Updates Forms 1099 and 1042-S

Transcription

1 Updates Forms 1099 and 1042-S Marianne Couch, JD Cokala Tax Group May, 2017

2 Treasury Inspector General Report on Backup Withholding Failures Nearly $9 billion in backup withholding tax was not withheld by payers submitting Tax Year (TY) 2013 information returns with missing or incorrect TINs as required. TIGTA s review identified 13,647 payers that submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013). These returns reported payments of about $14.3 billion. As such, payers were required to immediately withhold nearly $4 billion from these payees, yet just more than $1 million was withheld. These missing TIN failures are a result of non-compliance with the initial and annual TIN solicitation and backup withholding requirements and B Notice processing requirements. TIGTA identified 62,714 payers that submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years. These returns reported payments totaling nearly $17 billion. As such, payers were required to withhold nearly $5 billion from these payees, yet only $1 million was withheld. These incorrect TIN failures are a result of non-compliance with B Notice Processing procedures and backup withholding requirements COKALA Tax Information Reporting Solutions, LLC 2

3 IRS Response to TIGTA Report If a company undergoes an employment tax examination by the IRS, the examiner is required to also determine whether the company filed information returns as required. The internal IRS directive calls the examiners attention specifically to look at Forms 1099-MISC, 1099-K, 1099-INT and W-2, plus etc. If the appropriate forms were not correctly filed, the examiner must consider expanding the audit to include a penalty case file and/or review Form 945 in connection with establishing whether backup withholding requirements have been met COKALA Tax Information Reporting Solutions, LLC 3

4 Backup Withholding Rate Change? Backup withholding is a rate that could float depending upon the personal income tax rates applicable to unmarried individuals (fourth lowest rate). It s been consistent at 28% for many years, however, because the rates have stayed at 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Count from the lowest up, and you find the fourth lowest of these rates is 28%. The administration s plan for tax code changes include a proposal to reduce the seven tax brackets to three tax brackets of 10%, 25% and 35%. The previously released proposal from Speaker Ryan also would reduce the number of tax brackets to three. If three brackets are enacted, would the backup withholding section be amended to float with one of three tax bracket rates (instead of the fourth lowest ) or would it be amended to again establish a fixed rate? COKALA Tax Information Reporting Solutions, LLC 4

5 Corrections Safe Harbor For 1099s filed after 12/31/16, no correction will be required if * : the dollar amount for a single type of payment reported on the Form 1099 was in error but within $100 of the correct amount; or the dollar amount reported as withheld tax was in error but within $25 of the correct amount. * Unless your payee requests a correction. If payee requests a correction, you will have to do one. Notice , issued 01/2017, provides guidance on what the payee s request (referred to as an election ) must contain, your recordkeeping requirements for these elections, and how the payee may revoke the election. Payee may request either to: Receive corrections for the year in which the election is furnished to you, or Receive corrections for all years forward until payee revokes the election COKALA Tax Information Reporting Solutions, LLC 5

6 Spring B Notice Lists have been Mailed The last batch of spring B Notice lists were scheduled to be mailed out April 28. These lists must be processed by a certain date and certain payees on the list must respond with specific documentation by a deadline; if payee fails to respond, reportable payments made after the deadline are subject to 28% backup withholding. It is a good idea to call the IRS each spring and fall to verify with them whether a list was sent. Call the Information Returns Branch Centralized Call Site They may need authorization from your organization to provide you with the information, but this way, you can make sure that any list sent is timely processed COKALA Tax Information Reporting Solutions, LLC 6

7 Additional IGAs for FATCA The U.S. has signed intergovernmental agreements (IGAs) with the governments of Anguilla, Greenland and Ukraine for the implementation of information sharing for purposes of FATCA, the Foreign Accounts Tax Compliance Act. Under IGA Model 1, the governments of Anguilla, Greenland and Ukraine will collect information from financial institutions operating in their jurisdiction, concerning U.S. accountholders, and forward the information to the U.S. Department of Treasury. The current list of countries that have signed and have IGAs in force or are treated as having an IGA in effect, is available at along with links to the text of the agreements COKALA Tax Information Reporting Solutions, LLC 7

