Information Reporting for Payments Made in Settlement of Payment Card and Third Party Network Transactions, 49821-49836 [2010-20200]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 75, Number 157 (Monday, August 16, 2010)]
[Rules and Regulations]
[Pages 49821-49836]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20200]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 301

[TD 9496]
RIN 1545-BI51


Information Reporting for Payments Made in Settlement of Payment 
Card and Third Party Network Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations relating to 
information reporting requirements, information reporting penalties, 
and backup withholding requirements for payment card and third party 
network transactions. The final regulations implement section 6050W and 
related statutory changes enacted by the Housing Assistance Tax Act of 
2008 that require payment settlement organizations to report payments 
in settlement of payment card and third party network transactions for 
each calendar year. The final regulations in this document will affect 
persons that make payment in settlement of payment card and third party 
network transactions and the payees of these transactions. The final 
regulations provide guidance to assist persons required to report 
payment card and third party network transactions and to the payees of 
those transactions.

DATES: Effective Date: These regulations are effective on August 16, 
2010.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.6041-1(j), 1.6041A-1(d)(4)(iii), 1.6050W-1(j),1.6050W-2(b), 31.3406-
(b)(3)-5(e).

FOR FURTHER INFORMATION CONTACT: Concerning these final regulations, 
Barbara Pettoni, (202) 622-4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final regulations implementing amendments to 
the Income Tax Regulations (26 CFR part 1) relating to information 
reporting under sections 6041, 6041A, 6050W, and 6051 of the Internal 
Revenue Code (Code). This document also contains final regulations 
implementing amendments to the Regulations on Employment Tax and 
Collection of Income Tax at the Source (26 CFR part 31) relating to 
backup withholding under section 3406, and to the Regulations on 
Procedure and Administration (26 CFR part 301) relating to information 
reporting penalties under sections 6721 and 6722. These sections were 
amended or added by section 3091(a) of the Housing Assistance Tax Act 
of 2008 (Div. C of the Housing and Economic Recovery Act of 2008), 
Public Law 110-289, 122 Stat. 2654 (the Act) enacted on July 30, 2008. 
These regulations are issued under the authority contained in sections 
6041, 6041A, 6050W, 6051, 3406, 6721, 6722 and 7805.
    On February 6, 2009, the IRS announced that persons who will be 
required to report under section 6050W may match Taxpayer 
Identification Numbers (TINs) under the procedures established by Rev. 
Proc. 2003-9. See Announcement 2009-6, ``Taxpayer Identification Number 
(``TIN'') Matching Program is Available to Persons Required to Make 
Returns Under New Section 6050W of the Internal Revenue Code'' 
(Announcement 2009-6, 2009-9 IRB 643 (March 2, 2009)). See Sec.  
601.601(d)(2)(ii)(b).
    Notice 2009-19 invited public comments regarding guidance under 
section 6050W. See Notice 2009-19, ``Information Reporting of Payments 
Made in Settlement of Payment Card and Third Party Network 
Transactions'' (Notice 2009-19, 2009-10 IRB 660 (March 9, 2009)).
    On November 24, 2009, the Treasury Department and the IRS published 
in the Federal Register (74 FR 61294) proposed regulations (REG-139255-
08) reflecting the new requirements of the Act. The comments received 
in response to Notice 2009-19 were taken into account in developing the 
proposed regulations. Written comments were also received in response 
to the proposed regulations, and a public hearing was held on March 15, 
2010.

Summary of Comments and Explanation of Revisions

    Many written comments were received and are available for public 
inspection upon request. The comments are summarized in this preamble. 
After considering the public comments, the Treasury Department and the 
IRS are adopting the proposed regulations as revised by this Treasury 
decision.
    These final regulations provide guidance to implement section 
6050W, which requires information reporting for payments made in 
settlement of payment card and third party network transactions. These 
final regulations also amend the existing regulations under sections 
6041 and 6041A to provide relief from duplicate reporting for certain 
transactions. In addition, these final regulations amend existing 
regulations under sections 6721 and 6722 to expand the penalty 
provisions of these sections to apply to failures to file correct 
information returns required by section 6050W and to furnish correct 
payee statements required by section 6050W. These final regulations 
also amend existing regulations under section 3406 to provide that 
amounts reportable under section 6050W are subject to backup 
withholding.

Payment Settlement Entity

    Section 6050W(b)(1) provides that the term payment settlement 
entity means, in the case of a payment card transaction, a merchant 
acquiring entity; and, in the case of a third party network 
transaction, a third party settlement organization. Section 6050W(b)(2) 
defines merchant acquiring entity as the bank or other organization 
with the contractual obligation to make payment to participating payees 
in settlement of payment card transactions. Section 6050W(b)(3) defines 
third party settlement organization as the central organization that 
has the contractual obligation to make payment to participating payees 
of third party network transactions. The proposed regulations 
incorporated these statutory definitions, which are retained in the 
final regulations.
    Commenters asked how the reporting obligation applies when two or 
more persons qualify as payment settlement entities for a reportable 
payment transaction. Commenters stated that, under certain business 
models, multiple banks or other organizations have the contractual 
obligation to make payment to participating payees to settle payment 
card transactions. The final regulations provide that, if two or more 
persons qualify as payment settlement entities for a reportable payment 
transaction, then only the payment settlement entity that in fact makes 
payment in settlement of the reportable payment transaction is 
obligated to report the payment. The final regulations clarify that the 
entity that makes a payment in settlement of a reportable payment 
transaction is the entity that actually submits the instruction to 
transfer funds to the account of the participating payee to settle the 
reportable payment transaction. See also the discussion under 
``Electronic Payment Facilitator'' later in this preamble.
    A commenter requested that, when multiple parties qualify as 
payment settlement entities, the parties be permitted to designate a 
reporting party. Under the final regulations, only the payment 
settlement entity that in fact makes payment is obligated to report the 
payment. Thus, no multiple party reporting obligations should arise.

[[Page 49822]]

Nonetheless, the final regulations permit the party with the obligation 
to report to designate a different person to satisfy the reporting 
obligation under section 6050W. If, however, the designated person 
fails to satisfy the reporting obligation, then the party with the 
obligation to report is liable for any applicable penalties under 
sections 6721 and 6722.

