Withholding on Certain Distributions Under Section 3405(a) and (b)

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 31</CFR> <DEPDOC>[TD 10008]</DEPDOC> <RIN>RIN 1545-BN52</RIN> <SUBJECT>Withholding on Certain Distributions Under Section 3405(a) and (b)</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulation. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains a final regulation regarding income tax withholding on certain periodic payments and nonperiodic distributions from employer deferred compensation plans, individual retirement plans, and commercial annuities that are not eligible rollover distributions. The regulation addresses a payor's obligation to withhold income taxes in the circumstances in which those payments or distributions are made to payees outside of the United States and affects payors and payees of those periodic payments and nonperiodic distributions. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date.</E> This regulation is effective October 21, 2024. <E T="03">Applicability date.</E> This regulation applies with respect to payments and distributions made on or after January 1, 2026. However, taxpayers may apply it to earlier payments and distributions. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Jeremy Lamb at (202) 317-4575 or Isaac Stein at (202) 317-6320 (not toll-free numbers). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> Section 7805(a) authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code. <HD SOURCE="HD1">Background</HD> Section 3405(a)(1) of the Internal Revenue Code of 1986 (Code) requires the payor of any periodic payment to withhold income tax from the payment. Under section 3405(a)(2), an individual generally may elect not to have section 3405(a)(1) apply with respect to periodic payments made to the individual. Section 3405(b)(1) requires the payor of any nonperiodic distribution to withhold income tax from the distribution. Under section 3405(b)(2), an individual generally may elect not to have section 3405(b)(1) apply with respect to any nonperiodic distribution. Section 3405(e)(2) defines a periodic payment as a designated distribution that is an annuity or similar periodic payment. Section 3405(e)(3) defines a nonperiodic distribution as any designated distribution that is not a periodic payment. A designated distribution is defined in section 3405(e)(1) as generally any distribution or payment from or under an employer deferred compensation plan, an individual retirement plan (as defined in section 7701(a)(37) of the Code), or a commercial annuity. For this purpose, an employer deferred compensation plan is defined in section 3405(e)(5) as any pension, annuity, profit sharing, or stock bonus plan or other plan deferring the receipt of compensation, and a commercial annuity is defined in section 3405(e)(6) as an annuity, endowment, or life insurance contract issued by an insurance company licensed to do business under the laws of any State. Section 3405(e)(1)(B) identifies certain amounts or payments that are not a “designated distribution” for purposes of section 3405 withholding. Under section 3405(e)(1)(B)(iii), any amount that is subject to withholding under subchapter A of chapter 3 of the Code (relating to withholding of tax on nonresident aliens and foreign corporations) by the person paying such amount or which would be so subject but for a tax treaty is not a designated distribution. Section 3405(e)(13)(A) provides generally that, in the case of any periodic payment or nonperiodic distribution that is “to be delivered outside of the United States and any possession of the United States,” no election may be made under section 3405(a)(2) or (b)(2) with respect to such payment, with the result that withholding may not be waived. Section 3405(e)(13)(B) provides that section 3405(e)(13)(A) does not apply if the recipient certifies to the payor, in such manner as the Secretary of the Treasury may prescribe, that the recipient is not (i) a United States citizen or a resident alien of the United States, or (ii) an individual to whom section 877 of the Code applies. Section 877(h) provides that section 877 applies to certain nonresident alien individuals whose expatriation date, as defined in section 877A(g)(3), is before June 17, 2008. Notice 87-7, 1987-1 CB 420, provides guidance under section 3405(e)(13)(A) to payors of designated distributions with respect to their duty to withhold income tax from such distributions. The notice applies to designated distributions for the following categories of payees: (1) payees who have provided the payors with a residence address outside of the United States;  <SU>1</SU> <FTREF/> (2) payees who have provided the payors with a residence address within the United States; and (3) payees who have not provided the payors with a residence address. <FTNT> <SU>1</SU>  For purposes