IRS May Designate Payments Subject to Voluntary Income Tax Withholding Agreements

Author: Alice Gilman

October 3, 2014

Final regulations adopt without changes proposed and temporary regulations issued in 2013 that allow the Internal Revenue Service (IRS) to designate payments for which the payer and payee may agree will be subject to a voluntary income tax withholding agreement. The final regulations are applicable on or after September 16, 2014.

Several categories of payments are currently subject to voluntary income tax withholding agreements. These include some payments of third-party paid sick pay, pension payments and unemployment benefits. A catchall category under Internal Revenue Code § 3402(p)(1)(C)(iv) allows the Treasury Secretary to designate "other payments" that may be subject to voluntary income tax withholding agreements.

Under the final regulations, the IRS will describe the other payments for which withholding under a voluntary income tax withholding agreement, upon a payee's request and a payer's assent, would be appropriate in guidance published in its weekly Internal Revenue Bulletin. The guidance will also delineate the requirements regarding the form and duration of a voluntary withholding agreement.

To date, the IRS has designated certain dividends and other distributions made by the Alaska Native Corporation as amenable to a voluntary withholding agreement. Since at least 2004, the National Taxpayer Advocate has issued annual reports to Congress in which it recommends that independent contractors and service recipients be allowed to enter into voluntary income tax withholding agreements. This recommendation has been carried over into the Advocate's most recent report and is intended to close the tax gap - the difference between the taxes owed and the taxes paid - which is $65 billion dollars by the IRS's latest estimates.