Other Certifications

For most accounts you open, a payee will make both of the certifications we have discussed—that the TIN is correct, and that the payee is not subject to backup withholding. In some cases, however, the payee will not be able or will not be required to make one or either of these certifications.

Awaiting-TIN Certification

A payee would not be able to supply you with a TIN if he or she does not have one. Ordinarily, you would have to immediately begin backup withholding on the person’s account, if you allow the person to open the account at all. (See the later section in this chapter describing when you are permitted to refuse to open an account.) However, the regulations state that you may defer backup withholding if the payee makes the “awaiting-TIN certification.”

To make the awaiting-TIN certification, the payee must furnish a written statement to the payor, signed under penalties of perjury, that a taxpayer identification number has not been issued to the payee, that the payee has applied for a taxpayer identification number or intends to apply for a number in the near future, and that the payee understands that if the payee does not provide a taxpayer identification number to the payor within 60 days, the payor is required to withhold the current backup withholding percentage of any reportable payments thereafter made to the payee until the payor receives a number and the current backup withholding percentage of a withdrawal to the extent of reportable payments made to the payee during the 60-day period. [26 CFR 31.3406(g)-3(d)]

Briefly, the rule is that the payee must supply you with a certified TIN within 60 days of giving you the “awaiting-TIN” certification or you will have to begin backup withholding. Our later chapter on payors’ ongoing duties under backup withholding has more information on what you do after such an account has been opened.

The “awaiting-TIN” certification is a way to avoid having to immediately impose backup withholding. Therefore, payors will want to collect this certification whether operating under the “due diligence” standard or the “reasonable cause” standard.

Payees who supply the “awaiting-TIN” certification are not excused from supplying the “not subject to backup withholding” certification. So you should be sure to also get this certification at the time of account opening. If you do not obtain this certification, you would have to begin backup withholding immediately.

Incidentally, the IRS offers an online service known as “Internet EIN” which allows a payee to obtain an employer identification number (not a social security number) immediately. This online application process is available for all entities whose principal business, offfice, or legal residence (if an individual), is located in the US or US Territories.

Foreign Persons

Other payees will not have a TIN because they are “foreign persons.” The term “foreign person” includes individuals who are nonresident aliens as well as foreign partnerships, corporations, estates, and trusts. [26 CFR 1.1441-1(c)(2)] An individual is a nonresident alien if he or she is neither a citizen nor a resident of the United States. [26 USC 7701(b)(1)(B)]

Nonresident aliens, as well as foreign partnerships, corporations, estates, and trusts are not generally required to have a U.S. TIN. In fact, a nonresident alien may not even be able to obtain a social security number. (The Social Security Administration generally limits its assignment of social security numbers to individuals who are US. citizens and alien individuals legally admitted to the United States for permanent residence or under other immigration categories that authorize U.S. employment. A nonresident alien may, however, be able to obtain an “individual taxpayer identification number”or “ITIN”by submitting to the IRS a Form W-7. See 26 CFR 301.6109-1.) Also, interest payments to foreign persons are not “reportable.” This means payors are not required to report the interest payments to the IRS. It also means that payments to foreign persons are not subject to backup withholding since a payor is required to backup withhold only against certain “reportable” payments.

Note: Payments of interest to Canadian nonresident aliens are reportable on Form 1042S. These payments are not, however, subject to backup withholding. For details, see 26 CFR 1.6049-4(b)(5) and 26 CFR 31.3406(g)-1(d).]

How do you determine at account opening whether the payee is a foreign person? You do not. The payee must make that determination. Your responsibility is to treat the payee as not a foreign person unless the payee supplies a certification of foreign status. If a payee is unsure of his/her foreign status, you might supply the following guidelines from the IRS:

For income tax purposes, “nonresident alien individual” means an individual who is neither a U.S. citizen nor resident. Generally, an alien is considered to be a U.S. resident if:
  1. The individual was a lawful permanent resident of the United States at any time during the calendar year, that is, the alien held an immigrant visa (a “green card”), or
  2. The individual was physically present in the United States on:
    1. at least 31 days during the calendar year, and
    2. 183 days or more during the current year and the 2 preceding calendar years (counting all the days of physical presence in the current year, one-third the number days of presence in the first preceding year, and only one-sixth of the number days in the second preceding year.

See IRS Pub. 519, U.S. Tax Guide for Aliens, for more information on resident and nonresident alien status.

You must have a foreign person payee certify, under penalties of perjury, as to his or her foreign status so that the failure to supply a certified TIN and a “not subject to backup withholding” certification does not obligate you to impose backup withholding.

The IRS has an official form for taking this foreign status certification, form W-8. A substitute form is also permitted for this certification, and the statement required on a substitute form is a certification that the payee is not a United States person, or, in the case that the payee is an individual, that he or she is neither a citizen nor a resident of the United States. The substitute form must also include the name and address of the payee, and the payee’s TIN if the payee has one. If the account has more than one payee, you must obtain a certificate of foreign status from each of the payees. [26 CFR 1.6049-5(d)(2)(iii) and 26 CFR 31.3406(h)-2(a)(3)(i)] Otherwise, payments to the account will not be exempt from backup withholding. If not all of the payees have foreign status, one of the nonforeign payees will have to supply a certified TIN and make the “not subject to backup withholding” certification.

The certification of foreign status is effective for only the calendar year in which it is made plus the next two subsequent calendar years.

