Backup Withholding on Third Party Network Transactions, T.D. 10053, 91 Fed. Reg. 16269 (Aug. 10, 2026)

On August 10, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) published final regulations under Treasury Decision 10053, governing backup withholding requirements on reportable payments made in settlement of third-party network transactions under Internal Revenue Code (IRC) § 3406. These final regulations adopt the proposed regulations published on January 9, 2026, in the Federal Register under REG-112829-25, without any substantive changes.

The regulatory changes reflect a lengthy statutory and administrative history regarding information reporting by third-party settlement organizations (TPSOs). Section 6050W, originally enacted by the Housing Assistance Tax Act of 2008 (Public Law 110-289), requires payment settlement entities to report the gross amounts of transactions settled via payment cards and third-party networks. For third-party networks specifically, the statute originally mandated information reporting on Form 1099-K only if payments to a participating payee exceeded a gross annual threshold of $20,000 and the aggregate number of transactions exceeded 200 in a calendar year.

In 2021, Congress enacted the American Rescue Plan Act (ARPA) (Public Law 117-2), which significantly tightened these reporting rules. Section 9674 of ARPA amended section 6050W(e) to lower the TPSO reporting threshold to a flat gross amount of $600 in a calendar year, completely eliminating the 200-transaction volume threshold. This drastic reduction of the reporting floor introduced substantial compliance challenges and administrative burdens for taxpayers and payment facilitators.

In response to the practical difficulties of implementing the $600 threshold, the IRS issued a series of transition notices—Notice 2023-10, Notice 2023-74, and Notice 2024-85—which administrative delays kept the lower threshold from taking full effect. However, as the preambles to the proposed and final regulations note, these notices were merely transition measures and “are inconsistent with the statutory revisions and are obsoleted as of January 9, 2026”.

The legislative gridlock was resolved on July 4, 2025, when Congress passed the One, Big, Beautiful Bill Act (OBBBA) (Public Law 119-21). Section 70432(a) of the OBBBA retroactively reverted the reporting threshold in section 6050W(e) back to its pre-ARPA levels, requiring TPSO reporting on Form 1099-K only when annual gross payments to a participating payee exceed $20,000 and the aggregate number of transactions exceeds 200. Under section 70432(a)(2) of the OBBBA, this change took effect “as if included in section 9674 of the American Rescue Plan Act,” effectively erasing the $600 threshold from the statutory history of section 6050W.

The Backup Withholding Coordination Problem and Statutory Solution

While the OBBBA resolved the section 6050W reporting threshold, it also addressed a parallel issue under the backup withholding provisions of section 3406. Generally, section 3406(a) requires a payor to deduct and withhold tax on “reportable payments” if certain conditions are met, such as the payee’s failure to furnish a correct taxpayer identification number (TIN). Under section 3406(b)(3)(F), “reportable payments” include any transaction required to be shown on a return under section 6050W.

However, a critical statutory conflict existed under section 3406(b)(4), which specifies that “whether a payment is reportable is determined without regard to the minimum amount that must be paid before a return is required”. Under this prior rule, if a payee failed to provide a TIN to a TPSO, backup withholding technically applied to the very first dollar of any transaction settled through a third-party network, even if the payee never reached the section 6050W(e) de minimis thresholds. This meant TPSOs were required to backup withhold on small, isolated transactions of un-TINed payees, which was both practically unworkable and logically inconsistent with the purpose of a de minimis reporting carveout.

To resolve this conflict, section 70432(b)(1) of the OBBBA amended section 3406(b) by adding a new paragraph (8), applicable to calendar years beginning after December 31, 2024. Section 3406(b)(8)(A) provides that any payment in settlement of a third-party network transaction required to be shown on a return under section 6050W is treated as a reportable payment under section 3406 “only if” both of the following statutory conditions are met:

The aggregate number of transactions with respect to the participating payee during such calendar year exceeds the transaction threshold specified in section 6050W(e)(2) (currently 200).
The aggregate dollar amount of transactions with respect to the participating payee during such calendar year exceeds the dollar threshold specified in section 6050W(e)(1) (currently $20,000) at the time of such payment.

By tying the definition of “reportable payments” for backup withholding directly to the section 6050W(e) reporting thresholds, Congress aligned the two withholding and reporting regimes, offering substantial compliance relief. However, to prevent bad-faith actors from exploiting the de minimis threshold annually by repeatedly refusing to provide TINs, section 70432(b)(2) (codified as section 3406(b)(8)(B)) introduces a “lookback” exception: the de minimis backup withholding exception does “not apply with respect to payments to any participating payee during any calendar year if one or more payments in settlement of third party network transactions made by the payor to the participating payee during the preceding calendar year were reportable payments”.

