Final regs. issued for Sec. 3406 backup withholding rules

The IRS published final regulations (T.D. 10053) that reflect changes to the Sec. 3406 backup withholding threshold made by H.R. 1, P.L. 119-21, commonly referred to as OBBBA. The final regulations adopt proposed regulations published in January without change.

Under the final regulations, published Friday, third-party settlement organizations (TPSOs) — for example, PayPal or Venmo — generally are not required to backup-withhold on payments settled through third-party payment networks unless the gross amount of reportable payment transactions to a payee exceeds $20,000 and the number of transactions exceeds 200. These were the thresholds in effect before the enactment of the American Rescue Plan Act of 2021, P.L. 117-2.

H.R. 1 also amended Sec. 6050W to revert the threshold for filing Form 1099-K, Payment Card and Third Party Network Transactions, to those same reporting thresholds. The changes to the Sec. 6050W reporting threshold made by H.R. 1 are already reflected in the existing regulations under that section, so those regulations were not altered.

One commenter on the proposed regulations recommended that the IRS add a section on compliance and enforcement implications to the preamble to reduce tax controversy disputes and clarify several issues, including that the taxability of income is not affected by the absence of a Form 1099-K or the absence of backup withholding on payments made in settlement of third-party network transactions.

The recommendations are outside the scope of the regulations, the IRS said, but it agreed “that it is important to emphasize that the taxability of payments and the reportability of income on an income tax return are not determined by whether the IRS or the taxpayer receives a Form 1099-K, or by whether backup withholding is required with respect to a third-party network transaction.”

The final regulations apply to calendar years beginning after Dec. 31, 2024.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.