Gross Amount

    Section 6050W(a) provides that each payment settlement entity must 
report the gross amount of reportable payment transactions for each 
participating payee. The proposed regulations defined gross amount as 
the total dollar amount of aggregate reportable payment transactions 
for each participating payee without regard to any adjustments for 
credits, cash equivalents, discount amounts, fees, refunded amounts, or 
any other amounts.
    Several commenters suggested defining ``gross amount'' as net 
sales, taking into account credit transactions, chargebacks and other 
adjustments, on the ground that gross amount is not a true indicator of 
revenue. Commenters also suggested defining ``gross amount'' as the 
amount actually paid to a merchant. Other commenters favored the rule 
in the proposed regulations that would require reporting the gross 
amount of transactions without reductions. The final regulations retain 
the proposed rule. The plain language of the statute requires reporting 
the gross amount of transactions rather than the net amount of 
transactions or payments. The information reported on the return 
required under these regulations is not intended to be an exact match 
of the net, taxable, or even the gross income of a payee.
    Commenters asked whether the dollar amount of each transaction is 
determined on the date of the transaction, the settlement date, the 
date that payment is made, the posting date or some other date. Because 
the statute requires reporting of the gross amount of reportable 
payment ``transactions,'' the final regulations provide that the dollar 
amount of each reportable payment transaction is determined on the date 
of the transaction.
    Several commenters expressed concern that defining ``gross amount'' 
as a number that reflects all positive sales transactions without 
adjustment for any items may raise issues related to backup 
withholding. These comments are discussed in detail later in this 
preamble.

Payment Card Transactions

    Section 6050W(c)(2) defines a payment card transaction as any 
transaction in which a payment card is accepted as payment. Section 
6050W(d)(2) defines a payment card as a card issued pursuant to an 
agreement or arrangement that provides for: (1) One or more issuers of 
such cards; (2) a network of persons unrelated to each other, and to 
the issuer, who agree to accept the cards as payment; and (3) standards 
and mechanisms for settling the transactions between the merchant 
acquiring entities and the persons who agree to accept the cards as 
payment. Section 6050W(d)(2) further provides that the acceptance as 
payment of any account number or other indicia associated with a 
payment card is treated as the acceptance of the payment card. The 
proposed regulations incorporated these statutory rules. The proposed 
regulations further provided that a payment card includes, but is not 
limited to, all credit cards, debit cards, and stored-value cards 
(including gift cards). All of these provisions are retained in the 
final regulations.
    Several commenters requested an exemption for all private label 
cards and quasi-private label cards. According to one commenter, a 
private label card is a card issued by a retailer or financial 
institution that can only be used at one retailer, and a quasi-private 
label card is a card issued by a financial institution that can be used 
within a limited network of merchants or service providers that are 
unrelated but operate within a particular industry or share other 
similar characteristics. Another commenter requested that the 
regulations clarify whether a card that is accepted as payment by a 
group of merchants operating within a shopping mall (a ``mall card'') 
is a payment card.
    The final regulations do not provide an exemption for private label 
cards, quasi-private label cards and mall cards. Private label cards 
that can only be used at one merchant or within a group of related 
merchants do not meet the statutory definition of payment card because 
they are not accepted as payment by a network of unrelated persons. 
Quasi-private label cards that are accepted as payment by a network of 
unrelated merchants or service providers are payment cards if the other 
requirements of the statutory definition are met. Similarly, a mall 
card is a payment card if it is accepted as payment by a network of 
unrelated merchants and the other requirements of the statutory 
definition are met. However, if any of the merchants in the network are 
related to the issuer, as might be the case in certain campus card or 
mall card transactions, the final regulations clarify that no reporting 
is required for any transaction in which the card is accepted as 
payment by the related merchant or other payee. The final regulations 
provide additional examples to illustrate the treatment of private 
label, quasi-private label and mall cards.
    One commenter requested that the regulations clarify whether 
electronic benefit transactions are reportable transactions under the 
regulations. According to the commenter, electronic benefit 
transactions are transactions made on cards or other media issued by a 
governmental unit for benefit payments, such as food stamps, welfare or 
unemployment. A card issued by a governmental unit for benefits is a 
payment card if, pursuant to an agreement, it is accepted as payment by 
a network of unrelated merchants and the other requirements of the 
statutory definition are met. Electronic benefit transactions for the 
purchase of goods or services, made on a card that meets the statutory 
definition of ``payment card,'' are reportable under section 6050W. In 
contrast, the use of a benefits card to obtain cash would not be a 
reportable transaction, as discussed in the next paragraph.
    Commenters asked whether the use of a payment card solely to obtain 
a loan or cash advance by the cardholder is reportable under the 
regulations. The final regulations provide an example to clarify that 
the use of a payment card to obtain a loan or cash advance does not 
fall within the statutory definition of ``payment card transaction'' 
because the card is not being accepted by a merchant as payment. 
Rather, the cardholder is merely using the payment card to obtain a 
loan from the issuer. Similarly, the withdrawal of cash from an 
automated teller machine is not a payment card transaction because the 
card is not being accepted by a merchant as payment. Rather, the card 
is merely being used to obtain funds from the cardholder's own account.
    Commenters also asked whether the use of a paper check associated 
with a payment card account (a ``convenience check'') is reportable 
under the regulations. Section 6050W(d)(2) provides that the acceptance 
as payment of any account number or other indicia associated with a 
payment card is treated as the acceptance of the payment card. 
Convenience checks are processed through the banking system in the same 
manner as a traditional check and then processed against a cardholder's 
account as a cash advance. Because convenience checks are accepted and

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processed as checks, not as payment cards, the final regulations 
provide an example to clarify that the use of a convenience check is 
not a ``payment card transaction.''

Third Party Network Transactions

    Section 6050W(b)(1)(B) provides that, in the case of a third party 
network transaction, the payment settlement entity is the third party 
settlement organization. Section 6050W(b)(3) defines third party 
settlement organization as the central organization that has the 
contractual obligation to make payment to participating payees of third 
party network transactions. Section 6050W(c)(3) defines third party 
network transaction as any transaction that is settled through a third 
party payment network. Section 6050W(d)(3) defines third party payment 
network as any agreement or arrangement that: (A) involves the 
establishment of accounts with a central organization by a substantial 
number of persons who (i) are unrelated to such organization, (ii) 
provide goods or services, and (iii) have agreed to settle transactions 
for the provision of such goods or services pursuant to such agreement 
or arrangement; (B) provides for standards and mechanisms for settling 
such transactions; and (C) guarantees persons providing goods or 
services pursuant to an agreement or arrangement that those persons 
will be paid for providing those goods or services.
    The proposed regulations incorporated these statutory definitions. 
The proposed regulations also provided that, consistent with the Joint 
Committee on Taxation (JCT) technical explanation, a central 
organization is a third party settlement organization that is required 
to report to the extent it provides a third party payment network that 
enables purchasers to transfer funds to providers of goods and 
services. These provisions are retained in the final regulations.
    One commenter suggested that the regulations also incorporate the 
rule in section 6050W(d)(3) that a third party payment network does not 
include any agreement or arrangement that provides for the issuance of 
payment cards. The final regulations adopt this suggestion.

