2010 IRPAC Public Report: Emerging Compliance Issues Subgroup
A. Foreign Account Tax Compliance (FATCA) Provisions
On March 18, 2010, the Hiring Incentives to Restore Employment Act (HIRE Act) was enacted. The Foreign Account Tax Compliance provisions of Subtitle A of Title V of the HIRE Act (commonly referred to as FATCA) adopted an expansive new withholding tax and reporting regime by enacting a new chapter 4 of the Code and a number of related provisions. These provisions had their origin in Treasury’s “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals,” on which IRPAC commented extensively in 2009.
IRPAC has been working closely with the IRS and Treasury regarding the implementation of FATCA. The Discussion section below summarizes the principal issues that have been discussed.
IRPAC also notes that the IRS has recently released Notice 2010-60, Notice and Request for Comments Regarding Implementation of Information Reporting and Withholding Under Chapter 4 of the Code, which provides some preliminary guidance under FATCA, and addresses a number of the recommendations that IRPAC has made to the IRS. Because the Notice was released after IRPAC’s last 2010 working meeting in August, IRPAC has not had an opportunity to discuss the Notice with IRS and Treasury. However, IRPAC intends to provide a formal written comment letter relating to Notice 2010-60, and may discuss some of those recommendations at the October public meeting.
FATCA adopts a new withholding tax and reporting regime, requiring in general terms that U.S. source “withholdable payments” and certain gross proceeds paid to a foreign financial institution (FFI) be subject to withholding unless the FFI agrees to comply with certain reporting requirements with respect to “United States accounts” maintained by the FFI. FATCA also imposes a withholding tax on similar amounts payable to non-financial foreign entities unless they provide information regarding their direct and indirect U.S. owners. The statutory FATCA rules provide few details regarding the withholding and reporting requirements with which market participants will be required to comply. Thus, the IRS will need to issue extensive guidance on a broad range of issues to permit FATCA to be implemented effectively.
The principal issues that IRPAC discussed with the IRS and Treasury include the following:
- Guidance Process: IRPAC worked with the IRS and Treasury to identify the most critical issues raised by the enactment of FATCA and those issues with respect to which the issuance of prompt guidance is most critical. IRPAC also has discussed with the IRS and Treasury the feasibility of adopting guidance in stages and phasing in the applicable rules over time.
- Due Diligence Requirements: IRPAC discussed with the IRS and Treasury the processes that withholding agents, including FFIs, will be required to use to determine the status and characteristics of their customers and other payees. The issues discussed include the following:
- The processes that financial intermediaries (and other payers) currently use to collect and preserve information regarding their customers and payees.
- The challenges that withholding agents will face if required to obtain additional information regarding existing customer/account relationships. With respect to existing account relationships, IRPAC recommended that withholding agents be permitted to rely on information currently collected and systems currently in place, to the greatest extent possible.
- The circumstances under which regulations issued under FATCA should impose different due diligence and documentation standards for different classes of payees.
- The processes that withholding agents and other market participants will be able to use to determine whether a payee is an FFI, whether it has entered into an agreement with the IRS and other characteristics relevant to the application of FATCA to the payee.
- The processes that financial intermediaries (and other payers) currently use to collect and preserve information regarding their customers and payees.
- Definition of Foreign Financial Institution: IRPAC discussed with the IRS and Treasury numerous issues regarding how the rules applicable to FFIs should apply in particular contexts and to particular types of institutions. For example, IRPAC discussed the differing characteristics of different categories of institutions that may be treated as FFIs and has made recommendations regarding how the application of the rules may need to be modified to account for differences in the nature of the business and operations of different categories of FFI. IRPAC also attempted to identify categories of entities that do not raise significant compliance issues and thus for which exemptions or reduced burdens may be appropriate.
- FFI Agreements: IRPAC discussed with the IRS and Treasury several issues regarding the scope and nature of the agreements that FFIs will enter into pursuant to FATCA, including issues relating to FFIs’ due diligence obligations, their reporting obligations and the verification process.
