Does your company have late or unfiled tax information returns (such as Forms 1042, 1042-S, 8882 or 8804) and withholding tax liabilities in connection with payments made to non-U.S. customers or investors? The U.S. Internal Revenue Service recently issued guidance on its procedures for accepting delinquent withholding tax returns in connection with a withholding agent disclosure.
The IRS’ Foreign Payments Practice (FPP) developed these procedures after several IRS campaigns were launched focused on enforcing reporting and withholding requirements for payments to foreign persons. According to the FPP, the procedures were issued for consistency and in response to the multitude of entities that have come forward after identifying shortfalls in their systems and seeking to comply with obligations for filing Forms 1042, 8804, 8288 and related information returns.
The procedures continue the IRS’ efforts to encourage voluntary disclosure and compliance for taxpayers who previously failed to come forward with information on foreign financial assets under the Offshore Voluntary Disclosure Program, which closed on Sept. 28, 2018. The procedures also supplement the IRS’ Voluntary Disclosure Memorandum published in November 2018 as referred to in the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, which was published on April 11, 2019.
Below is an overview of procedures for withholding agent disclosures.
How do you submit delinquent returns?
The FPP has established a central point of contact for withholding agents to submit delinquent returns and pay delinquent withholding taxes. This process ensures review of information by more experienced agents, which should provide faster processing, fewer follow-up calls, and lower costs to taxpayers. Original signed returns with any outstanding payment must be submitted to the IRS.
What are the risks and requirements for submission?
To qualify for these procedures, withholding agents must submit any delinquent withholding tax returns along with full payment of the tax due and a statement, which includes the following:
- An explanation of the areas or lines of business for which there was non-compliance with tax, withholding and reporting obligations on payments to foreign persons
- An explanation of how the non-compliance was discovered
- A description of corrective procedures implemented to ensure future compliance
- A copy of those procedures as communicated to employees or other responsible parties of the withholding agent
Before submitting explanations of potential oversight, be sure you have considered the inherent risks involved and weighed the benefits of coming clean with the cost of providing a roadmap to other potential issues. Additionally, factual representations regarding how noncompliance was discovered and descriptions of corrective measures taken to ensure future compliance should be carefully evaluated and tested before submission of the disclosure to ensure the operating effectiveness of controls implemented to prevent any reoccurrence of the issue.
Who qualifies for a withholding agent disclosure?
In order to file a withholding agent disclosure, the guidance specifies that taxpayers cannot have filed delinquent returns using the same procedures in prior years, and cannot already be under examination or have received notification from the IRS of an impending examination. Additionally, qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts do not qualify as the withholding agent but must meet the definition of a withholding agent as set forth in regulation 1.1441-7(a)(1). Finally, the procedures are not available to taxpayers who have the same issue pending with appeals or in litigation.
A withholding agent utilizing the procedures must report and pay any tax not already paid, and will be subject to penalties and interest for which relief is not otherwise granted using these procedures. Where there is a large underpayment, the IRS will consider a withholding agent’s proposal for paying the liability over multiple payments.
Is there any relief afforded for submissions?
Filers may request penalty relief for reasonable cause. However, in order to qualify for the relief the new rules require that the company satisfy certain additional requirements. Specifically, to have penalties waived or reduced, withholding agents submitting disclosures must do all of the following:
- Explain their procedures for determining reporting and payment obligations to foreign persons
- Describe how those procedures resulted in any reporting and tax withholding failures
- Disclose the number of persons affected by the failures
- Calculate the total amount of an under withheld tax for any tax period open for assessment
It should be noted that disclosing your transgressions is no guarantee penalties will be waived. Additionally, obtaining reasonable cause relief is highly dependent on an individual taxpayer’s facts and circumstances. Therefore, any information should be carefully reviewed prior to submitting it to the IRS and taxpayers should understand that penalties might still be assessed.
What happens after the disclosure is submitted?
Once a disclosure is submitted, the IRS may verify the withholding agent is following the corrective procedures included in its submission statement. The verification is not considered an examination, but the IRS may determine that an exam is warranted. The IRS has advised that it will issue an acknowledgment letter at the conclusion of its verification if it is satisfied that the withholding agent has corrected its systems and paid, or made satisfactory arrangements to pay, any outstanding liabilities.
The acknowledgment letter that withholding agents receive post submission is not a closing agreement, and the IRS will process any delinquent returns received as it would normally. This, in effect, means the IRS may still examine the submitted returns later prior to the closing of the statute of limitations for assessment.
How can RSM help?
RSM’s team of tax controversy and information reporting professionals work with organizations to evaluate the feasibility, costs and benefits of filing prior year information returns, and making withholding agent disclosures. Companies that have recently acquired entities with delinquent or unfiled returns, those with reportable data in legacy systems that are no longer accessible, and organizations with gaps in their systems and processes for complying with reporting and withholding requirements can benefit from working with a tax advisor to resolve these issues.