8 Income Exempt from Tax per Income Tax Treaty The Winter 2017 issue of the IRS Statistics of Income Bulletin includes a report on U.S.-source income paid to foreign persons and the volume of tax treaty benefit claims which eliminate or reduce withholding from these payments. This report analyzes information from Form 1042-S filings for calendar year 2013 (filed to the IRS in 2014). Nearly 88% of the reported U.S.-source income paid in 2013 was exempted from U.S. income tax withholding, and for the portion of income that was subjected to withholding the average withheld was 16.8% (compared to the statutory rates of 30% in general and 14% on noncompensatory scholarship income). Claims under tax treaties were the main reason for reduced withholding COKALA Tax Information Reporting Solutions, LLC 8

9 Income Exempt from Tax per Income Tax Treaty Foreign recipients from countries with a tax treaty in effect with the United States received 81.9 percent of total U.S. income paid to foreign persons. However, residents in 11 nontreaty jurisdictions received more than $1 billion of U.S.-source income in 2013: the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, Kuwait, Puerto Rico, Saudi Arabia, Singapore, and the United Arab Emirates. Nontreaty countries combined to account for $125.9 billion of total U.S.- source income and $5.2 billion of total tax withheld. For additional information and statistics, see and COKALA Tax Information Reporting Solutions, LLC 9

10 AICPA Urges Senate to Approve Treaties The American Institute of CPAs (AICPA) is urging the Senate to approve income tax treaties and protocols (amendments) that have been awaiting Senate approval for years. Treaties signed as long ago as 2009 have not taken effect because the full Senate has failed to vote on them, despite approval of the treaties and protocols by the Senate Committee on Foreign Relations. Under Senate protocols, one member may block such a vote by the full Senate and such has been done repeatedly. The eight items approved by the committee but not voted on by the full Senate are treaties or protocols (amendments) to treaties with Japan, Switzerland, Luxembourg, Hungary, Chile, Poland and Spain; plus a protocol with the Organization for Economic Cooperation and Development (OECD) for mutual administrative assistance COKALA Tax Information Reporting Solutions, LLC 10

11 ITIN Expiration IRS altered the ITIN expiration schedule previously included in the PATH Act. The IRS believes that many ITIN holders may not know when their ITIN was issued and previously had no reason to keep a record of the date an ITIN was issued. To simplify the renewal process and allow for the effective administration of the program, the IRS will renew ITINs based upon the fourth and fifth digits (middle digits) in the ITIN. ITINs that contain the middle digits of 78 or 79 will no longer be in effect beginning January 1, The expiration and renewal schedules for ITINs with middle digits other than 78 or 79 will be announced in future guidance. For information about ITIN expiration and renewal see IRS Notice at ITINs on information returns: payers/filers of information returns that report an expired payee ITIN will not be subject to information return penalties under sections 6721 or 6722 solely because the ITIN is expired. ITINs may continue to be used for information return purposes regardless of whether they have expired for individual income tax return filing purposes COKALA Tax Information Reporting Solutions, LLC 11

12 Unique Identifier will be Required on Form 1042-S Unique 10-digit form identifying number will be required on each 1042-S form not a payee account number, but a separate unique number to identify the form itself so IRS can track it The unique identifying number cannot be the recipient s U.S. tax ID number or recipient s foreign TIN. The unique identifying number must be all numeric and the length must be exactly 10 digits. The identifying number must be unique to each original Form 1042-S filed for the year. (Your system may, if you choose, use the unique identifying number on a new original form in a subsequent year) Amended forms must show the same unique identifying number as the form being amended, and also show an amendment number. Any amended form must have the same unique form identifying number as the original form that s being amended. Each time you amend the same form (as determined by the unique form identifying number of the original) you must provide an amendment number in a box at the top of the form. And don t think outside the box for amendment numbers: IRS instructions are to label the first amendment number 1 and increase sequentially for each subsequent amendment COKALA Tax Information Reporting Solutions, LLC 12

