In Notice 2026-61, the IRS and Treasury Department extend through 2028 the phase-in period most recently provided by Notice 2024-44 for complying with the final regulations on dividend equivalents under IRC Sections 871(m), 1441, 1461 and 1473. The relief generally postpones applying the regulations to non-delta-one transactions occurring through 2028 and continues transitional treatment for qualified derivatives dealers (QDDs), qualified intermediaries (QIs) acting as qualified securities lenders (QSLs) and withholding agents. The Notice provides similar relief as Notices 2024-44 and 2022-37 (see Tax Alert 2024-1100).

The anti-abuse rule in Treas. Reg. Section 1.871-15(o) applies throughout the phase-in period, so a transaction that is otherwise outside the rules may still be treated as an IRC Section 871(m) transaction if the anti-abuse rule applies.

The Notice states that Treasury and the IRS continue to evaluate the IRC Section 871(m) regulations and will consider comments already received, as well as additional comments concerning tax policy, legal authority and administrative feasibility. They also intend to give taxpayers and withholding agents sufficient implementation time for any future changes.

EY observes: Notice 2026-61 gives withholding agents two additional years to operate under the existing phase-in framework. The extension is particularly important because implementing new requirements can generally take the industry at least 18 months. The Notice does not, however, provide or preview substantive new guidance that would allow withholding agents to plan for meeting any new requirements once the transition period ends.

Extension of the phase-in for delta-one and non-delta-one transactions

The Notice states that Treasury and the IRS intend to amend the applicability dates under Treas. Reg. Sections 1.871-15(d)(2) and (e) so the rules will not apply to payments on non-delta-one transactions occurring through 2028, including transactions that could be combined under Treas. Reg. Section 1.871-15(n). Accordingly, non-delta-one transactions occurring before January 1, 2029, generally remain outside the phased-in rules, subject to the anti-abuse rule. The Notice does not apply to transactions treated as specified notional principal contracts under Treas. Reg. Section 1.871-15(d)(1).

Good-faith enforcement standards

The Notice extends the periods during which the IRS will consider the extent to which a taxpayer or withholding agent made a good-faith effort to comply with the IRC Section 871(m) regulations. The standard applies to delta-one transactions for 2017 through 2028 and to non-delta-one transactions that become subject to Treas. Reg. Sections 1.871-15(d)(2) or (e) in 2029.

EY observes: The good-faith standard does not suspend the applicable tax or withholding requirements, create a waiver of liability, or prevent application of the anti-abuse rule. Rather, it is an enforcement standard under which the IRS may take into account the taxpayer's or withholding agent's compliance efforts. During the transition period, EY has not observed any IRS audits relating to IRC Section 871(m) and the IRS's Internal Revenue Manuals (IRMs), including model information documentation requests (IDRs), have not been updated to address IRC Section 871(m). For QDDs, the Notice separately extends through 2028 the period during which the IRS will consider good-faith efforts to comply with the IRC Section 871(m) regulations and the relevant provisions of the 2023 QI Agreement. QDDs will also be treated as satisfying the obligations that apply specifically to them under that agreement through 2028 if they make a good-faith effort to comply with the applicable provisions.

EY observes: During the good-faith transition period, QDDs have not been required to submit a periodic review to the IRS regarding IRC Section 871(m) compliance. The QDD periodic review sections in the 2023 QI Agreement are currently reserved for future guidance. Although QDDs are not currently required to perform periodic reviews of their activities through 2028, they must certify that there was a "good faith effort" to comply with the IRC Section 871(m) regulations and the relevant portions of the 2023 QI Agreement. FAQs on the IRS website have noted that "the QI must retain information to support the good faith effort certification."

Simplified standard for combined transactions

The simplified standard for determining whether transactions must be combined is extended to transactions entered in 2027 and 2028. Under that standard, withholding agents must combine transactions entered during 2017 through 2028 only if they are over-the-counter transactions that are priced, marketed or sold in connection with one another. Listed securities entered during those years generally do not need to be combined.

EY observes: As the simplified combination requirement applies only to withholding agents, hedge funds and similar entities that are not dealers and regularly engage in trading activity whereby they hold the long position should have processes in place to identify transactions that must be combined for purposes of IRC Section 871(m) compliance and pay the associated substantive tax.

Continued relief for QDDs

The Notice continues the relief for QDDs on dividends received in their equity derivatives dealer capacity during 2027 and 2028. QDDs currently have limited annual reporting requirements on Schedule Q, which must be filed with their US tax returns and Form 1042.

The Notice also relieves QDDs from computing their IRC Section 871(m) amount using the net-delta-exposure method through 2028. The purpose of this calculation was to require QDDs to pay substantive tax if they had any net long exposure to an underlying security. In addition, QDDs are not required to perform periodic reviews or provide the factual information in Appendix I of the 2023 QI Agreement for their activities for 2027 or 2028.

The relief does not eliminate QDDs' other tax obligations. Specially, QDDs remain liable for tax under IRC Section 881(a)(1) on dividends and dividend equivalents received outside their equity derivatives dealer capacity and on other US-source fixed or determinable annual or periodical income. QDDs also remain responsible for withholding on dividend equivalents paid to foreign persons on IRC Section 871(m) transactions, whether acting as equity derivatives dealers or in another capacity.

EY observes: The Securities Industry and Financial Markets Association (SIFMA) has asked Treasury and the IRS to make permanent two aspects of the QDD transition relief that Notice 2026-61 extends through 2028. First, SIFMA recommends preserving the exemption for dividends on shares received by QDDs in their dealer capacity even when the QDDs do not make a corresponding dividend-equivalent payment subject to IRC Section 871(m). This issue can arise when several derivatives with deltas below one produce an aggregate short delta-one exposure that the QDD hedges by acquiring the underlying shares. Second, SIFMA recommends preserving the exemption for dividends and dividend equivalents received in QDDs' dealer capacity even when QDDs have a positive net delta in the relevant shares.

The SIFMA letter highlights that the QDD regime is intended to prevent cascading withholding while preserving tax on dividend equivalents paid to foreign investors. In SIFMA's view, taxing dealer-capacity dividends solely because the QDD has no matching taxable payment or a small positive net-delta position would impose tax on ordinary dealer hedging and inventory rather than on a foreign investor's dividend-equivalent return. Notice 2026-61 does not resolve these policy questions; it preserves the existing transitional treatment while Treasury and the IRS consider possible regulatory changes.

Extension of the QSL transition rules

Withholding agents may continue applying the QSL transition rules in Parts III.C, III.D and III.E of Notice 2010-46 to payments made in 2027 and 2028. The extension applies to the QSL transition regime and not to Notice 2010-46's credit-forward framework.

EY observes: Extending the QSL transition rules allows existing securities-lending and sale-repurchase withholding processes to continue through 2028. Withholding agents and QIs should nevertheless assess how the extension interacts with the substitute-dividend provisions of the 2023 QI Agreement and maintain documentation supporting their reliance on QSL status.

Implications

Notice 2026-61 preserves the current operational framework through 2028 rather than introducing a new compliance model. Affected broker-dealers, withholding agents, QIs and QDDs should update implementation timelines and procedures to reflect the extended dates, confirm continued reliance on the simplified combination and QSL rules, retain evidence of good-faith compliance and look for future guidance.