- Verification Process: IRPAC discussed with the IRS and Treasury numerous aspects of the “verification” process that FATCA contemplates will be necessary to ensure that FFIs fulfill their obligations. IRPAC recommended that the scope of the verification requirements be sensitive to the scope and nature of the activities of particular types of FFIs and take into account existing processes currently in use. IRPAC also made recommendations regarding the need to adopt simplified and streamlined processes in many cases, to make the processes manageable given the very substantial number of FFIs that will be subject to the requirements.
- Coordination with Chapter 3 Withholding and Reporting Requirements and Chapter 61 Reporting Requirements: IRPAC discussed with the IRS and Treasury issues relating to the coordination of the FATCA documentation and reporting rules with other rules that apply under chapters 3 and 61 of the Code, including the desirability of integrating FATCA compliance with the existing qualified intermediary program where appropriate, and the need to avoid duplicative reporting obligations.
- Documentation Implications: IRPAC discussed with the IRS and Treasury the types of documentation that may need to be developed or revised to accommodate processes under FATCA, including potential revisions to the Form W-8 series and Forms 1042 and 1042-S, or the development of new forms to implement the new chapter 4 requirements. IRPAC recommended that the IRS consider attempting to incorporate the FATCA documentation requirements into the existing forms used under chapter 3, to simplify the reporting and withholding process and facilitate the coordination of chapter 3 and chapter 4 obligations.
- Exceptions: IRPAC discussed with the IRS and Treasury the potential exceptions to FATCA withholding and reporting suggested in the legislation, as well as other exceptions that may be adopted in order to enable FATCA to operate effectively. These conversations focused both on the scope of the substantive exceptions that may be adopted, as well as the procedural requirements for establishing that an exception applies in a particular case.
- Refunds: IRPAC previously commented on problems with the current process for obtaining refunds in respect of amounts overwithheld under chapter 3. IRPAC believes that the complexity of FATCA makes it likely that significant overwithholding will occur, in particular in the initial years following FATCA’s entry into force. Thus, an effective and efficient refund process will need to be implemented. In addition, to be fully effective, any such refund process will need to address the problems experienced with the existing process under chapter 3.
- Affiliate Accounts: IRPAC discussed with the IRS and Treasury issues relating to the provisions of FATCA that may in some circumstances require that affiliated entities share information and responsibility for obtaining and reporting customer information, including the application of data and consumer protection laws in other countries and systems limitations that may make it difficult for affiliated entities to share information even when otherwise permitted.
- Non-Financial Institution Payers: IRPAC discussed with the IRS and Treasury the particular challenges inherent in applying the FATCA rules outside the context of customary interest, dividend and similar payments made by and to financial institutions and intermediaries. Particular challenges are anticipated in applying the new rules to accounts payable operations, where payers frequently do not have well-developed systems for implementing complex withholding and documentation procedures, in particular in the cross-border context. IRPAC also discussed with the IRS and Treasury the possibility of adopting targeted exceptions to reduce these burdens in contexts in which a rigid application of the FATCA rules is not necessary to avoid a significant risk of tax avoidance.
B. Section 6050W, Information Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions
In response to the issuance of proposed regulations, IRPAC made the following recommendations in a comment letter on January 20, 2010 (see Appendix K):
1. The existence in the statute of the Electronic Payment Facilitator (EPF) demonstrates that Congress was seeking to have payments, not transactions, reported. As a result, “gross amounts” should be defined as the amount of the payment provided to the merchant not adjusted for cashback or other items. New Form 1099-K, Merchant Card and Third-Party Payments, calls for reporting payments; at the very least coordination between the regulations and the form will be necessary. In addition, reporting transactions would result in several backup withholding problems including how to withhold on the day of a transaction when no funds are available until 1-2 days later, how to deal with transactions in one period and backup withholding in another, and the effective rate increase due to backup withholding on gross transactions not adjusted for returns.