Healthcare Networks and Self-Insurance Arrangements

    The proposed regulations included an example to demonstrate that 
health insurance networks are outside the scope of section 6050W 
because a healthcare network does not enable the transfer of funds from 
buyers to sellers. Instead, health carriers collect premiums from 
covered persons pursuant to a plan agreement between the health carrier 
and the covered person for the cost of participation in the healthcare 
network. Separately, health carriers pay healthcare providers to 
compensate providers for services rendered to covered persons pursuant 
to provider agreements. This example is retained in the final 
regulations.
    A commenter requested that the final regulations clarify that a 
self-insurance arrangement is also outside the scope of section 6050W. 
According to the commenter, a typical self-insurance arrangement 
involves a health insurance entity, healthcare providers, and the 
company that is self-insuring. The company submits bills for services 
rendered by a healthcare provider to the health insurance entity. The 
health insurance entity pays the healthcare provider the contracted 
rate and then debits the self-insuring company's bank account for the 
payments made to the healthcare providers.
    This suggestion was not adopted because this arrangement could 
create a third party payment network of which the health insurance 
entity is the third party settlement organization to the extent that 
the health insurance entity effectively enables buyers (the self-
insuring companies) to transfer funds to sellers of healthcare goods or 
services. If so, payments under a self-insurance arrangement are 
reportable provided the arrangement meets both the statutory definition 
of a third party payment network and the de minimis threshold (that is, 
for a given payee, the aggregate payments for the year exceed $20,000 
and the aggregate number of transactions exceeds 200).

Electronic Checks, Bill Paying Services and Other Electronic Payment 
Acceptance Products

    Several commenters requested that the final regulations exclude 
electronic checks, bill paying services, and other electronic payment 
acceptance products from the scope of section 6050W. Financial 
institutions offer a wide array of services to allow individual and 
business customers to make and receive payments. Whether arrangements 
involving electronic checks, bill paying services or other electronic 
payment acceptance products fall within the statutory definition of 
``third party payment network'' depends on the facts and circumstances. 
For example, a customer initiated bill payment by means of an 
electronic check from the customer's bank account to the merchant is 
merely an electronic transfer of funds from the buyer to the seller 
that would generally not meet the definition of a third party payment 
network.
    In contrast, in certain arrangements, a third party entity may 
facilitate bill payment and presentment. According to one commenter, 
many financial institutions offer products and services that allow a 
commercial customer who provides goods or services to (1) send a 
purchase invoice electronically to customers; and (2) accept payment 
from these customers by automated clearinghouse (ACH) transfer. In 
these arrangements, the financial institution typically enters into an 
agreement with the merchant customer to settle payment transactions to 
an account the merchant has established at the financial institution. 
The individual or business that has purchased goods or services from 
the merchant is not required to establish an account with the financial 
institution. For payments that are made by ACH transfer, the financial 
institution will initiate payment through the ACH network. Commenters 
contend that these arrangements should not qualify as third party 
payment networks because the arrangements require merchants to 
establish accounts with a financial institution to accept electronic 
payment services but do not also require purchasers to establish 
accounts with the same financial institution. The commenters requested 
modifying the definition of a third party payment network to require 
purchasers to establish accounts with the same central organization as 
the merchant providers in order to participate in the arrangement.
    This suggestion was not adopted. The portion of the statutory 
definition of ``third party payment network'' relating to accounts 
requires only that the agreement or arrangement involve the 
establishment of accounts with a central organization by a substantial 
number of unrelated persons who provide goods or services and have 
agreed to settle transactions for the provision of goods or services 
pursuant to the agreement or arrangement. Nothing in this definition 
requires purchasers also to have established accounts with the same 
central organization. Therefore, a financial institution that enters 
into an agreement or arrangement with its merchant customers to settle 
payment transactions to an account the merchant customer has 
established at the financial institution may be operating a ``third 
party payment network'' if the agreement or arrangement with these 
merchants involves the establishment of accounts with a central 
organization by a substantial number of unrelated persons who provide 
goods or services

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and have agreed to settle transactions for the provision of goods or 
services pursuant to the agreement or arrangement, and the central 
organization guarantees payment to those persons for the goods or 
services.

Automated Clearing House (ACH) Networks

    The proposed regulations provided that an ACH network is not a 
third party payment network. As explained in the preamble to the 
proposed regulations, an ACH merely processes electronic payments 
between payors and payees, and does not itself have contractual 
agreements with payees to use the ACH network. Thus, the ACH does not 
meet the statutory definition of a ``third party settlement 
organization.''
    A commenter asked that the regulations provide that an ACH 
processor is not a third party settlement organization of a third party 
payment network. According to the commenter, an ACH processor provides 
a variety of ACH payment processing services to a large number of 
merchants, such as converting checks received in payment of bills into 
ACH transactions. The ACH processor groups payment transactions into an 
ACH file and transmits the ACH file into the ACH network on behalf of 
merchants in order to initiate payment to merchants through the ACH 
network. The ACH processor will make the payment to the merchant after 
the ACH network verifies that the customers' accounts have sufficient 
funds.
    This request was not adopted. An ACH processor's agreement or 
arrangement with merchants could potentially create an independent 
third party payment network separate from the ACH network of which the 
ACH processor is the third party settlement organization. Because the 
ACH itself is not a third party settlement organization, a party that 
makes payment on behalf of an ACH cannot be an electronic payment 
facilitator because it is not acting on behalf of a payment settlement 
entity. Nonetheless, an entity that initiates ACH entries into an ACH 
network on behalf of merchants may itself be operating a network that 
falls within the statutory definition of ``third party payment 
network'' if the entity has a separate agreement or arrangement with 
these merchants that: (A) involves the establishment of accounts with 
the entity by a substantial number of merchants or other persons who 
(i) are unrelated to the entity, (ii) provide goods or services, and 
(iii) have agreed to settle transactions for the provision of such 
goods or services pursuant to such agreement or arrangement; (B) 
provides for standards and mechanisms for settling such transactions; 
and (C) guarantees persons providing goods or services pursuant to such 
agreement or arrangement that those persons will be paid for providing 
such goods or services. Whether an entity that initiates ACH entries 
into an ACH network has such a separate agreement or arrangement with 
merchants depends on the facts and circumstances. As stated earlier, 
the statutory definition of ``third party payment network'' does not 
require that this entity also have an agreement or arrangement with 
purchasers.

