Red Light: Dealing with the IRS Enforcement Action

Transcription

1 SESSION 4.3 Red Light: Dealing with the IRS Enforcement Action Michael Guerra, EASi Lori Nichols, Internal Revenue Service Carol Rutlen, Partner, GTN/Rutlen Associates LLC B

2 SESSION 4.3 Red Light: Dealing with the IRS Enforcement Action Michael Guerra, EASi Lori Nichols, Internal Revenue Service Carol Rutlen, Partner, GTN/Rutlen Associates LLC Agenda Tier I initiative overview Reporting and withholding rules IRS 1441 Tier I initiative details Common challenges and practical solutions

3 Tier I Initiative Overview LMSB adopted in 2006 to ensure all high risk compliance issues are properly addressed and treated consistently across the division for all LMSB taxpayers are involved in the issue. Provides examiners and teams clear and timely guidance on how to address significant compliance, and dovetails with other issue management activities, allowing resources to be targeted in the areas most needed. Issue Owner Executives are accountable to designing and implementing strategies for the identification, development, and resolution of the assigned compliance issue. Tier I Initiative Overview Tier I High Strategic Importance. Tier I issues are of high strategic importance and have a significant impact on one or more industries. Tier I issues could include areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility where there are established legal positions. Tier II Significant Compliance Risk. Tier II issues reflect areas of potential high non-compliance and/or significant compliance risk to LMSB or industry. Tier II includes emerging issues, where the law is fairly well established but there is a need for further development, clarification, direction and guidance on the Service s position. Tier III Industry Risk. Tier III issues are those that represent the highest compliance risk for a particular industry, which require unique treatment for an industry.

4 Taxation of Individuals US citizen taxed on worldwide income Resident alien taxed on worldwide income Green card holder Substantial presence test First year election Non-resident alien (NRA) Not US citizen or resident alien Taxed on US sourced income Taxation of Resident Aliens Taxed the same as a US citizen Same withholding and reporting requirements Issues Taxed on worldwide income Paid outside US

5 Taxation of Non-Resident Aliens Effectively connected income (ECI) Non-ECI Non-US sourced income not taxable in US Effectively Connected Income Connected to a US trade or business Compensation for personal services (sourced based on where services are performed) Taxed at regular graduated rates Wages reported on W-2

6 Nonresident Aliens Deferred Payments 864(c)(6) Treatment of Certain Deferred Payments, Etc. Income or gain of a NRA or foreign corporation which (A) is taken into account for any taxable year, but (B) is attributable to a sale or exchange of property or the performance of services in any other taxable year Shall be made as if such income or gain were taken into account in such other taxable year Nonresident Alien - Income Not effectively connected Investment income Passive income Examples (dividends, interest, rents, royalties, alimony) Taxed at flat 30% rate or lower treaty rate Exempt from US taxation Interest on deposits with banks 871(h) and (i) Certain portfolio obligations Most capital gains

7 IRC Sec 861. Income from Sources within US (a) Gross income from sources with US. The following items of gross income shall be treated as income from sources within the US (3) Personal services. Compensation for personal services performed in US; except shall not be deemed to be income from sources within US if- (A) the services are performed by NRA temporarily present in US < 90 days during year, (B) compensation does not exceed $3,000 in aggregate, and (C) employer not engaged in trade or business in the US Sourcing Compensation Multi-year compensation (b)(2)(ii)(F) Bonus Equity awards Time-based vesting Grant to vest Grant to exercise

8 Taxability of Compensation Wages for withholding except 3401(a)(5) services for a foreign government or international organization 3401(a)(6) services performed by a nonresident alien individual 3401(a)(8)(A) for services for an employer (other than the US ) (i) Performed by a citizen of the US if that remuneration will be excluded from gross income under Sec 911; or (ii) Performed in a foreign country by such a citizen if the employer is required by law in the foreign country to withhold income tax upon such remuneration Withholding on US-Source Non-Business Income Persons subject to withholding Nonresident alien individuals Foreign corporations Foreign partnerships Foreign estates and trusts 1441 income subject to withholding Fixed or determinable, annual, or periodical Derived from sources in US

9 Withholding on US-Source Non-Business Income Applicable tax rate 30% Except Portfolio interest Disposition of US real property interest Foreign partner s distributive share of partnership s ECI 14% withholding rate for certain scholarships and fellowships received by NRA Treaties, usually 15% Withholding on US-Source Non-Business Income Withholding agent Obligated to withhold Any person having control, receipt, custody, disposal, or payment of an item of US-source non-business income to a foreign person Corporations distributing dividends Debtors paying interest Tenants paying rent Licensees paying royalties Agent liable for uncollected tax Form W-8, W-8BEN or W-9 submitted to withholding agent Deposits tax and files annual informational return (Form 1042/1042-S)

10 Withholding on US-Source Non-Business Income Administrative matters Withholding agent (payor) can rely on submitted documentation Form 8233 to claim treaty benefits If payee fails to provide adequate documentation Presumption that payee is US person 28% backup withholding Withholding under 1441 not required on US-source income effectively connected with US trade or business Subject to standard wage withholding IRS 1441 Tier I Initiative Details Non-filing Information matching Form 1042 Examinations Notional Principal Contracts Industry Director Directive Foreign persons working in the US

11 How Do You Address These Issues? Common challenges Identify appropriate employees and determine correct tax status Capture the transaction Allocate the income Meet withholding and reporting responsibilities Develop appropriate policies Risk management Contacts Michael Guera (510) Lori Nichols (202) Carol Rutlen (650)

