” and “reasonable cause” standards to prevent being penalized for filing a 1099 form with an incorrect or missing TIN.

The certifications should be made by the actual owner of the account when there is more than one account holder.

In certain circumstances, the payee is not required to provide these certifications and, instead, must supply a different certification. Other certifications which the payee might supply include the “awaiting-TIN” certification when the payee does not have a TIN, the certification of foreign status when the payee is a foreign person, and the exempt status certification when the payee is exempt from the requirements of backup withholding altogether.

Certain accounts have special rules with respect to obtaining certifications. These include accounts held by partnerships and informal organizations, as well as mortgage escrow accounts, POD accounts, trust accounts, and Uniform Gifts to Minors Act accounts.

If the payor is unable to obtain the required certifications, then the payor must begin backup withholding, although a payor is entitled to refuse to open an account when the payee refuses to supply a TIN or certify the correctness of the TIN he or she supplies.

Payors can rely on certifications received from the payee prior to opening the account, so long as the payor has not, in the meantime, learned that the certifications are not correct.

Finally, certain penalties apply to payors who do not backup withhold when required or who file a 1099 form with an incorrect or missing TIN. The payor is liable for all amounts which the regulations require to be withheld, even if the payor does not in fact withhold them (reduced by the taxes the payee has paid on interest income). The payor is also generally liable for a penalty of $50 per 1099 form filed with an incorrect or missing TIN, unless the payor has met “due diligence” standard or, for 1099 Forms to be filed after 1989, the “reasonable cause” standard.

The requirements spelled out in this section can be found in the IRS regulations governing backup withholding, which appear at 26 C.F.R. § 31.3406(a)-1 through 31.3406(h)-3. Regulations defining the “reasonable cause” standard can be found at 26 CFR 301.6724-1.