2. Clarification is needed regarding the rules to be applied to determine whether a merchant qualifies for the “foreign address” exception, both in the United States and abroad, particularly with regard to the use of Forms W-8, documentary evidence standards, and any presumptions.
3. IRPAC applauded the IRS for adopting the anti-duplication rules for the overlap between IRC Sections 6050W and 6041, and urged the IRS to extend them to the overlap between Sections 6050W and 3402(t).
4. Modify the existing electronic payee statement standards to reflect the differences between reporting in a paper-based consumer world of the past decade and the electronic based business world of today. Specifically, IRPAC asked the IRS to permit filers to notify merchants electronically of their right to opt out of electronic payee statements, and to permit paper-based merchants to opt in by registering on the filer’s web site.
5. IRPAC provided several examples of different types of cards and how they should be treated under the statute.
6. De minimis rules for third party networks should not be mandatory.
In addition to the recommendations made in our formal comment letter, IRPAC responded to several questions posed by Counsel. Recommendations as a result of those discussions included:
7. The payment settlement entity (PSE) is the acquiring bank. If not, and there are multiple parties meeting the definition of PSE, the one making payment should be the default PSE.
8. “Making payment” should be defined as the process of taking steps to provide the merchant with funds.
IRPAC supports the IRS’s need for accurate taxpayer data to promote compliance and reduce the agency’s audit burden. IRPAC also believes that the compliance burdens placed on filers should be reasonable and provide useful information to the IRS and to taxpayers. Distorted or confusing data will only lead to tax return errors and unnecessary audits. The information provided and the recommendations made by IRPAC in our oral and written comments are all aimed at the goals of providing useful and understandable data to the IRS and the taxpayer, in a manner that places the lowest burden on the filing community and on the IRS processing and audit systems.
The final regulations published in August adopted a number of IRPAC recommendations clarifying who the PSE or EPF is, when withholding attaches, and the scope of the third party network rules. However, the final regulations keep the proposed definition of gross amounts, which IRPAC believes is contrary to the statute and legislative history of the provision. In doing so, the final regulations greatly complicate reporting for those that heretofore have had one party doing the processing and another party doing the paying. This complexity could easily have been avoided by requiring the reporting of payments rather than transactions. The retention of the proposed definition of gross amounts also will create backup withholding problems for all PSEs. For payment card transactions there is never any money at the time of transaction, the normal time to do withholding. The final regulations provide that the backup withholding may be done later when payment is made. This will involve complex recordkeeping to associate each payment with specific transactions. It will also require the payer to know the transaction amount, which will always be different than the payment amount, in order to calculate the appropriate amount of withholding. Because the reportable amount will not be adjusted for things like returns of merchandise, the effective rate will always be more than the statutory rate. The final regulations’ retention of the proposed definition requires a jerry-rigged backup withholding approach that fails to provide guidance on what a timely deposit would be and fails to reconcile these delayed deposits with Form 945. They also created a competitive disadvantage for those PSEs (likely the smaller ones) that prefer to have one party process transactions and another handle the payments.
The final regulations clarified the standards to be applied to treat a merchant as exempt from reporting under the foreign address rule. While IRPAC believes that Congress intended the rule to be a simple foreign address rule without further documentation, IRPAC applauds the IRS for providing some relief in grandfathering current accounts from the new requirement to obtain Forms W-8 for merchants processed in the United States.
With regard to IRPAC’s recommendation that the IRS revise existing, consumer-based, electronic payee statement rules for an electronic business environment, the final regulations provide that consent can be obtained electronically, but saddled that consent process with a lengthy list of disclosure requirements. The proposed regulations appear to provide relief through a rule whereby a merchant that has previously provided consent to receive tax documents electronically could be deemed to have consented to receive the Forms 1099-K electronically. However, this provision will not provide useful relief because no PSE/merchant relationship has previously entailed any tax reporting, so no such consent would ever have been provided.
