IRS plays Santa Claus: backup withholding regulations arrived in time for Christmas.

In December 1995, the IRS issued final regulations on backup withholding under Sec. 3406 for situations in which a payee of interest or dividends fails to provide the payer with a taxpayer identification number (TIN) in the required manner. Generally, a payer must backup withhold on payments to all accounts of a payee that the payer can identify with reasonable care. Payers with computer systems that use a universal account number to retrieve all accounts of a payee must also use this method to identify all of the payee's accounts for backup withholding purposes.

A payer is no longer required to track backup withholding on dormant accounts. The payer may stop monitoring a dormant account for backup withholding after the third year following the later of the payer's last reportable payment into the account or the receipt of a C Notice.

Backup withholding is not required during the period (up to 60 days) that a payer is waiting for a payee's TIN, unless the payee makes a substantial withdrawal (i.e., more than 69% of the balance, in a transaction exceeding $500) from the account during this period.

When payments are made in property, the payer's obligation to backup withhold terminates either when sufficient cash is deposited in the account to satisfy the obligation or after the end of the fourth calendar year after the obligation arose.

A grantor trust with two or more grantors is now considered a payer, and the trust must withhold on payments to its grantors that are subject to backup withholding.

An S corporation making a payment of a distributive share to a shareholder is no longer considered a payer. This provision gives S corporations an exception similar to a reporting exception for partnerships.