Detailed Revisions, Additions, and Deletions under the Final Regulations

The final regulations under Treasury Decision 10053 amend 26 CFR Part 31 to reflect these critical statutory changes. The regulations implement specific revisions, additions, and deletions to the existing administrative rules.

First, the IRS revised § 31.3406(a)-1(a), which provides an overview of the backup withholding requirement. The existing regulations contained an outdated hardcoded rate of “31 percent”. The revised overview aligns the regulatory rate with the statute, stating:

“Under section 3406 of the Internal Revenue Code (Code), a payor must deduct and withhold an amount equal to the product of the fourth lowest rate of tax applicable under section 1(c) of the Code and a reportable payment if a condition for withholding exists.”

Second, the IRS amended the exceptions paragraph in § 31.3406(a)-1(c). The amendment adds a critical cross-reference to § 31.3406(b)(3)-5(b)(2) (the new third-party network de minimis exception) and corrects an existing typo in the cross-reference to § 31.3406(b)(3)-1, changing it from paragraph “(a)(3)” to “(b)(3)”.

Third, the final regulations make a significant deletion in § 31.3406(b)(3)-5(b). The prior regulations under § 31.3406(b)(3)-5(b) explicitly stated that “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 associated regulations”. The final regulations delete this “without regard to” clause entirely, replacing it with new paragraph (b)(2), which implements the new “with regard to” standard.

Fourth, the regulations add § 31.3406(b)(3)-5(b)(2), which dictates the technical mechanics of backup withholding when the de minimis threshold is active. Under these mechanics, a payment is treated as a reportable payment only if the annual transaction volume exceeds 200 and the aggregate amount exceeds $20,000. Crucially, the regulations clarify how the withholding obligation is triggered once the threshold is crossed:

“The amount subject to withholding is the entire amount of the transaction that causes either the total number of transactions to exceed the number of transactions specified in section 6050W(e)(2), or the entire amount of the transaction that causes the total amount paid to the participating payee to exceed the dollar amount specified in section 6050W(e)(1) at the time of such payment, whichever occurs later, and the amount of any subsequent transactions made to the participating payee during the calendar year.”

Fifth, the regulations add § 31.3406(b)(3)-5(b)(3), which incorporates the statutory “lookback rule” of section 3406(b)(8)(B). Under this provision, if a participating payee triggers backup withholding (or has reportable payments) in Year 1, the de minimis exception is unavailable in Year 2, and the payor must backup withhold on every single payment made to that payee in Year 2 from the very first dollar.

Regulatory Mechanics in Action: The Four Examples

To illustrate these complex coordination rules, the IRS added four detailed examples under § 31.3406(b)(3)-5(b)(4), which tax professionals must analyze carefully to understand how the lookback rule propagates over multi-year periods.

Example One: Threshold Crossing and Initial Withholding Trigger

“Platform A is a third party settlement organization... and Y is a participating payee... A complies with all the requirements to solicit a taxpayer identification number (TIN) from Y, but Y does not provide its TIN to A.” During calendar year 2026, Platform A makes 201 payments to Y totaling $20,000.01.

Under § 31.3406(b)(3)-5(b)(2), Platform A is not required to backup withhold on the first 200 payments, because the de minimis reporting thresholds have not yet been crossed. However, “A must backup withhold under paragraph (b)(2) of this section on the entire amount of the 201st transaction because that transaction caused Y to exceed the de minimis reporting threshold for calendar year 2026 of 200 transactions and $20,000 in gross payments.” Any subsequent payments to Y in 2026 would also be subject to backup withholding.

Example Two: Lookback Rule Activation in Year Two

In calendar year 2027, Y continues to use Platform A without providing its TIN. During 2027, Platform A makes 199 payments to Y totaling $18,000.00.

Although these payments are below the de minimis threshold of 200 transactions and $20,000, “A must backup withhold on each payment made to Y in settlement of a third party network transaction during 2027 under paragraph (b)(3) of this section because one or more payments in settlement of third party network transactions made by A to Y during the preceding calendar year (2026) were reportable payments.” Thus, the lookback rule completely strips Y of the de minimis exception, and Platform A must backup withhold starting from the first dollar of the first transaction in 2027.

Example Three: Continued Lookback Rule Propagation in Year Three

During calendar year 2028, Y still has not provided a TIN, and Platform A makes only four payments to Y in settlement of third-party network transactions, totaling $2,000.00.

Even though the transaction count and gross dollar volume are extremely low, “A must backup withhold on each payment made in settlement of a third party network transaction during 2028 under paragraph (b)(3) of this section because one or more payments in settlement of third party network transactions made by A to Y during the preceding calendar year (2027) were reportable payments.” This example demonstrates that because every payment in 2027 was reportable (due to the 2026 trigger), the lookback rule continues to propagate and force backup withholding in 2028.

