IRS Form 1042 Examinations - Is My Organization Ready?

Transcription

1 Institute of International Bankers IRS Form 1042 Examinations - Is My Organization Ready? June 21, 2010 Todd Larsen todd.larsen@us.pwc.com PwC

2 Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Slide 2

3 Preparing for an IRS Form 1042 examination Consider the following questions about your organization: - Do we have substantial written policies and procedures addressing these responsibilities? - Have we considered all entities and areas within our organization that may make payments to foreign persons? - Do we have sufficient staff and are they well equipped to carry out the necessary responsibilities in this area? - Are our IT systems adequate to maintain compliance in this area? - Does the validity of our documentation (i.e., Form W-8, W-9, 8233) meet IRS requirements? Is it current? - If my organization had exposure for failure to meet requirements with respect to withholding, depositing, filing and information furnishing, would I be aware of it? - What is the likelihood of an IRS examination addressing this area? Slide 3

4 Why should you care? Tier 1 status means almost certain examination of this area for certain entities Significant potential exposure, especially with respect to having valid Forms W-8. - Generally 30% withholding where forms are invalid. - Withholding agent is liable for the amount of tax that should have been withheld, plus penalties and interest - Penalties can be significant compared to underwithheld tax liability Areas most susceptible to errors are frequently those out of the direct control and jurisdiction of the tax department, adding to tax risk. Examination generally does not afford the time to remediate errors found (i.e., invalid documentation on a large scale) Slide 4

5 Perform a compliance review or health check Begin an internal compliance health check to assess current compliance and any potential exposure A self review begun prior to examination generally puts the withholding agent in a more favorable position when an exam arises - IRS may allow self-review to continue if already in process, with IRS oversight - Scope and depth of exam may be limited - IRS may accept withholding agent s sample selection, if it meets IRS guidelines - IRS may allow additional time for any necessary remediation before finalizing any potential assessment If exposure items are found prior to raising the issue, carefully consider voluntary disclosure Use existing IRS examination guidelines IRM U.S. Withholding Agent Examinations - Form 1042, Aug 2008 Industry Directive on Examination of Forms 1042, Oct 2003 Slide 5

6 Performing an effective health check Consider all areas and entities within organization that may have responsibilities Type of Income: Department Most Likely Responsible: Compensation for personal services Dividends Interest Original issue discount / Cancellation of debt Pensions & Annuities Royalties, License fees, etc. Taxable grants, Prizes, Awards & Sponsorships Legal awards Rents Accounts Payable / Payroll / Treasury Treasury / Business Unit / Intercompany Treasury / Business Unit / Intercompany Treasury / Business Unit Payroll / Human Resources / Business Unit Accounts Payable / Intercompany / Business Unit Accounts Payable / Marketing / Payroll Accounts Payable / Legal Accounts Payable Slide 6

7 Performing an effective health check Understand the types of payments being made to NRAs - Look beyond dividends and interest - Look beyond what is reported on Forms 1042 and 1042-S - Identify foreign persons, the income they receive and whether or not withholding and reporting is applicable. Ensure that there are effective policies, procedures, controls and IT systems in place to effectively manage the process - Review written policies and procedures to ensure they are current and are actually followed by the relevant functions - Ensure that IT systems properly track the type, character and source of income paid, the status, residency and treaty eligibility of beneficial owners and all other relevant information to ensure appropriate withholding and reporting determinations are made. - Ensure that all relevant IT systems effectively communicate with each other to make appropriate withholding and reporting decisions. Slide 7

8 Performing an effective health check Assess knowledge of personnel and effectiveness of training programs/manuals - IRS may interview relevant personnel with respect to the various steps in the withholding and reporting process Perform documentation review (Forms W-8, 8233 and W-9) and remediation - Invalid documentation is one of the most common contributors to underwithholding by withholding agents - Review an effective sample of documentation to determine validity Remediate invalid documentation - Regulations allow for documentation to be cured IRS generally has accepted reliance on late received Forms W-8 with certain language for retro-active applicability. - Consider focusing on accounts or strata with the highest potential for underwithholding first. - Expect that multiple attempts at resolicitation will be required for some accounts Slide 8

9 Performing an effective health check In general, validate documentation as follows: Confirm that the form is complete: - Applicable line items and certifications must be completed and/or checked; - The form must be signed (and when required, capacity to sign indicated); - U.S. TIN is required if treaty benefits claimed (unless dividends and interest from actively traded securities). Confirm that payee s mailing and permanent addresses are not in the U.S. or that there are no hold mail instructions: - Obtain documentary evidence supporting claim of foreign status; and - A written explanation of U.S. address (if the client is an individual). Confirm that payee s mailing and permanent addresses are in the country whose treaty benefits they claim; or - Get documentary evidence or written explanation. Slide 9

10 Performing an effective health check Documentation received must be managed effectively: Processes should be in place to: - Record and maintain documentation; - Review; - Track expiration if necessary; - Generate documentation renewal requests when needed; and - Monitor changes in circumstances; Slide 10

11 Performing an effective health check Determine if tax deposits are being made timely Review Form 1042 and 1042-S filings thoroughly - Reconcile Forms 1042-S to Form Ensure that Forms 1042-S are properly completed Ensure correct codes, amounts and rates are input - (i.e., country code vs. income code vs. tax rate) As part of Tier 1 initiative, IRS has increased its focus on addressing 1042-S reporting errors and more strictly apply relevant penalties Go to search Ten most common errors for completing the Form 1042-S Consider both NRA withholding and domestic reporting compliance Slide 11

12 Thank you 2010 LLP. All rights reserved. "" refers to LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of International Ltd., each of which is a separate and independent legal entity. *connectedthinking is a trademark of LLP. PwC