Finally, the final regulations fail to provide penalty relief. Providing only 4½ months to implement these complex rules is totally inadequate. IRPAC renews its call for across-the-board penalty relief for all involved who make a good faith effort to comply by the effective date.
C. Expansion of Information Reporting Under IRC Section 6041
As a follow-up to the discussions held at the April and June meetings, IRPAC sent a letter on May 24, 2010 (see Appendix L) providing a legal analysis of the scope of the legislative changes. Recommendations included:
1. Corporations that qualify for exceptions based on factors unrelated to their status as corporations (such as being a foreign person) can still qualify for that other exemption from reporting; and
2. The changes made to section 6041 are limited to the rules of IRC Section 6041, and do not override the corporate exemption under other sections including IRC Sections 6042, 6044, 6045, 6049, and 6050N.
In response to the IRS’s call for comments issued in Notice 2010-51, Information Reporting Under the Amendments to Section 6041 for Payments to Corporations and Payments of Gross Proceeds and With Respect to Property, IRPAC sent a second letter on August 19, 2010 (see Appendix N) that:
1. Provided an extensive analysis of the implications of these changes on the IRS including:
a. Exponential increase in returns filed, potentially ten-fold or more;
b. Concomitant increase in paper returns filed, along with increases in corrections, B Notices, penalty notices, and impacts on the Fed/State filing program;
c. Increase in the number of underreporter cases and non-filer cases that likely will not result in increased compliance, along with increase in appeals and litigation and the need for more highly trained employees to deal with the more technically complicated cases involving non-individual tax returns; and
d. Need to revise Forms 1099-MISC or create a new form, with commensurate changes to filing instructions.
2. IRPAC noted the reasons why a document matching program, the mainstay of the automated compliance efforts with regard to individual taxpayers, may not be possible with respect to entity taxpayers including:
a. Cash reporting for accrual taxpayers;
b. Calendar-year reporting for fiscal-year taxpayers;
c. Gross proceeds reporting for merchandise with basis;
d. Lack of requirements for consumers to report their transactions;
e. Foreign income earned may mask domestic income;
f. Filing of consolidated returns by affiliated groups of taxpayers;
g. Allocation of income among members of a consolidated group;
h. Some income may be tax-exempt or tax deferred;
i. Some pension plans use their corporate sponsor EINs confusing the issue of whose income it is; and
j. More complicated tax returns with timing issues that may not be coordinated between payer and payee.
3. IRPAC recommended that several optional exceptions be created in the regulations to help limit the burden on the payer community by limiting required reporting to payee data that may actually be useful to, and processable by, the IRS. The suggested exceptions include:
a. Payments to publicly traded entities;
b. Payments to publicly regulated entities;
c. Payments to tax-exempt organizations;
d. Payments to governments;
e. Payments to international organizations;
f. Payments to financial institutions; and
g. Payments within affiliated groups.
4. The second letter also noted the challenges facing payers including:
a. The need for sufficient time to implement any regulatory changes;
b. The need to re-classify existing payees as reportable;
c. The need to obtain TINs for existing payees that heretofore were non-reportable;
d. The need to adjust new accounts procedures;
e. The need to re-write internal procedures and re-train personnel;
f. The need to re-program systems for reporting and withholding; and
g. The need to budget for such additional burdens in a time of economic uncertainty.
5. Other recommendations included:
a. Use of box 11 or 12 on Form 1099-MISC to report merchandise transactions;
b. Clarification of the existing rules for use of Form W-9;
c. Expansion of TIN matching databases to include “doing-business-as” names;
d. “Soft” B Notices for the first two years to give payers time to improve their databases;
e. Penalty relief for payers making a good faith effort to comply;
f. No backup withholding on individual transactions under $600;
g. Use of any known payee address; and
h. Elimination of duplication between and among sections 6041, 6050W, and 3402(t).
