If You do Not Obtain a Required Certification

Generally speaking, if a payee will not supply you with an “awaiting TIN” or foreign person or exempt payee certification, you should begin backup withholding on the account—if you allow the account to be opened at all (see section below on when you can refuse to open an account for failure to provide certifications). [26 CFR 31.3406(a)-1(b)(1)(i) and 26 CFR 31.3406(a)-1(b)(2)(ii)] If a payee does not supply both of the first two certifications (correct TIN and “not subject to backup withholding”), you are required to start backup withholding unless: (1) the payee certifies that he or she is awaiting a TIN, (2) the payee is a foreign person or exempt payee, or (3) the payee opened the account by mail or electronic transmission (see earlier section). [26 CFR 31.3406(a)-1(a) - (c)] Payors can require that foreign persons and exempt payees either certify their status as foreign persons or exempt payees, or not be treated as such by the payor. [26 CFR 31.3406(g)-1(b)] From the standpoint of complying with backup withholding requirements, it seems safest to take this approach. Payors may, however, treat a payee as an exempt recipient without a certificate of exempt status if the “eyeball” test is satisfied. See the earlier section in this chapter dealing with exempt payees.

In The Mechanics of Backup Withholding, we discuss the mechanics of imposing backup withholding—when to start withholding; how to remit the withheld funds; when to stop withholding, etc.