Electronic Payment Facilitators

    Section 6050W(b)(4)(B) requires that, if an electronic payment 
facilitator or other third party ``makes payments in settlement of 
reportable payment transactions on behalf of the payment settlement 
entity,'' the electronic payment facilitator must report in lieu of the 
payment settlement entity. The proposed regulations incorporated this 
statutory requirement, which is retained in the final regulations.
    Commenters requested that the final regulations clarify what it 
means to ``make payments in settlement of reportable payment 
transactions on behalf of the payment settlement entity.'' According to 
one commenter, when a merchant acquiring bank employs the services of a 
third party processor, the settlement obligation remains with the 
merchant acquiring bank. Another commenter stated that certain payment 
settlement entities, such as independent sales organizations (ISOs), 
use a ``sponsoring bank'' or other third party to do their payment 
processing. According to the commenter, it is not clear whether this 
third party processor is an electronic payment facilitator because the 
processor does not have a contract with the participating payee. 
Additionally, this processor generally would only know the net amount 
of the payment and would not have the information necessary to report 
the gross amount of the reportable payment transaction. Another 
commenter suggested defining ``electronic payment facilitator'' as the 
party who contracts with a payment settlement entity to ``facilitate 
the settlement (directly or indirectly)'' of reportable payment 
transactions on behalf of the payment settlement entity.
    In response to these comments, the final regulations provide that a 
payment settlement entity (or an electronic payment facilitator acting 
on behalf of a payment settlement entity) makes a payment in settlement 
of a reportable payment transaction if the payment settlement entity 
(or its facilitator) submits the instruction to transfer funds to the 
account of the participating payee to settle the reportable payment 
transaction. In cases involving a processor, the processor need not 
have any agreement or arrangement with the payee to qualify as an 
electronic payment facilitator. The statute requires only that the 
facilitator act on behalf of the payment settlement entity. Also, the 
payment need not come from the processor's account. The processor need 
only submit the instruction to transfer funds from the payment 
settlement entity's account. If a processor merely prepares payment 
instructions for the payment settlement entity, which in turn submits 
these instructions to initiate the transfer of funds, then the 
processor is not an electronic payment facilitator, and the payment 
settlement entity retains the reporting obligation. Electronic payment 
facilitators that do not know the gross amount of each reportable 
payment transaction are expected to obtain this information from the 
payment settlement entity. The final regulations include additional 
examples applying the electronic payment facilitator rule.
    A commenter also expressed concern that merchants might only be 
aware of the merchant acquiring bank or other payment settlement entity 
and might, therefore, be confused when receiving statements from the 
electronic payment facilitator. To address this concern, Form 1099-K, 
``Merchant Card and Third Party Payments,'' will include the 
identifying information of both the payment settlement entity and the 
electronic payment facilitator. In addition, the payee's copy of Form 
1099-K will describe the entities that are shown on the form.

Participating Payee--Foreign Address Exclusion

    Section 6050W(d)(1)(B) provides that, except as provided by the 
Secretary in regulations or other guidance, the term participating 
payee does not include any person with a foreign address (the ``address 
rule''). The proposed regulations did not exclude persons with foreign 
addresses from the term participating payee, although the proposed 
regulations did provide that in many cases a payment settlement entity 
may rely on a foreign address to avoid reporting. Specifically, the 
proposed regulations provided that a payment settlement entity that is 
not a United States (U.S.) payor or U.S. middleman may rely on a 
foreign address for a participating payee to avoid reporting as long as 
the payor neither knows nor has reason to know that the payee is a U.S. 
person. The proposed regulations also

[[Page 49825]]

provided that a payment settlement entity that is a person described as 
a U.S. payor or U.S. middleman in Sec.  1.6049-5(c)(5) is not required 
to report payments to payees with a foreign address as long as, prior 
to payment, the payee has provided the payor with documentation upon 
which the payor may rely to treat the payment as made to a foreign 
person in accordance with Sec.  1.1441-1(e)(1)(ii).
    Commenters expressed concern that the proposed regulations treat 
U.S. and non-U.S. payors inconsistently and may impose overly 
burdensome documentation requirements on U.S. payors, and requested 
that the address rule apply to U.S. and non-U.S. payors alike. 
Alternatively, commenters requested that documentation and records 
maintained consistent with section 326 of the USA PATRIOT Act 
(``Patriot Act''), 31 U.S.C. 5318(l), should satisfy the documentation 
requirements for U.S. payors under these regulations.
    The final regulations do not adopt these recommendations. The final 
regulations do not adopt the suggestion that the documentation 
standards be made consistent with the Patriot Act because the customer 
identification requirements under the Patriot Act are not intended to 
identify U.S. taxpayers and do not adequately address the tax 
administration concerns of section 6050W.
    The final regulations also do not extend the address rule to 
payment settlement entities that are U.S. payors. The Treasury 
Department and the IRS understand from meeting with affected parties 
that payment settlement entities do not currently rely solely on an 
address to identify a participating payee because payment settlement 
entities have a business interest in verifying the identity of the 
participating payee due to the credit and reputational risks inherent 
in payment card transactions. The Treasury Department and the IRS have 
a similar compliance interest in ensuring that the participating 
payee's identity is verified, and applying the address rule generally 
to payment settlement entities that are U.S. payors does not adequately 
address those concerns. For example, where a participating payee 
receives payment from a U.S. person inside the United States or to a 
U.S. account, the Treasury Department and the IRS believe it is 
appropriate to require the participating payee to complete a Form W-
8BEN (or other appropriate certification) thereby certifying its 
foreign status and whether the payment constitutes income that is 
effectively connected with the conduct of a trade or business in the 
United States, as required under the proposed and final regulations.
    To address the concerns of certain commenters regarding the burden 
that would be involved in re-documenting existing participating payees, 
however, the final regulations provide a transition rule. For payments 
made pursuant to contractual obligations entered into before January 1, 
2011, a payment settlement entity that is a U.S. payor or middleman may 
rely on a foreign address as long as the U.S. payor or middleman 
neither knows nor has reason to know that the payee is a U.S. person. 
For this limited purpose, a renewal of such a contractual obligation 
will not result in a new contractual obligation unless there is a 
material modification of the contractual obligation.
    In addition, the final regulations provide a presumption under 
which a payment settlement entity that is a U.S. payor or middleman 
making a payment outside the United States to an offshore account (as 
defined in Sec.  1.6049-5(c)(1)) need not report payments to a 
participating payee with only a foreign address if the name of the 
participating payee indicates that it is a foreign per se corporation 
listed in Sec.  301.7701-2(b)(8)(i) and the payment settlement entity 
neither knows nor has reason to know that the participating payee is a 
U. S. person. The final regulations also provide a grace period after 
account opening to collect documentation by applying the grace period 
rules of Sec.  1.6049-5(d)(2)(ii) if the participating payee has only a 
foreign address.
    Payment settlement entities that are not U.S. payors or middlemen 
are not required to make a return of information if the participating 
payee does not have a U.S. address as long as the payment settlement 
entity does not know or have reason to know that the payee is a U.S. 
person. Commenters requested additional guidance for situations in 
which a participating payee has both a foreign address and a U.S. 
address. Under the final regulations, if the participating payee has 
any U.S. address, the non-U.S. payment settlement entity may treat the 
participating payee as a foreign person only if the non-U.S. payment 
settlement entity has in its files documentation upon which the payment 
settlement entity may rely to treat the payment as made to a foreign 
person in accordance with Sec.  1.1441-1(e)(1)(ii).

