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The garnishment of both regular income and investments for tax purposes. In most developed countries, a certain percentage of wages and salaries are withheld from the employee and paid directly to the tax authority. The same applies with many investment profits, including, but not limited to, dividends, commissions, and fees. It does not generally apply to real estate transactions. Governments instituted this regulation to avoid the possibility that a taxpayer may spend all his/her money before it is due to the tax authority, leaving it with the difficult process of collecting. In the United States, back-up withholding originated before the Civil War and was reinstituted in the 1940s.
Compulsory withholding from payments to an investor in order to take care of a potential tax liability. Payments of interest, dividends, and proceeds from a sale of securities are subject to backup withholding when certain requirements are not met, including if the investor fails to provide a correct taxpayer identification number (TIN) or if dividends and interest have been underreported.