13 New Regulations Under Chapter 3 of the IRC TD 9808 provides new regulations under chapter 3 for certain payments of U.S.- source income to foreign individuals and entities and includes changes to many of the foreign provisions found in 1099 information reporting sections of the Code; there are many more changes other than those listed in these slides. New rules for electronic signatures on Forms W-8 A withholding agent... may accept a withholding certificate with an electronic signature, provided the electronic signature meets the requirements of [the regulation]. The withholding certificate must reasonably demonstrate to the withholding agent that the form has been electronically signed by the recipient identified on the form (or a person authorized to sign for the person identified on the form). For example, a withholding agent may treat as validly signed a withholding certificate that has, in the signature block, the name of the person authorized to sign, a time and date stamp, and a statement that the certificate has been electronically signed. However, a withholding agent may not treat a withholding certificate with a typed name in the signature line and no other information as validly signed. The act of the electronic signature must be effected by the person whose name is on the electronic Form W-8. The signature must also authenticate and verify the submission. For this purpose, the terms authenticate and verify have the same meanings as they do when applied to a written signature on a paper Form W-8. An electronic signature can be in any form that satisfies the foregoing requirements. The electronic signature must be the final entry in the person's Form W-8 submission COKALA Tax Information Reporting Solutions, LLC 13

14 Changes in Presumption Rules May 7-9, 2017 Per Se Foreign Corporation List The per se list at Reg. sec (b)(8)(i) identifies foreign word labels that indicate corporation status in many foreign jurisdictions (i.e., a foreign corporate eyeball test) the payee is presumed to be a foreign person... if the name of the payee indicates that the entity is the type of entity that is on the per se list of foreign corporations contained in (b)(8)(i) of this chapter (other than a name which contains the designation corporation or company ) Examples: Ag, PLC, SA, SE, others Now, corporation and company can also be used to presume foreign corporate status as long as the withholding agent has a document that reasonably demonstrates the payee was incorporated in the relevant jurisdiction COKALA Tax Information Reporting Solutions, LLC 14

15 Changes In Regulations For Curing Documentation Scanned or faxed forms acceptable to cure documentation for payments prior to the effective date of the fax-or- regulation. The 2014 regulations permit a withholding agent to rely on a valid Form W-8 or documentary evidence received by fax or scanned and furnished by unless the withholding agent knows that the person transmitting the withholding certificate or documentary evidence is not authorized to do so, effective for payments made after March 6, The new 2017 regulations permit reliance on fax or scanned and ed forms or documentation regardless of when the related payment was made, stating, A taxpayer may apply this paragraph (e)(4)(iv)(d) to all of its open tax years, including tax years that are currently under examination by the IRS. [Reg. sec t(e)(4)(iv)(d)] Affidavit with late receipt of ECI documentation. New Reg. sec T(b)(7)(ii)(B) provides that a Form W-8ECI may be accepted late if associated with a signed affidavit that states that the information and representations contained on the certificate were accurate as of the time of the payment and either (i) the beneficial owner has included the income on its U.S. income tax return for the taxable year in which the income must be reported, or (ii) the beneficial owner will include the income on its U.S. income tax return for the taxable year in which the income must be reported and the due date for filing the return (including any applicable extensions) is after the date on which the affidavit is signed. A corresponding change is made in the chapter 4 regulations COKALA Tax Information Reporting Solutions, LLC 15

16 Hold Mail Address Additional Chapter 3 Changes A hold mail instruction can be relied upon as a permanent residence address if the person provides documentary evidence (as described in (c)(17)) establishing the person s residence in the country where the person is claiming to be resident. These revisions also provide that if a hold mail instruction is provided to a withholding agent after the withholding certificate was provided, this will be considered a change in circumstances requiring that additional documentary evidence be obtained in order to use the address on the withholding certificate as a permanent residence address. U.S. indicia not a red flag on Form W-8ECI. The final regulations provide that the existence of U.S. indicia on a Form W-8ECI will not cause a withholding agent to have reason to know that the form is unreliable or incorrect for purposes of establishing the account holder s status as a foreign person. Form W-8ECI has lines for a U.S. address, which normally provides a withholding agent with a reason to doubt a claim of foreign status, but not in this case. Unambiguous abbreviation of country is not an error an abbreviation of a country of residence is an inconsequential error that would need to be cured only if it is an ambiguous abbreviation COKALA Tax Information Reporting Solutions, LLC 16