Payments Made in Currencies Other Than the United States Dollar

    Several commenters requested that the final regulations provide a 
rule for the conversion into U.S. dollars of amounts paid in foreign 
currency. This suggestion was adopted. The final regulations provide 
that when a payment is made or received in a foreign currency, the U.S. 
dollar amount is determined by converting such foreign currency into 
U.S. dollars on the date of the transaction at the spot rate (as 
defined in Sec.  1.988-1(d)(1)) or pursuant to a reasonable spot rate 
convention, such as a month-end spot rate or a monthly average spot 
rate.

Duplicate Reporting of the Same Transaction

    Section 6050W(g) provides that the Secretary may prescribe 
regulations or other guidance as necessary or appropriate to carry out 
section 6050W, including rules to prevent the reporting of the same 
transaction more than once. The proposed regulations provided that any 
payment card transaction that otherwise would be reportable under both 
sections 6041 and 6050W must be reported under section 6050W and not 
section 6041. Relief from reporting under section 6041 was not provided 
in the proposed regulations, however, for third party network 
transactions because these transactions are not subject to reporting 
under section 6050W unless the de minimis threshold (more than 200 
transactions aggregating more than $20,000 per calendar year for a 
given payee) is met. Nor was relief provided from reporting under 
section 6050W and other Code sections, including section 3402(t) 
(relating to withholding on certain payments made by government 
entities). The proposed regulations requested additional comments 
regarding the application of a rule to prevent the reporting of the 
same transaction more than once.
    Numerous commenters requested that relief from duplicate reporting 
under both sections 6050W and 6041 be extended to include third party 
network transactions. This suggestion was adopted. Accordingly, the 
final regulations provide that payment card and third party network 
transactions that otherwise would be reportable under both sections 
6041 and 6050W must be reported under section 6050W and not section 
6041. The final regulations also provide that, solely for purposes of 
determining whether a payor is eligible for relief from reporting under 
section 6041, the de minimis threshold for third party network 
transactions in Sec.  1.6050W-1(c)(4) is disregarded because the 
section 6041 payor will be unable to determine whether the de minimis 
threshold applies.
    Commenters also requested relief from duplicate reporting under 
both

[[Page 49826]]

sections 6050W and 3402(t). However, commenters have indicated that 
merchant acquiring banks and other payment settlement entities would 
have administrative difficulty in determining whether payment card and 
third party network transactions will be subject to withholding and 
reporting under section 3402(t). Therefore, the final regulations do 
not provide relief for transactions that would otherwise be reported 
under both sections 6050W and 3402(t). However, the Treasury Department 
and the IRS are continuing to consider whether relief could be provided 
under section 3402(t) or section 6050W.
    Several commenters requested relief from duplicate reporting of the 
same transaction under both sections 6050W and 6041A (relating to 
returns regarding payments of remuneration for services and direct 
sales). This suggestion was adopted for payment card transactions and 
third party network transactions subject to section 6041A(a). The final 
regulations provide that any transaction that would otherwise be 
reported under both sections 6050W and 6041A(a) must be reported under 
section 6050W and not section 6041A(a).
    Similar relief from duplicate reporting of the same transaction 
under both sections 6050W and 6041A(b) is not warranted, however, 
because sections 6050W and 6041A(b) report different types of 
information and serve different purposes. Section 6041A(b) provides 
that if any person engaged in a trade or business, in the course of the 
trade or business during any calendar year, sells $5,000 or more of 
consumer goods to any buyer on a buy-sell basis, a deposit-commission 
basis, or any similar basis, for resale in the home or other than in a 
permanent retail establishment, that person must file a return 
reporting the amount of the sales to the buyer during the calendar 
year. Thus, unlike section 6050W, which requires payors to report 
information about payments to sellers, section 6041A(b) requires 
sellers of certain consumer products to report information about 
payments from buyers. Therefore, the final regulations do not provide 
relief for transactions that are reportable under both sections 6050W 
and 6041A(b).

Electronic Consent Procedures

    Section 6050W(f) provides that payee statements may be furnished 
electronically. Prior to the proposed regulations, commenters requested 
that the existing procedures for payee statements be modified to 
eliminate the requirement for an affirmative consent to receive the 
payee statement under section 6050W electronically. This request was 
not adopted in the proposed regulations. Instead, additional comments 
were requested on electronic consent procedures.
    Many commenters suggested eliminating the requirement for an 
affirmative consent to receive the payee statement electronically. 
Commenters requested that merchants already receiving business 
communications electronically be deemed to have consented to receive 
electronic payee statements under section 6050W. Commenters also 
suggested eliminating the requirement to notify payees about electronic 
payee statements in a separate communication. Commenters suggested 
permitting merchants receiving paper communications to consent to 
electronic payee statements by logging onto a website to indicate their 
consent, with no further written consent required.
    In response to these comments, the final regulations simplify 
existing electronic consent procedures. Section 1.6050W-2 provides that 
a recipient consents to receive the statement required under section 
6050W in an electronic format either by making an affirmative consent 
or, in the alternative, by previously having consented to receive from 
the furnisher other federal tax statements in an electronic format. The 
consent may be made electronically in any manner that reasonably 
demonstrates that the recipient can access the statement in the 
electronic format in which it will be furnished to the recipient. 
Alternatively, the consent may be made in a paper document if it is 
confirmed electronically. Section 1.6050W-2 sets forth the procedures 
for meeting the consent requirements.

