Information reporting for 2006 exempt interest.

• Author: Levy, Marc

With Notice 2006-93 providing guidance on the 2006 Form 1099-INT, Interest Income, requirements for reporting exempt interest and exempt-interest dividends, the IRS has offered tenuous relief from reporting procedures. Payers must still report on substitute statements substantially the same information as required on the official form, both to the Service and payees, retroactive to the beginning of 2006 and by the same due dates as required for the official form. For backup withholding implementation, however, the relief is more helpful, in that it precludes backup withholding on payments of exempt interest and exempt-interest payments through the first quarter of 2007.

Background

U.S. persons (and certain U.S.-related persons) making payments of interest and original issue discount (OLD) generally must report such payments to the IRS, unless the payee is duly documented, or can be treated, as either foreign or an "exempt recipient." (Interest payments to non-U.S. persons may have to be reported, and possibly withheld, under different rules.) Corporations are exempt recipients for this purpose; individuals and partnerships are not. If such a payment is subject to information reporting, and the payee has not certified his or her taxpayer identification number (TIN) on Form W-9, Request for Taxpayer Identification Number and Certification (or certain other conditions exist), the payer must perform "backup" withholding at 28%.

Prior to 2006, Sec. 6049(b)(2)(B) provided that payments of exempt interest were exempt from information reporting and, thus, backup withholding. Because exempt--interest dividends paid by U.S. mutual funds are deemed to be exempt interest under Sec. 852(b)(5), this exemption from information reporting and backup withholding also covered exempt-interest dividends. In May 2006, Congress repealed this exception in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), effective for interest paid after Dec. 31,2005.

Notice 2006-93

In response to numerous requests from the payer community, the Service issued Notice 2006-93, which provides transition relief in connection with the 2006 Form 1099-INT requirement for reporting exempt interest.

Reporting: Exempt interest, including exempt--interest dividends, will now be reported on Form 1099-INT; certain types of otherwise exempt interest subject to the alternative minimum tax (AMT) must be separately reported on the same form. Form 1099-INT for 2006 has been...