IRPAC supports the IRS’s need for accurate taxpayer data to promote compliance and reduce the agency’s audit burden. IRPAC also believes that the compliance burdens placed on filers should be reasonable and provide useful information to the IRS and to taxpayers.
The changes enacted by the Patient Protection and Affordable Care Act of 2010 raise numerous issues about the utility of the data to be reported and the ability of the IRS to process it. The expected exponential increase in the number of returns filed, especially paper returns, and the hurdles the IRS must overcome in actually utilizing the return information in any matching program between information returns and tax returns, cry out for a series of exceptions where the utility of the data is small relative to the cost to produce and process it. It is important that these exceptions be optional as reporting all payees will be more efficient for some payers. To minimize the significant burdens these reporting changes will engender, payers should have maximum flexibility to determine when and whether to report payees that potentially qualify for an exemption, even refusing a claim of exemption of Form W-9, and to change that determination at any point.
IRPAC is very concerned about the burdens these changes place on the IRS, and, given the current economic situation, the lack of sufficient resources to accomplish the tasks at hand. The huge increase in the number of returns to be filed is just the beginning. Those increases will be followed by increases in corrected returns, B Notices, penalty notices, underreporter cases, appeals, and even litigation, among other things. The IRS needs to supplement its staff, training, and systems in all those areas, especially given the fact that many of payers filing under these new rules will be first-time filers and will need assistance in understanding their obligations and their rights.
IRPAC also believes that the IRS should clarify without delay that the changes to section 6041 are limited to section 6041 and do not alter the reporting rules under any other section, and that a payment exempt under another section does not become reportable under section 6041 as a result of that other exemption. While we believe that this is clearly the intent of the statute, confusion in the payer community about the scope of the statutory change should be put to rest as soon as possible. Confusion also exists as to whether a corporation, which no longer qualifies as an exempt payee due to the repeal of the corporate exemption under section 6041 may still qualify as exempt from reporting by virtue of its status as another type of exempt recipient, such as a foreign person.
IRPAC appreciates the willingness of Counsel to openly explore the parameters of this statutory change. IRPAC is committed to providing continued assistance over the next few months as the IRS sorts out its regulatory scheme and the practical applications of these new rules.
D. Withholding Tax Issues
IRPAC met with the IRS to discuss Chapter 3 withholding tax issue and made the following recommendations.
1. Capacity: The determination of whether the capacity of a person who executes a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, for an entity should be considered valid continues to be an issue for U.S. withholding agents. IRPAC recommends that the IRS issue guidance to the effect that a U.S. withholding agent may treat a person who has executed a Form W-8BEN for an entity as an authorized representative regardless of the person’s title shown on the Form W-8BEN.
2. Permanent Residence Address: The instructions to the Form
W-8BEN state that the Permanent Residence Address (Line 4) of the beneficial owner should not be the address of a financial institution, a post office box, or an address used solely for mailing purposes. The only address of many offshore investment funds is that of a registered agent or investment advisor. IRPAC recommends that the IRS issue guidance on the acceptability of such an address and the type of additional documentation, if any, that is required to validate the Form.
3. Claims for Refund by Foreign Persons Investing Though a Qualified Intermediary: IRPAC met with the IRS and discussed the need for a process for foreign persons who invest through a Qualified Intermediary (QI) to obtain refunds of withholding tax. IRPAC recommends that the IRS issue guidance that will allow such foreign persons to substantiate the amount of tax withheld by the QI by providing alternative documentation in lieu of a Form 1042-S issued in the name of the foreign person.
4. Bilingual Forms W-8: IRPAC met with the IRS to discuss the use of bilingual substitute Forms W-8. There is little published guidance on the use and completion of Forms W-8 that are in a foreign language. For example, the scope of the requirement that the form include “the English version of the statements and information otherwise required to be included” is somewhat unclear. IRPAC recommends that the IRS issue more detailed guidance concerning the requirements for the completion of bilingual Forms W-8. In particular, it is recommended that the guidance clarify that identifying information regarding the beneficial owner may be completed in the language of the beneficial owner.