12 IRS Information Document Requests Tier I Compliance Issue Company A Provide a copy of Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons, filed by each member of the consolidated group Provide copies of all Forms S, Foreign Person s US Source Income Subject to Withholding, filed with each Form Provide copies of all Forms W- I Ben, Beneficial Owner s Certificate of Foreign Status for US Tax Withholding, in your possession. Provide copies of all Forms 8233, Exemption from Withholding on Compensation for Independent (&Certain Dependent) Personal Service of a Non Resident Alien, in your possession. A copy of a corporate accounting department manual that describes the overall system related to withholding on payments to foreign persons. If this document is not available, describe the company s identification and operation of processing such payments through a system flowchart. Company B Summary schedule of payments of interest, dividends, rents, royalties, salaries, wages, commissions, premiums, annuities, gains, profits, compensation, and any other kinds of income paid to nonresident aliens, foreign corporations, partnerships, or any other foreign entities. Executed contracts with any foreign person and/or entity for the performance of any kind of service as employee or as independent contractor during the years under examination. Forms 1078, Certificate of Alien Claiming Residence in the US, filed with you for the years under examination. Retained copy of transmittal or cover letter for all Forms 1078 submitted to Philadelphia Service Center during the years under examination. Any other similar written statements filed with you in the years under examination, by any alien individual claiming residence in the US. Treaty documentation provided to you, or for you, by any persons claiming exemption from or reduced rate of tax under any treaty provision. Form 1001, Ownership, Exemption, or Reduced Rate Certificate, or any similar statements filed with you claiming reduced rates of, or exemption from tax, under an applicable tax treaty between the country of which they are residents and the US. Include any employee statements claiming exemption or reduced rates. If you are not the actual withholding agent for any remuneration paid to a foreign person or entity, provide the name, address, employer ID number, telephone number and contact person for any person, financial institution, or any other entity employees as an independent agent by you for purposes of withholding. Other Items

13 Provide a copy of Sarbanes- Oxley procedures developed to identify and report foreign payments and withholding amounts. Payroll Tax Audits Addressing foreign nationals working in the US: Identify foreign nationals living and working in the US and entity for which they worked List the compensation components provided to each individual, including deferred and stock- based compensation, fringe benefits, and employer contribution to a foreign pension fund Identify how each compensation element was treated for US compensation reporting, tax withholding and employment tax purposes For US resident employees, was the worldwide compensation reported on the information return form and subject to US income tax withholding and social security taxes? Identify any payments treated as nontaxable and provide the basis for such treatment and outline any exemptions from withholding. For non- US resident employees, identify the types and amounts of payments considered exempt from wage reporting and tax withholding and provide the basis for the exemption. Addressing US Citizens working overseas: Identify the names, SSNs, assigned country, amount of annual compensation provided. List any nontaxable benefits provided and explain the basis for the exemption. Provide Forms 673 for two years for each employee who worked in a foreign country. General questions on mobility: During the years under audit, were there any employees or officers on the payroll of the domestic parent or a domestic subsidiary who are either stationed abroad or perform services for foreign affiliates whether abroad on in the US? If so, provide name, title, services performed, salary, fringe benefits, country where service were performed, any reimbursement to the domestic company, any US income or FICA withholding.

14 TO: All LMSB Employees FROM: LMSB Communications DATE: August 19, 2009 Acceptance of Late Filed or Amended Forms 1042 This message is being sent to all LMSB employees to advise that a Form 1042 that is filed late or amended with a LMSB Revenue Agent to report additional transactions is not subject to the Voluntary Disclosure Program procedures for taxpayers with undisclosed foreign accounts. Form 1042 reports the annual withholding of a payer (a United States Withholding Agent) of United States sourced income paid to a foreign person. The Withholding Agent is declaring the income of a foreign person and paying tax to the US Treasury on behalf of the foreign person. A Withholding Agent filing a late or amended Form 1042 is not a United States person concealing assets and income from the IRS. The Voluntary Disclosure Program is a longstanding practice of IRS Criminal Investigation. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. Recent IRS enforcement efforts in the offshore area have led some taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax to seek to become compliant with the tax laws of the United States. Currently, the IRS is allowing taxpayers with undisclosed foreign accounts to make a Voluntary Disclosure by September 23, If you are contacted by a taxpayer who wishes to file a delinquent Form 1042 or to file an amended Form 1042, you are not to direct the taxpayer to file a Voluntary Disclosure. If, however, a taxpayer indicates that they would like to file under the formal Voluntary Disclosure Program, they should be directed to CI as outlined in the manual procedures. Please use the following instructions to respond to the taxpayer s request to late file or amend Form Request that the taxpayer present to you a written submission made under penalties of perjury that includes the following information: The name, address, and the EIN of the submitting party, Copies of any Forms 1042 previously filed and copies of any amended Forms 1042, A statement as to whether of not any return of the submitting party is being examined by the Internal Revenue Service, including any contact information for the IRS personal conducting any examination,

15 The years included in the submission, and A summary of the issues and types of errors the submitter wishes the IRS to review. In addition, the submitter may include: Proposal of new procedures to ensure future compliance, and A statement of reasonable cause why no penalty should be asserted. This information may be submitted at a later date. Upon receipt, you must contact Stuart A. Mann, Foreign Payments Program Manager, by , submitting the name, address, and EIN of the submitting party and the name and contact information of the IRS person who received the request from the taxpayer. If you have questions about handling a late filed or amended Form 1042, contact Stuart A. Mann at Lori Nichols Director, International Compliance Strategy and Policy