17 Additional Chapter 3 Changes Treaties Due diligence includes verifying tax treaty is in effect If a beneficial owner makes a treaty claim, the withholding agent must determine that the referenced tax treaty exists and is in force (which a withholding agent can determine by consulting the list of jurisdictions with which the United States has an income tax treaty in force maintained on the IRS website, and reading the treaty provisions). Limitation on Benefits requirement for Forms W-8BEN-E claiming treaty benefits Withholding agents may rely on a valid Form W-8BEN-E that includes limitation on benefits information unless they have actual knowledge that the information provided with respect to the limitation on benefits is unreliable or incorrect. Treaty statements associated with documentary evidence to support treaty claims must also identify the specific limitation on benefits provision on which the entity relies to claim benefits under the applicable income tax treaty (checkboxes added to Form W-8BEN-E and a Limitation on Benefits code added to Form 1042-S) COKALA Tax Information Reporting Solutions, LLC 17

18 Additional Chapter 3 Changes Payments to foreign owners for shipping and air transportation IRS has clarified that income from shipping and air transportation, as U.S. Gross Transportation Income ( USGTI ) is not subject to Form 1042-S reporting and withholding. (Income from truck and rail transportation IS subject to Form 1042-S withholding and reporting rules.) Financial institutions must obtain foreign TINs Starting January 1, 2017, for an account maintained at a U.S. office or branch of a withholding agent that is a financial institution, the withholding agent is required to collect the account holder s foreign TIN, and, in the case of an individual account holder, the account holder s date of birth, on a withholding certificate. A withholding certificate that does not contain a date of birth but is otherwise valid will not be invalid if the withholding agent has such information in its files. For withholding certificates associated with payments made on or after January 1, 2018, a foreign person that does not have a foreign TIN must provide a reasonable explanation as to the lack of a foreign TIN (for example, that the country of residence does not provide TINs) COKALA Tax Information Reporting Solutions, LLC 18

19 Additional Chapter 3 Changes Documentation provided together with forms For individuals. W-8BEN forms can remain valid indefinitely if the individual furnishes government-issued documentary evidence of foreign status at the same time as the Form W- 8BEN. The new regulations permit the documentary evidence to be provided within a period of 30 days of furnishing the W-8BEN (regardless of which is provided first) and still qualify for provided together indefinite validity. For entities. W-8BEN-E forms can remain valid indefinitely for purposes of certifying foreign status (but not for treaty benefits) if government-issued documentary evidence of foreign organization is furnished at the same time as the form. The new regulations eliminate the phrase provided together and instead provide that a Form W-8BEN-E (other than the portion relating to a claim for treaty benefits) accompanied by documentary evidence will be valid indefinitely if the withholding agent receives both before either the withholding certificate or the documentary evidence would otherwise expire (even if the withholding certificate and documentary evidence are not provided simultaneously) COKALA Tax Information Reporting Solutions, LLC 19

20 Additional Chapter 3 Changes Forms 8233 U.S. TIN still required. The IRS reaffirmed that the individual must have and furnish a U.S. SSN or ITIN to make a Form 8233 claim. Electronic systems for collecting Form 8233 permitted. New Reg. sec T(e)(4)(iv)(C) permits use of an electronic system to collect Form 8233 from a foreign individual (claiming exemption from withholding on payments for personal services performed in the U.S.) and provides the requirements for the system. Note that this refers to a comprehensive electronic system that collects and validates information and certifications. More time, generally, to implement new versions of W-8 forms The new final regulations provide that withholding agents generally may use prior versions of withholding certificates until the later of six months after the date of issuance of the most recent revision to the withholding certificate, or the end of the calendar year during which the revised version was issued. Note that date of issuance is not defined and it is not clear whether this date refers to the date the IRS publishes the form as final or the date noted in the top left-hand corner of the form. However, even under the new rule, the Treasury Department and the IRS may designate a shorter transition period COKALA Tax Information Reporting Solutions, LLC 20