The Form W-8BEN requires the person who signs the Part IV Certification for an entity to enter the capacity in which the person is acting. U.S. withholding agents continue to see many different titles entered for capacity. One major financial institution has compiled a list of over 100 different titles. It is not possible for a U.S. withholding agent to know whether a particular title provides the signer with the actual authority to sign the Form W-8BEN for a foreign entity. The Certification on the Form W-8BEN does, however, include the statement: "I am the beneficial owner (or am authorized to sign for the beneficial owner)...." Based on this language, a U.S. withholding agent should be permitted to treat the signer as authorized, unless the U.S. withholding agent has reason to know that the signer is not authorized.
IRPAC recognizes the need for the Form W-8BEN to contain a permanent residence address that is outside of the United States and that the address should not be a mailing address or an in-care-of address. However, some entities (such as investment funds) have no other address than a mailing or in-care-of address. In such cases the address represents the principal place of business of the entity and generally is the address shown on organizational documents. IRPAC recommends that the IRS issue guidance on the acceptability of such an address and whether any additional documentation (such as an organizational document) is required to validate the Form.
IRPAC has also raised concerns regarding certain documentation issues that have arisen in the context of the refund process. Foreign persons who invest through a QI are unable to obtain refunds of overwithholding unless they receive a Form 1042-S from the QI. In many cases, QIs will not issue Form1042-S to individual investors since reporting is done by the QI on a pooled basis. The only documentation that the service center will accept to substantiate the overwithholding is a Form 1042-S issued in the name of the foreign investor. IRPAC recommends that the IRS issue guidance that will allow foreign persons to substantiate the amount of tax withheld by the QI by providing alternative documentation.
There is little published guidance concerning the use of bilingual substitute Forms W-8. The only guidance is that the form must include “the English version of the statements and information otherwise required to be included”. This instruction raises a number of questions, including whether the Form must be filled out in English. In particular, this is an issue with respect to the beneficial owner’s identifying information (e.g., name and address), which may not be readily translatable into English. The enactment of FATCA will increase the number of Forms that will need to be completed by foreign persons. The issuance of more detailed guidance regarding the use of bilingual forms, in particular guidance clearly permitting the Forms to be filled out in the language of the beneficial owner, would facilitate completion of the Forms by foreign persons.
E. Identity Theft and Information Reporting
IRPAC recommends that the IRS provide clear guidance on whether Forms 1099 should be filed with the IRS and recipient copies issued to the named payees of fraudulent accounts. IRPAC recommends that the IRS consider the potential burdens to the identity theft victims if such forms were or were not issued. IRPAC also recommends that, if Form 1099 reporting or some other notice to the identity theft victims is required, the IRS should consider the potential burdens to the payer community if reporting changes are required, particularly any changes that would require system modifications.
Earlier this year, IRPAC became aware of situations where payments were being made to accounts that were fraudulently opened with the name and social security number of an identity theft victim. In cases where the payer has knowledge before the Form 1099 filing deadline that payments were made to a fraudulent account, the question raised was whether a Form 1099 should be issued for that account. The current rules and regulations do not provide clear guidance on what a payer should do in these identity theft situations. IRPAC met twice this year with IRS staff from Counsel and Privacy, Information Protection and Data Security (PIPDS) to discuss whether reporting should be required, and if so, ways to protect the theft victim while minimizing the burden to the payer community.
IRPAC noted that if Forms 1099 were issued in the name and SSN of the identity theft victim (i.e., the named payee), with no knowledge of the theft, the IRS would expect the payments to be reported on the identity theft victim’s Form 1040. The victim may not include the payment amounts on his or her return either because (s)he knows the income was not his/hers or the victim remains unaware of the theft (if, for example, the Form 1099 was not sent to the victim’s correct address). This may result in the IRS sending an unreported income notice to the victim, beginning a process that could be burdensome (administratively, mentally, and possibly economically) for the victim.