The IRS also requires use of four other W-8 forms: W-8BEN, W-8ECI, and W-8EXP. Form W-8BEN is valid until the earlier of the last day of the third calendar year in which the certificate is signed or the day that a change of circumstances occurs that makes any information on the certificate incorrect. [26 CFR 1.1441-1(e)(4)(ii)(A)]

Obtaining this certification is not in furtherance of the “due diligence” or the “reasonable cause” standards. The certification establishes that payments to the person are not “reportable,” which means you do not need to send in a 1099 for payments to this person. Therefore, you do not need to do anything (either exercise due diligence or establish reasonable cause) to avoid liability for an incorrect or missing TIN on a 1099 since no 1099 is required. However, you do need this certification, as we pointed out, to avoid having to impose backup withholding on payments to the account. [26 CFR 31.3406(h)-2(a)(3)(i)]

Exempt Payees

Some payees are not required to certify the correctness of their TIN nor certify that they are not currently subject to backup withholding because payments to them are exempt from the reporting requirements. Again, backup withholding only applies to certain reportable payments. Payees exempt from the reporting requirement—and, therefore, exempt from backup withholding—are known as “exempt payees” or “exempt recipients.” They are usually entities other than human beings. Here is the list of entities which are exempt payees:
  1. A corporation.
  2. An organization exempt from tax under Section 501(a) or a custodial account under Section 403(b)(7).
  3. An individual retirement plan, as defined in Section 7701(a)(37).
  4. The United States or any agency or instrumentality thereof.
  5. A state, the District of Columbia, a possession of the United States, or any political subdivision or instrumentality thereof.
  6. A foreign government or a political subdivision, agency, or instrumentality thereof.
  7. An international organization or any agency or instrumentality thereof.
  8. A foreign central bank of issue.
  9. A dealer in securities or commodities required to register in the U.S. or a possession of the U.S.
  10. A real estate investment trust, as defined in Section 856 and Section 1.856-1.
  11. An entity registered at all times during the tax year under the Investment Company Act of 1940.
  12. A common trust fund operated by a bank under Section 584(a).
  13. A financial institution.
  14. A trust exempt from tax under Section 664 or described in Section 4947.
  15. A nominee or custodian.
  16. A broker as defined in Section 6045(c) and 1.6045-1(a)(1).
  17. A swap dealer [a dealer in notional principal contracts as defined in Section 1.446‑3(c)(4)(iii)].

[26 CFR 1.6049-4(c)(1)(ii)(A) – (Q)

Note: This list is not identical to the list of exempt payees in the instructions to form W-9.

Also, payments of tax-exempt interest (including exempt-interest dividends under Section 852) are not subject to backup withholding. The same is true of payments described in Section 6049(b)(5) to nonresident aliens. (See “Instructions for the Requester” of Form W-9 for details and other payments not subject to backup withholding.)

Payments to the exempt payees listed above are not “reportable.” [26 CFR 1.6049-4(c)(1)] As with payments to foreign persons, the fact that these payments are not reportable means they are not subject to backup withholding, even if the payee does not supply a certified TIN or the “not subject to backup withholding” certification. This is because backup withholding applies only to reportable payments. [26 USC 3406(a)(1)] However, in order for you to know that such a payee is exempt, the payee must either (1) certify, under penalties of perjury, that he or she is an exempt payee or (2) have a characteristic which satisfies the “eyeball test” discussed below. The W-9 or a substitute form can be used to take the certification. It is also very important that the payee supply a TIN, although, as we have seen, the payee need not certify under penalties of perjury the correctness of it. Without a TIN, you cannot rely on the certification of exempt status. [26 CFR 31.3406(h)‑3(c)(2)]

Form W-9 contains instructions on how an exempt payee can make the exempt status certification on that form. If you use a substitute form, it must enable the payee to certify, under penalties of perjury, that the payee is an exempt recipient and must contain provisions that are substantially similar to those of the official Form W-9 relating to exempt recipients. [26 CFR 31.3406(h)-3(c)(2)]

As an alternative to getting an exempt status certification from an exempt payee, the regulations make reference to what is known as the “eyeball test.” The “eyeball test” says, in short, that if the account name itself indicates that the payee is exempt, you can treat the payee as exempt, even if you do not have an exempt status certification. For example, if the account is named “ABC Industries, Inc.,” you can assume that the payee is a corporation and therefore exempt.

The problem with the eyeball test is that, for many years, it was contained in some regulatory sections that the IRS has deleted from its regulations. After the deletion, however, other backup withholding regulations still contained a reference to the deleted sections. It is unclear whether the IRS intended to do away with the eyeball test and merely neglected to update the backup withholding regulations referring to it, or whether the IRS still intended that the eyeball test be used for backup withholding purposes.

The IRS cleared up the problem in 1997 by inserting the eyeball test language in some revised regulations. The test is now incorporated in the regulation’s list of exempt payees we cited earlier. See 26 CFR 1.6049-4(c)(1)(ii)(A) – (Q).

Again, obtaining the exempt payee certification or making an eyeball test determination is not in furtherance of the “due diligence” or the “reasonable cause” standards. Instead, the certification establishes that payments to the person are not “reportable,” which means you do not need to send in a 1099 reporting interest payments that you made to this person. Therefore, you do not need to do anything (either exercise due diligence or establish reasonable cause) to avoid liability for a missing or incorrect TIN on a 1099 since no 1099 is required. However, you do need this certification, as we pointed out, to avoid having to impose backup withholding on payments to the account.