Compliance
Compliance Risks and Best Practices: Navigating the Remittance Transfer & Backup Withholding Rules
The remittance transfer tax and new backup withholding thresholds under the OBBB pose compliance pitfalls — this article explains obligations, common errors, and how entities can avoid penalties.
By NomadicTax Research Team • 5-8 min read • June 30, 2026
## Understanding the New Compliance Requirements
Two major compliance changes under the One Big Beautiful Bill (OBBB) have recently become operative:
| Rule | Applies To | Key Changes |
|------|-------------|-------------|
| **Remittance transfer tax** | Individuals sending remittances to foreign recipients when using **physical instruments** (cash, money orders, cashier’s checks, etc.) | **1% excise tax**, effective January 1, 2026. Remittance transfer providers must collect it, make **semimonthly deposits**, file **quarterly Form 720 returns**. If a provider fails to collect, the provider itself becomes liable.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-new-remittance-transfer-tax-established-under-the-one-big-beautiful-bill?utm_source=openai)) |
| **Backup withholding/reporting thresholds for third-party settlement orgs** | Payment apps, marketplaces, platforms, and payees who receive payments through them | Threshold reverts to: more than **$20,000 in gross payments** *and* **more than 200 transactions** in a year to require Form 1099-K reporting or backup withholding.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-reflecting-changes-from-the-one-big-beautiful-bill-to-the-threshold-for-backup-withholding-on-certain-payments-made-through-third-parties?utm_source=openai)) |
## Common Compliance Pitfalls & Examples
- **Misunderstanding what “physical instrument” means**: Sending remittances via electronic transfers may *not* trigger the excise tax—only when sender uses a physical instrument. Providers must track instrument types carefully.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-new-remittance-transfer-tax-established-under-the-one-big-beautiful-bill?utm_source=openai))
- **Inaccurate backup withholding triggers**:
- Example: A marketplace seller with $25,000 in payments but 150 transactions. Under the new rule, since the seller does *not* exceed both thresholds (150 < 200 transactions), backup withholding doesn’t apply. Yet many platforms may misapply rules and trigger withholding incorrectly.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-reflecting-changes-from-the-one-big-beautiful-bill-to-the-threshold-for-backup-withholding-on-certain-payments-made-through-third-parties?utm_source=openai))
- **Late deposits or returns for excise tax**:
- Providers must make **semimonthly deposits** starting Jan 29, 2026 and file **quarterly returns**. Delays in deposits may result in penalties, unless relief applies.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-new-remittance-transfer-tax-established-under-the-one-big-beautiful-bill?utm_source=openai))
## Best Practices for Entities and Individuals
1. **Define roles and responsibilities**
- Remittance transfer providers must coordinate with sender to collect tax; platform operators must clarify thresholds and reporting responsibilities.
2. **Track transactions & dollar volume**
- Platforms, gig workers, sellers: maintain records of both number of transactions *and* gross payment amounts across all accounts/streams.
3. **Update policies and system logic**
- Payment platforms should build compliance into software to automatically flag accounts approaching thresholds.
4. **Assure proper forms & filings**
- Remittance excise tax: Form 720. Backup withholding/reporting: make sure payees receive correct 1099-K/1099-Misc as applicable with correct income classification.
5. **Stay current with IRS guidance & comment periods**
- Regulations are proposed/not final in some cases. Entities can review and comment—e.g. backup withholding regs, Section 892 rules.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-new-remittance-transfer-tax-established-under-the-one-big-beautiful-bill?utm_source=openai))
## Consequences of Noncompliance
- **Penalties and interest** for incorrectly withheld or late deposited remittance tax.
- Backup withholding misapplications can result in both payee confusion and employer penalties.
- Misreporting may lead to IRS notices, audits, or assessments.
- Reputational harm, especially for platforms used by many individual sellers.
## Action Checklist
- Review remittance transfer policies: instrument types and collection mechanisms.
- Customize software/record-keeping systems to track thresholds accurately.
- Train staff and inform users of changes (platform sellers, freelancers).
- Consider legal review of proposed regulations to provide input before final rules are published.
- Conduct regular internal audits to ensure remittance excise tax and backup withholding are handled well.
These compliance changes under OBBB are more than bookkeeping headaches—they affect cash flows, vendor relationships, and legal exposure. Organizations that stay ahead will avoid penalties and maintain trust with their users.