Time, Form and Manner for Reporting

    Section 6050W(a) provides that the return required under this 
section shall be made at the time and in the form and manner as 
required by regulations. The proposed regulations provided that the 
return required by section 6050W must be made according to the forms 
and instructions published by the IRS. Form 1099-K, ``Merchant card and 
third-party payments,'' requires annual reporting, with respect to each 
participating payee, of the gross amount of the aggregate reportable 
payment transactions for the calendar year and the gross amount of the 
aggregate reportable transactions for each month of the calendar year.
    A commenter expressed concern that the requirement for monthly 
amounts to be reported on Form 1099-K would be burdensome for small 
businesses and sole proprietors. The final rules retain the proposed 
rule because the inclusion of monthly amounts on the return filed with 
the IRS and furnished to the payee will aid in reconciling payment card 
and third party network transactions for fiscal year payees.

Backup Withholding

    The Act amended section 3406(b)(3) to provide that amounts 
reportable under section 6050W are subject to backup withholding 
requirements, effective for amounts paid after December 31, 2011. The 
proposed regulations proposed to amend existing regulations under 
section 3406 to provide that persons making information returns with 
respect to any reportable payment under section 6050W made after 
December 31, 2011, are included in the definition of ``payors'' 
obligated to backup withhold.
    Section 6050W(d)(1)(C) provides that, for purposes of section 
6050W, the definition of participating payee includes any governmental 
unit. The proposed regulations incorporated this statutory provision. 
One commenter asked whether reportable payments made to governmental 
units are subject to backup withholding under section 3406(a). The Act 
amended section 3406(b) to provide that reportable payments subject to 
information reporting under section 6050W are subject to backup 
withholding if a condition for backup withholding, as set forth in 
section 3406(a)(1), exists. The Act, however, did not eliminate any of 
the existing statutory exceptions to backup withholding. For example, 
section 3406(g) provides that backup withholding under section 3406(a) 
shall not apply to any payment made to any organization or governmental 
unit described in subparagraph (B), (C), (D), (E), or (F) of section 
6049(b)(4). The final regulations make no changes to the existing 
statutory exceptions to backup withholding.
    As discussed earlier in this preamble, several commenters stated 
that defining ``gross amount'' as a number that reflects all positive 
sales transactions on the date of the transaction, without adjustment 
for any items, may complicate backup withholding, which is generally 
imposed on the amount of the payment at the time of payment rather than 
on the amount of the transaction at the time of the transaction. The 
amount reportable under section 6050W is the gross amount of the 
transaction on the date of the transaction, which may differ from the 
amount and date of the payment (potentially a net amount paid on a 
later date). In response to these comments, the final regulations 
clarify that the obligation to withhold arises on the date

[[Page 49827]]

of the transaction. A payor is not required, however, to satisfy its 
withholding liability until the time that payment is made. The amount 
withheld is based on the total reportable amount, that is, the gross 
amount of the transaction.
    A commenter stated that on the date of payment, the payee's account 
may have insufficient funds available for backup withholding. For 
example, if sales returns exceed positive sales transactions for the 
transaction period, a merchant's account balance could be less than the 
required amount of backup withholding or even zero. In response to this 
concern, the final regulations allow backup withholding from an 
alternate source maintained by the payor for the payee if the payee's 
account has insufficient funds. The final regulations further provide 
that if the payor cannot locate an alternative source of cash from 
which to backup withhold, the payor may defer its obligation to backup 
withhold until the earlier of the date on which the payee's account has 
sufficient funds or the close of the fourth calendar year after the 
obligation arose. At the close of the fourth calendar year after the 
backup withholding obligation arose, if the payor has not located an 
alternate source from which to backup withhold, and the account has 
insufficient funds, then the backup withholding obligation will cease 
to exist.
    Finally, the final regulations clarify how to apply the backup 
withholding rules to third party network transactions, which are 
subject to a de minimis rule. In general, the amount that is subject to 
withholding under section 3406 is the amount subject to reporting under 
section 6050W. Section 3406(b)(4) provides that the determination of 
whether a payment is a reportable payment for purposes of backup 
withholding is made without regard to any minimum amount that must be 
paid before a return is required. Accordingly, the final regulations 
provide that, in the case of payments made in settlement of third party 
network transactions, the amount subject to withholding under section 
3406 is determined without regard to the exception for de minimis 
payments by third party settlement organizations in section 6050W(e) 
and the final regulations in this document.

Penalties

    The Act amended section 6724(d) by adding returns required by 
section 6050W to the definition of information return for purposes of 
penalties for failure to comply with certain reporting requirements. 
The proposed regulations proposed to amend the regulations to add 
reportable payments under section 6050W to the list of information 
returns subject to the penalties under section 6721 (failure to file 
correct information returns) and section 6722 (failure to furnish 
correct payee statements). The final regulations adopt these 
amendments.
    Commenters requested that the final regulations specifically waive 
penalties for persons who have made a reasonable and good faith effort 
to implement section 6050W reporting and related backup withholding but 
who fail to comply. This suggestion was not adopted because the 
existing regulations under section 6724 provide extensive guidance for 
waiver of penalties due to reasonable cause for failure to file correct 
information returns and failure to furnish correct payee statements. 
The IRS will continue to work closely with stakeholders to ensure the 
smooth implementation of the provisions in these regulations, 
including, in general, the mitigation of penalties in the early stages 
of implementation, except for particularly egregious cases.

Effective/Applicability Dates

    The regulations under sections 6041, 6041A, 6050W, 6051, 6721 and 
6722 apply to returns for calendar years beginning after December 31, 
2010. The regulations under section 3406 apply to amounts paid after 
December 31, 2011.