21 IRS Revokes Ruling That Was Contrary To The Rule For Compensatory Grants A scholarship or fellowship grant paid under a requirement for the performance of services by the recipient individual is a payment of compensation for the services taxable wages, not a tax-exempt grant. New PLR states: In Private Letter Ruling , the Internal Revenue Service held that the stipends that Taxpayer paid to its research fellows using grants other than those authorized under the National Research Service Award (NRSA) program did not constitute wages for employment tax purposes, and were not subject to social security taxation under sections 3101, 3111 and 3121(a). The Service has recently determined that Private Letter Ruling is not in accord with the current views of the Service. Amounts paid to research fellows under non-nrsa grants that are compensatory in nature constitute a payment for services, are wages for employment tax purposes, and are subject to social security taxation under sections 3101, 3111 and 3121(a). See COKALA Tax Information Reporting Solutions, LLC 21

22 EINs Obtained For Fraudulent Use A 2013 report by the Treasury Inspector General for Tax Administration (TIGTA) identified billions of dollars lost to tax fraud as a result of stolen Employer Identification Numbers (EINs) and EINs which thieves fraudulently get the IRS to assign and then use solely for tax fraud. Since that TIGTA report the IRS has made changes in the Form SS-4 process of applying for an EIN (to limit EIN applications and try to catch and deny fraudulent EIN requests) and Congress moved the information return filing date to January 31 (to try to get W-2 and 1099-MISC box 7 data to the IRS in time to be used to catch and deny fraudulent tax refund claims). IRS Office of Chief Counsel further suggests that IRS deny an EIN request if the applicant does not have a Social Security Number (SSN), an Individual Taxpayer Identification Number (ITIN), or has not filed a tax return. Adoption of rules that would limit issuance of an EIN to a human being that has a SSN or ITIN and has filed a return reasonably restricts use of EINs to its statutory purposes. Form SS-4 requires the identification of a responsible party that can choose to identify himself or herself by an EIN (instead of a personal SSN or ITIN) and there s no check of whether it s an actual tax return filer. If Chief Counsel s recommendation is adopted, IRS would accept EIN applications only if the responsible party s personal name and social security number (or name and ITIN) are validated by the IRS system and matched to a U.S. income tax return COKALA Tax Information Reporting Solutions, LLC 22

23 Notifying IRS of Form W-2 Data Theft The IRS has established a process to be used for quick reporting of any data losses related to the W- 2 data thefts being perpetrated by criminals who send s purporting to be from a high-level person within the company instructing the recipient to send employee W-2 or Name/SSN information in a reply . If your business received the but did NOT fall victim to the scam, forward the to the IRS. The IRS needs the header from the phishing for its investigation, which means you must do more than just forward the to phishing@irs.gov. Detailed instructions regarding the data the IRS needs can be found in the IRS webpage dedicated to this information (link below) Employers that were victimized by this scam should the Federation of Tax Administrators at StateAlert@taxadmin.org to get information on how to report victim information to the states. See a detailed discussion of this issue and instructions for what to do if you fell victim to this scam or received a phishing requesting employee tax information at COKALA Tax Information Reporting Solutions, LLC 23

24 Input on Priority Guidance Plan Requested In Notice , the Department of the Treasury and IRS invite public comment on recommendations for items that should be included on the Priority Guidance Plan, the document which identifies the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The Priority Guidance Plan will identify guidance projects that the Treasury Department and the Service intend to work on as priorities during the period from July 1, 2017, through June 30, Recommendations should be submitted to the IRS by June 1, 2017, for possible inclusion in the next Priority Guidance Plan. See Notice at for additional information and the addresses to which written comments should be sent or hand-delivered COKALA Tax Information Reporting Solutions, LLC 24

25 Questions? Questions? Questions? Q uestions? 25