Example Four: Lookback Rule Reset

During calendar year 2029, A makes no payments to Y. In calendar year 2030, A makes 199 payments in settlement of third-party network transactions to Y totaling $18,000.00.

In this scenario, “A is not required to backup withhold on any payment made in settlement of third party network transactions during calendar year 2030 because A did not make any reportable payments to Y during the preceding calendar year (2029), and A did not make payments in settlement of third party network transactions that exceed the de minimis reporting threshold.” Because there was a complete absence of reportable payments in the preceding year (2029), the lookback rule’s chain is broken, and Y’s de minimis exception is successfully restored for 2030.

IRS Analysis of Law and Rejection of Public Comments

Treasury received eight written comments in response to the proposed regulations but adopted the rules without any changes. The preamble to Treasury Decision 10053 provides a detailed look into the IRS’s legal justifications and administrative authority.

Prospective-Only Application and Congress’s Intent

One commenter requested that the final regulations apply prospectively only. The IRS flatly rejected this request, explaining that its regulatory authority is bound by the effective dates established by Congress. The OBBBA section 70432(b)(1) states that the amendments to section 3406 apply to calendar years beginning after December 31, 2024. To “prevent taxpayer confusion that might arise from a conflict between the statutory text of section 3406 and the text of the regulations, and to adhere to the effective date prescribed in the OBBBA by Congress,” the IRS determined that the regulations must apply retrospectively to match the statute.

Taxability of Income vs. Information Reporting

Another commenter requested that the preamble clarify the substantive tax implications of Form 1099-K. Although the IRS noted this request was technically outside the scope of the backup withholding regulations, it explicitly clarified its position in the preamble to prevent tax controversy:

“the Treasury Department and the IRS agree 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.”

Furthermore, the IRS emphasized that the de minimis threshold is strictly an administrative reporting and withholding relief provision; it “does not create a safe harbor for structuring, account-splitting, or other conduct intended to avoid information reporting or backup withholding,” and the IRS retains all exam and enforcement tools to verify taxpayer income.

Aggregation of Accounts under Section 6050W

The same commenter recommended that the IRS clarify that TPSOs are responsible for internally aggregating multiple accounts with identical identifying information indicating common beneficial ownership or the same TIN. The IRS agreed with the sentiment but noted it was technically outside the scope of these regulations. It clarified that the de minimis thresholds “apply with respect to each participating payee, as defined by section 6050W(d)(1),” which focuses on the legal payee accepting payment.

Request for Regulatory Exemptions and Scope Boundaries

One commenter requested that the IRS exempt patent royalties, dividends, and payments for defense-related goods from backup withholding, and coordinate with the Commodity Futures Trading Commission (CFTC) regarding digital commodity settlement payments. The IRS refused to make any changes, stating that “these final regulations are limited to backup withholding on third party network transactions, not any broader issues related to backup withholding.” Additionally, the IRS clarified that it lacks the statutory authority to alter the de minimis reporting thresholds themselves, as those are codified by Congress in sections 3406(b)(8) and 6050W(e).

Administrative and Special Analyses

Under the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Treasury Department certified that the final regulations will not have a “significant economic impact on a substantial number of small entities.” While the rules affect small entities that operate as TPSOs, the economic impact is positive rather than negative. By increasing the backup withholding threshold from the ARPA level of $600 to the pre-ARPA level of $20,000 and 200 transactions, the final regulations “reduce the frequency with which entities must backup withhold.” Thus, the regulatory burden on small entities is substantially decreased.

Under the Paperwork Reduction Act (44 U.S.C. 3501-3520), the IRS noted that the recordkeeping and reporting burdens associated with backup withholding under § 31.3406(b)(3)-5 are already captured under OMB control number 1545-0029 for Form 945 (Annual Return of Withheld Federal Income Tax). The decrease in compliance burden resulting from the OBBBA’s statutory changes is reflected in the updated Instructions for Form 941 (updated in March 2026).

Effective Dates and Retrospective Application

The final regulations under Treasury Decision 10053 are officially effective on August 10, 2026, which is the date of their publication in the Federal Register. However, to maintain perfect consistency with section 70432(b)(1) of the OBBBA, the applicability dates are retrospective. The regulations state that the amended provisions of § 31.3406(a)-1(e) and § 31.3406(b)(3)-5(e) “apply with respect to payments made in calendar years beginning after December 31, 2024.”

Consequently, for any audits or compliance reviews covering calendar years 2025 and 2026, tax professionals must apply the new $20,000/200 de minimis thresholds and the multi-year lookback rules retroactively, rather than the transitional standards described in the now-obsoleted Notices.

Prepared with assistance from Google Notebook.