The Internal Revenue Service (IRS) Information Reporting Advisory Committee (IRPAC) recently released a report with recommendations on a broad range of topics from withholding on cross border fees in lending transactions to the reporting of deemed dividends under Internal Revenue Code (the code) section 305(c). While a few of the recommendations have already been adopted to date, we’ve highlighted key points below that organizations should be aware of, particularly since the IRS has launched a new exam campaign focused on withholding for payments to non-US persons, and as they implement tax planning in response to U.S. tax reform legislation:
Guidance on reporting and withholding for cross border fees
IRPAC has requested that the IRS issue written guidance on the source and character of cross-border fee payments (particularly loan syndication fees) and recommended adopting a chart (see pages 80-82 on this report) with details on reporting and withholding requirements for cross border fees. If adopted, this guidance would provide much needed relief for taxpayers struggling to understand guidance published to date on loan syndication fees and other cross-border fees including those associated with standard lending transactions. Banks, in particular, will want to watch this one closely as sweeping changes to product master files, remapping of system income codes, and updates to procedure guides may be required if this recommendation is adopted.
Relief for over withholding at pre-TCJA 28 percent back-up withholding rate
IRPAC has also recommended that the IRS issue communications clarifying that payers who may have applied the old 28 percent backup withholding rate after Jan. 1, 2018 (when the new 24 percent rate under the Tax Cuts and Jobs Act (TCJA) became effective), but before October 2018 (when the IRS revised Form W-9 to reflect the new rate) are not required to issue refunds to payees for any over withheld amounts. This announcement would clarify payer obligations and document the IRS’ position on the issue.
Collective refund claims by U.S. withholding agents on behalf of foreign persons
In order to address the IRS’ concern with preventing fraudulent refund claims and foreign payees’ concerns with delays in receiving refunds, IRPAC has recommended giving U.S. withholding agents the option to file collective refund claims on behalf of foreign payees similar to what is currently available for qualified intermediaries (QIs). This change would be welcomed relief for millions of foreign payees who forego or wait on refunds of over withheld amounts annually because of restated earnings and profits, for example, or errors in the calculation of their allocable share of partnership income.
Treatment of liquidating distributions paid by mutual funds
Another ongoing issue that IRPAC continues to highlight is whether cost-basis reporting on Form 1099-B or reporting on form 1099-DIV is required when a Regulated Investment Company (RIC) taxed under Subchapter M of the Code performs a complete liquidation in redemption of all holders’ interest in a fund. If the amount is reportable on Form 1099-B instead of on Form 1099-DIV, IRPAC noted that the 1099-B form and its accompanying instructions must be revised to reflect this so that brokers can properly report cost basis information for those distributions.
Form 1099-DIV reporting for section 305(c) deemed dividends
IRPAC has requested that Form 1099-DIV reporting of IRC section 305(c) deemed dividends be deferred until regulations are issued and sufficient time is provided to the issuers to implement the new requirements. Under IRC section 6042, a Form 1099-DIV is generally required when a dividend is paid. Currently, the code does not require that reporting be completed for a deemed dividend under section 305(c). However, the proposed regulations under IRC section 305(c) indicate that similar treatment should be applied for reporting deemed dividends under Reg. section 1.6045B-1 to the extent that such dividends affect the basis of a security. Should such treatment be applied to section 305(c), IRPAC recommends that the regulations under IRC section 6042 be amended to include coordination rules with respect to the timing and amount of an IRC section 305(c) deemed dividend to be reported on a Form 1099-DIV and when it would be governed by the issuer’s reporting of such on Form 8937 (Report of Organizational Actions Affecting Basis of Securities), as required under IRC section 6045B.
Further guidance regarding section 871(m) implementation for non-delta 1 transactions
As you may recall, last year, the IRS issued Notice 2017-42 which provided withholding agents with additional time to focus on implementing withholding on delta 1 transactions, but did not ease the burden on withholding agents to implement the delta 0.8 standard required by the regulations. This year, the IRS issued Notice 2018-72, Extension of the Phase-in-Period for the Enforcement and Administration of Section 871(m), which delayed the effective date for implementation of the delta 0.8 standard. As implementing such systems would be costly to withholding agents and yield little benefit to the IRS, IRPAC has requested that the IRS either eliminate the delta 0.8 standard or provide other relief in the regulations that would make the implementation of this requirement less costly.
Section 1446 publicly traded partnership withholding
A request has been made to extend the deadline for withholding on certain derivative payments referencing master limited partnerships from March 15 to Sept. 15 to allow for sufficient time to determine the dividend equivalent amounts. According to IRPAC, the current deadline of March 15 does not provide enough time for withholding agents to obtain Schedule K-1 data needed to calculate complex allocations or required to perform proper withholding and would thus be overly burdensome for withholding agents to complete.
Elimination of form 8233 and modification of form W-8 for explanation of missing FTIN
IRPAC has recommended that IRS Form 8233, U.S. Tax Withholding Certificate for Independent Personal Services, be eliminated and that existing Forms W-8BEN or W-8ECI be enhanced to request data in certain fields currently captured on Form 8233. While Form 8233 is not widely used by banks or funds, it is still commonly used in other industries and its elimination may help to streamline documentation requested from certain vendors, directors, scholarship recipients, and others, so we await additional guidance. IRPAC also suggested that a field be added IRS Forms W-8BEN, W-8BEN-E, and W-8ECI and W-8 EXP for account holders to provide a reasonable written explanation for the lack of a foreign Taxpayer Identification Number (FTIN) on the withholding certificate.
Waiver of penalties in 2019 if employee fails to update W-4
In light of tax reform, IRPAC has suggested that the IRS waive penalties for under withholding and clarify the rules for withholding in 2019 in instances where employees fail to update or change their W-4.
Extension of deadline for Affordable Care Act reporting by insurance companies and applicable large employers under IRC section 6055 and section 6056
IRPAC proposed that penalties not be imposed on large employers reporting incorrect or incomplete information on IRS Forms 1095-B and 1095-C as long as the reporting entity can demonstrate that good faith efforts were made to comply with applicable information reporting requirements. In addition, it was recommended that the IRS provide a 30-day extension for furnishing forms 1095-B and 1095-C due on Jan. 31, 2019 for the 2018 tax year. Should the IRS agree to provide this extension, the additional time will allow withholding agents more time to ensure that more accurate returns are submitted and would reduce the number of corrections made.
It remains to be seen whether the IRS will implement all of the recommendations made by IRPAC. However, it is encouraging that the IRS has begun to issue Notices deferring the implementation of some of these code sections to allow for further industry discussion.