Sec. 3406. Backup Withholding

Sec. 3406. Backup Withholding
Sec. 3406. Backup Withholding

3406. Backup Withholding
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(a)Requirement to deduct and withhold.
   (1) In general. in the case of any reportable payment, if -
      (A) the payee fails to furnish his TIN to the payor in the
            manner required,
      (B) the Secretary notifies the payor that the TIN furnished
            by payee is incorrect,
      (C) there has been a notified payee under-reporting
            described in subsection (c), or
      (D) there has been a payee certification failure described
             in subsection (d), 
    then the payor shall deduct and withhold from such payment 
    a tax equal to 31 percent of such payment.
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(2) Subparagraphs (c) and (d) of paragraph (1) apply only to interest and dividend payments.
Subparagraphs (C) and (D) of paragraph (1) shall apply only to reportable interest or dividend payments. .....
26 USC 3406

OK. This statute generally gets wrongfully invoked by banks and brokers, through wrongful notice from the IRS - caused by no 1040 Return being filed for the SSN associated with the account, and the misleading language of subparagraph (2). Or, for providing no SSN or an incorrect SSN.

However, this statute is in Subtitle C, It does not apply to Subtitle A activities or relationships !

For banks and brokers the response should be that they are confused about the Subtitles, their legal authorities, and their proper application. The banks and brokers operate under Subtitle A, They are not your employer and therefore, Subtitle C is irrelevant to your particular relationship - which is NOT one of employment, which is what Subtitle C addresses.

They are required under Subtitle A (Sec. 6041) to make a report on a 1099 of earnings paid. However, Section 6041 does not actually require an SSN for the Subtitle A report (Form 1099). That is because Subtitle A reports are not asoociated with employmemnt, which is what SSNs are used (exclusively) for under the law. This statute, Sec. 3406, is in Subtitle C, which addresses employment, But they (the bank/broker) are not your employer, and are therefore relying on inapplicable authorities. Additionally, the "manner required" by the statute (6041) for the 1099 report does not include the use of an SSN.

If the IRS tries to backup withhold from wages paid by an employer, they must have one of the explicit causes set forth in the statute present as justification for such attempt. Since C and D ONLY APPLY to interest and dividends, which few people get from their employer, 'wages' cannot have backup withholding imposed as a result of a failure to file (report) (as authorized in subparagraph C for dividends and interest). If no SSN is provided to an employer, NO W-4s or W-2 are required to be provided or filed (the employer can use a 1099), and NO SSN is part of the "manner required" for the 1099, and you are back under Subtitle A exclusively, with the employer reduced to the legal capacity and legal authority of a withholding agent", because you do not want the social security coverage or benefit.

So if anyone tries to BACKUP WITHHOLD from your SALARY OR WAGES, you ask him where that's authorized in the law, because this section only applies to interest and dividends - which employers don't pay.
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Last Update: 03/01/2007
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