of this preamble, references to the “United States” include any possession of the United States. </FTNT> Notice 87-7 specifies that, if a payee has provided the payor with a residence address outside of the United States, the payor is required to withhold income tax from designated distributions to the payee. If a payee has provided the payor with a residence address within the United States, the payor is required to withhold income tax from these distributions to the payee unless the payee has elected no withholding in accordance with the applicable provisions of section 3405. If a payee has not provided the payor with a residence address, the payor is required to withhold income tax from designated distributions; included within this category is a payee who has provided the payor with an address for the payee's nominee, trustee, or agent without also providing the payee's residence address. On May 31, 2019, the Department of the Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking regarding withholding on certain periodic payments and nonperiodic distributions under section 3405 (other than eligible rollover distributions) in the <E T="04">Federal Register</E> (84 FR 25209). No comments responsive to the notice of proposed rulemaking were received, and no public hearing was requested or held. Thus, this final regulation adopts the provisions of the proposed regulation with no modifications except for the change in the applicability date to January 1, 2026, and other minor changes in wording that are nonsubstantive. <HD SOURCE="HD1">Explanation of Provisions</HD> This document contains a final regulation under section 3405(e) that provides withholding guidance for payors of periodic payments and nonperiodic distributions under section 3405(a) and (b), respectively. The regulation generally addresses a payor's obligation to withhold under section 3405(a) and (b) in the following situations: (1) payments to payees with a military or diplomatic Post Office address; (2) payments to payees with a residence address located within the United States; (3) payments to payees with a residence address located outside of the United States or who have not provided a residence address; and (4) payments subject to withholding under subchapter A of chapter 3 (sections 1441 through 1446 of the Code). <HD SOURCE="HD2">1. Payees With a Military or Diplomatic Post Office Address</HD> For purposes of section 3405(e)(13)(A), the regulation treats an Army Post Office (APO), a Fleet Post Office (FPO), or a Diplomatic Post Office (DPO)  <SU>2</SU> <FTREF/> address as an address located within the United States. In 1986, when this provision was added to the Code by the Tax Reform Act of 1986, Public Law 99-514 (TRA '86), it was one of several provisions intended to increase compliance with the internal revenue laws by United States persons resident abroad and green card holders. The Senate Finance Committee Report for TRA '86 indicates a concern, based on data gathered by the General Accounting Office (GAO), <SU>3</SU> <FTREF/> that the percentage of taxpayers who fail to file returns is substantially higher among Americans living abroad than it is among those resident in the United States, and that it is often difficult for the IRS to enforce compliance by these taxpayers. S. Rep. No. 99-313, at 390 (1986). <FTNT> <SU>2</SU>  APO is associated with Army or Air Force installations. FPO is associated with Navy installations and ships. APO/FPO addresses are utilized by Department of Defense personnel, their family members, and other authorized users. DPO provides global mail service to authorized personnel assigned to designated posts abroad. </FTNT> <FTNT> <SU>3</SU>  Effective July 7, 2004, the GAO's legal name was changed from the General Accounting Office to the Government Accountability Office. </FTNT> The GAO data referred to in the legislative history does not include United States military personnel and their families as taxpayers who are living abroad. Johnny C. Finch, <E T="03">United States Citizens Living in Foreign Countries and Not Filing Federal Income Tax Returns,</E> United States General Accounting Office, May 8, 1985. In addition, enforcement of compliance by individuals receiving mail at an APO, an FPO, or a DPO address generally does not involve the same challenges as enforcing compliance by other taxpayers living abroad. Because APO, FPO, and DPO delivery destinations are generally United States military or diplomatic facilities, taxpayers with an APO, an FPO, or a DPO address commonly maintain a current or former employment or contractor relationship with the United States government. Moreover, these addresses generally are treated as “domestic” by the United States Postal Service. <E T= ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 28k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━