Middleman Rules Refresher – Part 2

Who is Impacted?

Any persons who may be considered a middleman and obligated to perform U.S. tax information reporting or any payor making payments to a third party or agent, will be interested in a quick twopart refresher on the rules governing payments for or on behalf of others. This article will walk through the nuances of the middleman rules as second installment, Part 2, to our last article.

As a reminder, a person making payments to a third party, for or on behalf of the recipient, will trigger the application of the middleman rules. So long as the income is treated as gross income to the payee, a middleman will be any person who performs management or oversight functions in connection with the payment or has significant economic interest in the payment.

What changed for the Middleman?

Similar to Part 1 of this article, nothing has changed, per se; however, the middleman rules are never top of mind. This article takes a look at the nuances to the rules for determining who is a middleman and walks through a few examples to help apply the rules to practical experiences.

There are some nuances to consider in identifying the middleman. For instance, what if two or more persons meet the requirements? In that case, the person obligated to report the payment is the person closest in the chain to the payee. This is the case, of course, unless the parties agree in writing that one of the other parties meeting the middleman requirement will report the payment.

Another special rule relates to payments by employee to employer. Here, an employee acting in the course of his employment who makes a payment to his employer on behalf of another person is not required to make a return of information with respect to that payment. This might be where an accountant, who works for a firm, receives payment from a client for work performed by the accountant at that firm. When the accountant remits that payment to the firm on behalf of the client, there is no reporting obligation, because the accountant is acting in the course of his employment when making a payment to the firm on behalf of the client of the firm.

As mentioned in Part 1 to this article, it is important to note that even though a person might not qualify as a middleman and may not be required to make an information return, that person may elect to do so pursuant to certain procedures. This approach might apply to paying agents wishing to report and deposit amounts withheld for payors under the statutory provisions of backup withholding.

Example: Attorney With Management and Oversight

Assume an Attorney deposits a settlement payment into a client trust fund. The payment is from the Defendant in a breach of contract action for lost profits. The Attorney makes payments from the client trust fund to service providers such as expert witnesses and private investigators for expenses incurred in the litigation. The Attorney decides whom to hire, negotiates the amount of payment, and determines that the services have been performed to the satisfaction of the Attorney. The Attorney handles any disputes with service providers and will withhold payments until the dispute is settled.

With respect to payments to the service providers, the Attorney is performing management or oversight functions and is obligated to perform U.S. tax information reporting.

Example: Attorney With No Management and Oversight

In this example, we will focus on payments from an Attorney to his Client. Assume an Attorney has a Client and pays for expenses related to the case of the Client. Once a settlement is reached, the Attorney deducts his legal fees and expenses and pays his Client the remaining funds that the Attorney receives from the settlement of the Client’s cause of action.

Here, the Attorney is not performing management or oversight functions with respect to the payments made to its Client. Further, the Attorney does not have a significant economic interest in the payment. As such, the Attorney is not subject to U.S. tax information reporting requirements with respect to those payments.

Example: Medical Insurer With Management and Oversight

Assume a Medical Insurer operates as the administrator of a health care program under a contract with a state. The Medical Insurer makes payments of government funds to health care providers who provide care to eligible patients. The Medical Insurer receives, and reviews claims submitted by patients or health care providers, and determines if the claims meet all the requirements of the program. Some of these requirements include whether the care is authorized and that the patients are eligible beneficiaries. Finally, the Medical Insurer determines the amount of payment.

In this case, the Medical Insurer is performing management or oversight functions and is subject to the U.S. tax information reporting requirements with respect to those payments.

Closest in Chain

Assume a Bank contracts with a Company with respect to the disbursement of funds on a construction loan. Under the contract, a Contractor will send draw requests to the Company. The Company inspects the work, verifies the amount requested, and then sends the draw request to the bank with supporting documentation. The Bank then pays the Company the amount of the draw request and the Company insures the Bank against any loss if it cannot obtain the required lien waivers.

Here, the Bank has a significant economic interest in the payment as a mortgagee. The Company exercises management or oversight over the payment. Since the Company is closest in the chain to the Contractor, the Company will be obligated to report the payment under its U.S. tax information reporting requirements. That is, unless the parties agree in writing that someone else should report the payment.

Includible in Gross Income

Assume an Attorney represents a Client in a cause of action for lost profits against a Defendant. The Client settles the case for damages and for attorney’s fees. Under applicable law, the full amount of damages and fees is includible in the Client’s gross taxable income. The Defendant issues a check payable to the Attorney and his Client in the full amount for damages and attorney’s fees (look for a future article from us on gross proceeds reporting for payments to attorneys). The Defendant is required to make a U.S. tax information return reporting payment to the Client of the Attorney in the full amount.

Assume the same facts, except that the Defendant issues a check to the Client of the Attorney for attorney’s fees and then a separate check to the Client of the Attorney for damages. The Defendant is required to make a U.S. tax information return to report payment to the Client of the Attorney for the full amount of attorney’s fees and damages.

How to Implement?

If there are any possibilities of triggering the middleman rules, it is important to make note of when those situations could arise and implement procedures to carry out U.S. tax information reporting obligations. Below are a few items to consider:

  • For payments your organization may make to third parties, review your contracts to determine if the third party’s contractual obligations include management and oversight of the payments or if the third party has a significant economic interest making them the middleman.
  • Clearly document all middlemen that your organization makes payments to and the corresponding rationale.
  • Confirm with suspected middleman that the information reporting and withholding will take place.
  • Controls, approvals, or sign off procedures for making payments. Implement controls for all business areas that are able to make payments – or, consolidate that ability to make payments to few or one business department.
  • For organizations receiving payments as potential middlemen, confirm that no one is making management or oversight decisions and that there is no economic interest in those payments.
  • For payments that your organization is treated as a middleman and as such, responsible for reporting, make sure you have coordinated with the originator of the payment that you receive all information needed.
  • Communication with business units to identify areas that could trigger middleman rules. Over communication is never a problem when you are looking out for your business and identifying areas of risk that could trigger an obligation for your business for which you are no aware.
  • Be sure you have processes and procedures for reporting where you do find yourself to be a middleman.
  • Review your internal training to make sure you are adequately covering middleman rules if your organization pays or could pay third party agents.


  • IRC §6041 and 6045
  • Treas. Reg. §1.6041-1

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This document contains general information only and is not a substitute for accounting, tax, or any other professional advice or services. The information provided is considered accurate at the time of publishing and will not be updated with new regulation requirements.

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