Special Analyses

    It has been determined that this final rule is not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations. Pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that the 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the persons required to report under section 6050W, 
payment settlement entities, will generally not be small businesses. 
Merchant acquiring entities, the payment settlement entities required 
to report payment card transactions, will primarily be banks with over 
$175 million in assets. Third party settlement organizations, the 
payment settlement entities required to report third party network 
transactions, will generally not be small entities by virtue of the 
definition of a third party payment network, which requires the 
establishment of accounts with a central organization (the third party 
settlement organization) by a substantial number of persons. Further, 
section 6050W(e) provides a de minimis exception that exempts third 
party settlement organizations from reporting transactions with respect 
to a payee if the aggregate amount of such transactions does not exceed 
$20,000 or the aggregate number of such transactions does not exceed 
200. The Treasury Department and the IRS certify that the regulations 
in this document will not have a significant economic impact on a 
substantial number of small entities. Pursuant to section 7805(f) of 
the Code, the notice of proposed rulemaking preceding these regulations 
was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these proposed regulations is Barbara 
Pettoni, Office of Associate Chief Counsel (Procedure and 
Administration).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Fishing Vessels, Gambling, Income taxes, 
Penalties, Pensions, Railroad retirement, Reporting and recordkeeping 
requirements, Social security, Unemployment compensation.

26 CFR Part 301

    Administrative practice and procedure, Alimony, Bankruptcy, Child 
support, Continental shelf, Courts, Crime, Employment taxes, Estate 
taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law 
enforcement, Oil pollution, Penalties, Pensions, Reporting and 
recordkeeping requirements, Seals and insignia, Statistics and taxes.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 31 and 301 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805.


0
Par. 2. Section 1.6041-1 is amended by adding a sentence at the end of 
paragraph (a)(1)(ii), adding paragraphs (a)(1)(iv) and (a)(1)(v), and 
revising paragraph (j) to read as follows:

[[Page 49828]]

Sec.  1.6041-1  Return of information as to payments of $600 or more.

    (a) * * *
    (1) * * *
    (i) * * *
    (ii) * * * For payment card transactions (as described in Sec.  
1.6050W-1(b)) and third party network transactions (as defined in Sec.  
1.6050W-1(c)) required to be reported on information returns required 
under section 6050W (relating to payment card and third party network 
transactions), see special rules in Sec.  1.6041-1(a)(1)(iv).
* * * * *
    (iv) Information returns required under section 6050W for calendar 
years beginning after December 31, 2010. For payments made by payment 
card (as defined in Sec.  1.6050W-1(b)(3)) or through a third party 
payment network (as defined in Sec.  1.6050W-1(c)(3)) after December 
31, 2010, that are required to be reported on an information return 
under section 6050W (relating to payment card and third party network 
transactions), the following rule applies. Transactions that are 
described in paragraph (a)(1)(ii) of this section that otherwise would 
be subject to reporting under both sections 6041 and 6050W are reported 
under section 6050W and not section 6041. For provisions relating to 
information reporting for payment card and third party network 
transactions, see Sec.  1.6050W-1. Solely for purposes of this 
paragraph, the de minimis threshold for third party network 
transactions in Sec.  1.6050W-1(c)(4) is disregarded in determining 
whether the transaction is subject to reporting under section 6050W.
    (v) Examples. The provisions of paragraph (a)(1)(iv) of this 
section are illustrated by the following examples:

    Example 1.  Restaurant owner A, in the course of business, pays 
$600 of fixed or determinable income to B, a repairman, by credit 
card. B is one of a network of unrelated persons that has agreed to 
accept A's credit card as payment under an agreement that provides 
standards and mechanisms for settling the transactions between a 
merchant acquiring bank and the persons who accept the cards. 
Merchant acquiring bank Y is responsible for making the payment to 
B. Under paragraph (a)(1)(iv) of this section, A, as payor, is not 
required to file an information return under section 6041 with 
respect to the transaction because Y, as the payment settlement 
entity for the payment card transaction, is required to file an 
information return under section 6050W.
    Example 2.  Restaurant owner A, in the course of business, pays 
$600 of fixed or determinable income to B, a repairman, through a 
third party payment network. B is one of a substantial number of 
persons who have established accounts with Y, a third party 
settlement organization that provides standards and mechanisms for 
settling the transactions and guarantees payments to those persons 
for goods or services purchased through the network. Y is 
responsible for making the payment to B. Under paragraph (a)(1)(iv) 
of this section, A, as payor, is not required to file an information 
return under section 6041 with respect to the transaction because 
the transaction is a third party network transaction that is subject 
to reporting under section 6050W. Solely for purposes of determining 
whether A is eligible for relief from reporting under section 6041, 
the de minimis threshold for third party network transactions in 
Sec.  1.6050W-1(c)(4) is disregarded.

* * * * *
    (j) Effective/applicability date. The provisions of paragraphs (b), 
(c), (e), and (f) of this section apply to payments made after December 
31, 2002. The provisions of paragraphs (a)(1)(iv) and (a)(1)(v) apply 
to payments made after December 31, 2010.

0
Par. 3. Section 1.6041A-1 is amended by adding paragraph (d)(4) to read 
as follows:


Sec.  1.6041A-1  Returns regarding payments of remuneration for 
services and certain direct sales.

* * * * *
    (d) * * *
    (4) Information returns required under section 6050W for calendar 
years beginning after December 31, 2010. (i) For payments made by 
payment card (as defined in Sec.  1.6050W-1(b)(3)) or through a third 
party payment network (as defined in Sec.  1.6050W-1(c)(3)) after 
December 31, 2010, that are required to be reported on an information 
return under section 6050W (relating to payment card and third party 
network transactions), the following rule applies. Transactions that 
otherwise would be reportable under both sections 6041A(a) and 6050W 
are reported under section 6050W and not section 6041A(a). For 
provisions relating to information reporting for payment card 
transactions and third party network transactions, see Sec.  1.6050W-1. 
Solely for purposes of this paragraph, the de minimis threshold for 
third party network transactions in Sec.  1.6050W-1(c)(4) is 
disregarded in determining whether the transaction is subject to 
reporting under section 6050W.
    (ii) Examples. The provisions of paragraph (d)(4) of this section 
are illustrated by the following examples:

    Example 1.  Service-recipient A, in the course of its business, 
pays remuneration of $600 to service provider B by credit card for 
services performed by B. B is one of a network of unrelated persons 
that has agreed to accept A's credit card as payment under an 
agreement that provides standards and mechanisms for settling the 
transactions between a merchant acquiring bank and the persons who 
accept the cards. Merchant acquiring bank Y is responsible for 
making the payment to B. Under paragraph (d)(4)(i) of this section, 
A is not required to file an information return under section 
6041A(a) with respect to the transaction because Y, as the payment 
settlement entity for the payment card transaction, is required to 
file an information return under section 6050W.
    Example 2.  Service-recipient A, in the course of business, pays 
$600 of fixed or determinable income to B, a repairman, through a 
third party payment network. B is one of a substantial number of 
persons who have established accounts with Y, a third party 
settlement organization that provides standards and mechanisms for 
settling the transactions and guarantees payments to those persons 
for goods or services purchased through the network. Y is 
responsible for making the payment to B. Under paragraph (d)(4)(i) 
of this section, A is not required to file an information return 
under section 6041A(a) with respect to the transaction because the 
transaction is a third party network transaction that is subject to 
reporting under section 6050W. Solely for purposes of determining 
whether the transaction is subject to reporting under section 6050W, 
the de minimis threshold for third party network transactions in 
Sec.  1.6050W-1(c)(4) is disregarded.
    (iii) Effective/applicability date. Paragraph (d)(4) of this 
section applies to payments made by payment card or through a third 
party payment network after December 31, 2010.
* * * * *

0
Par. 4. Section 1.6050W-1 is added to read as follows:


Sec.  1.6050W-1  Information reporting for payments made in settlement 
of payment card and third party network transactions.

    (a) In general--(1) General rule. Every payment settlement entity, 
as defined in paragraph (a)(4) of this section, must file an 
information return for each calendar year with respect to payments made 
in settlement of reportable payment transactions, as defined in 
paragraph (a)(3) of this section, setting forth the following 
information:
    (i) The name, address, and taxpayer identification number (TIN) of 
each participating payee, as defined in paragraph (a)(5) of this 
section, to whom one or more payments in settlement of reportable 
payment transactions are made.
    (ii) With respect to each participating payee, the gross amount, as 
defined in paragraph (a)(6) of this section, of--
    (A) The aggregate reportable payment transactions for the calendar 
year; and
    (B) The aggregate reportable payment transactions for each month of 
the calendar year.
    (iii) Any other information required by the form, instructions or 
current revenue procedures.
    (2) Payments in settlement of reportable payment transactions. A

[[Page 49829]]

payment settlement entity, as defined in paragraph (a)(4) of this 
section (or an electronic payment facilitator, as defined in paragraph 
(d)(2) of this section), makes a payment in settlement of a reportable 
payment transaction if the payment settlement entity (or electronic 
payment facilitator) submits the instruction to transfer funds to the 
account of the participating payee for purposes of settling the 
reportable payment transaction.
    (3) Reportable payment transaction. The term reportable payment 
transaction means any payment card transaction (as defined in paragraph 
(b)(1) of this section) and any third party network transaction (as 
defined in paragraph (c)(1) of this section).
    (4) Payment settlement entity--(i) Definition. The term payment 
settlement entity means a domestic or foreign entity that is--
    (A) In the case of a payment card transaction, a merchant acquiring 
entity (as defined in paragraph (b)(2) of this section); and
    (B) In the case of a third party network transaction, a third party 
settlement organization (as defined in paragraph (c)(2) of this 
section).
    (ii) Multiple payment settlement entities. If two or more persons 
qualify as payment settlement entities (as defined in paragraph 
(a)(4)(i) of this section) with respect to a reportable payment 
transaction, then only the payment settlement entity that in fact makes 
payment in settlement of the reportable payment transaction must file 
the information return required by paragraph (a)(1) of this section.
    (5) Participating payee--(i) Definition. In general, the term 
participating payee means any person, including any governmental unit 
(and any agency or instrumentality thereof), who:
    (A) In the case of a payment card transaction, accepts a payment 
card (as defined in paragraph (b)(3) of this section) as payment; and
    (B) In the case of a third party network transaction, accepts 
payment from a third party settlement organization (as defined in 
paragraph (c)(2) of this section) in settlement of such transaction.
    (ii) Foreign payees--(A) In general. For payments pursuant to 
contractual obligations entered into after December 31, 2010, a payment 
settlement entity that is a person described as a U.S. payor or U.S. 
middleman in Sec.  1.6049-5(c)(5) is not required to make a return of 
information for payments to a participating payee with a foreign 
address as long as, prior to payment, the payment settlement entity has 
in its files documentation upon which the payment settlement entity may 
rely to treat the payment as made to a foreign person in accordance 
with Sec.  1.1441-1(e)(1)(ii). For purposes of this paragraph 
(a)(5)(ii), the provisions of Sec.  1.1441-1 shall apply by 
substituting the term payor for the term withholding agent and without 
regard to the limitation to amounts subject to withholding under 
chapter 3 of the Internal Revenue Code and the regulations under that 
chapter. Such a payment settlement entity need not make a return of 
information for payments made outside the United States (within the 
meaning of Sec.  1.6049-5(e)) to an offshore account (as defined in 
Sec.  1.6049-5(c)(1)) to a participating payee with only a foreign 
address if the name of the participating payee indicates that it is an 
entity listed as a per se corporation under Sec.  301.7701-2(b)(8)(i) 
and the payment settlement entity does not know or have reason to know 
that the participating payee is a United States person. A payment 
settlement entity may apply the grace period rules of Sec.  1.6049-
5(d)(2)(ii) of the regulations for payments to a participating payee 
with only a foreign address, without regard to whether the amounts paid 
are described in Sec.  1.1441-6(c)(2) or are reportable under section 
6042, 6045, 6049, or 6050N. For payments pursuant to contractual 
obligations entered into before January 1, 2011, a payment settlement 
entity that is a person described as a U.S. payor or U.S. middleman in 
Sec.  1.6049-5(c)(5) is not required to make a return of information 
for payments to a participating payee with a foreign address as long as 
the payment settlement entity neither knows nor has reason to know that 
the participating payee is a United States person. For this purpose, a 
renewal of such a contractual obligation will not result in a new 
contractual obligation unless there is a material modification to the 
contractual obligation.
    (B) Non-U.S. payor or middleman. A payment settlement entity that 
is not a person described as a U.S. payor or U.S middleman in Sec.  
1.6049-5(c)(5) is not required to make a return of information for a 
payment to a participating payee that does not