IRPAC questioned whether it was necessary for payers to issue Forms 1099 to the IRS and/or the named payees and requested that the IRS consider specifically stating that such reporting is not required in a known identity theft situation. IRPAC noted that the current instructions to Form 1099-C, Cancellation of Debt, indicate that the form should not be issued in an identity theft situation and suggested expanding this treatment to other Forms 1099 indicating situations where reporting was not required. IRPAC indicated that, in cases where there was backup withholding on the fraudulent account, Forms 1099 could be issued to an “unknown payee,” enabling the payer to reconcile its Forms 1099 and Form 945, while shielding the theft victim’s name and SSN and hopefully not generating a B Notice or penalty notice.
IRPAC understands that PIPDS may be concerned that, if a theft victim is not issued a Form 1099 or some notice of the payments made to the account with the victim’s name and SSN, the victim may become the subject of further identity theft, and may face more difficult burdens in the long run. In response to this concern, IRPAC and the IRS discussed ways in which the theft victims could be notified of the payments while minimizing the reporting burdens on the payer community. IRPAC and the IRS considered changes to the Forms 1099, or the provision of special instructions regarding how the Forms 1099 should be completed in these circumstances, as well as the idea of a new notice that could be issued to both the IRS and the theft victim. IRPAC noted that it would be very burdensome to the payer community if the reporting to the theft victim would require changes to payer systems, particularly given the relatively few cases in which the identity theft issue arises.
IRPAC also has discussed with the IRS the question of whether Forms 1099 should be issued when the address of the payee is known to be “stale” (or undeliverable). A payee has a “stale” address if mailings to that address have been returned because the address is incorrect and no new address has been provided. The general rule for most IRS-required mailings is to mail to the last known address for the payee, but there is some guidance for Forms 1099-INT and W-9 and B Notices providing that this general rule is changed for mailings where the last known address is known to be stale. However, this guidance does not directly apply to all Form 1099 filings. In addition, IRPAC understands that in some circumstances, the IRS has advised payers to send certain Forms 1099 to the last known address, even when it is a known bad address. In other contexts, the IRS has advised that certain mailings should not be done in such circumstances.
Given the rise in the incidence of identity theft, payers are concerned that, if Forms 1099 are sent to the “stale” address, personal data of the account holder may be made available for potential theft.
IRPAC intends to further its discussions next year with the IRS regarding this issue, with the goal of obtaining clear guidance on whether and, if so, which Forms 1099 should be mailed to “stale” addresses.
F. Clarification of the Information to be Reported to U.S. Investors on the Form 1099-DIV, Box 6, Foreign Tax Paid
IRPAC recommended that the IRS change the language in the Instructions for Form 1099-DIV, Dividends and Distributions, Box 6, Foreign Tax Paid to direct payers to report any foreign tax withheld and paid on dividends and other distributions on stock. The current instructions provide that payers should enter the “creditable foreign tax withheld and paid (within the meaning of section 901).” The IRS and IRPAC have discussed this issue and concur that payers would generally not know what portion, if any, of an amount of foreign tax withheld from a dividend payment was creditable for any particular taxpayer. Payers, however, would know the actual amount of foreign tax withheld. Accordingly, the IRS and IRPAC agree that the following language (provided in the instructions prior to 2008) be used in the Form 1099-DIV instructions going forward.
“Enter any foreign tax withheld and paid on dividends and other distributions on stock. A RIC must report only the amount it elects to pass through to the recipient. Report this amount in U.S. dollars.”
U.S. payers are generally required to report to U.S. investors dividend payments made in respect of foreign securities on Form 1099-DIV. In addition to reporting the dividend payments, payers are also required to report any foreign tax paid or withheld on such dividends. Prior to 2008, the Instructions for Form 1099-DIV directed payers to report in Box 6 any foreign tax withheld and paid on dividends and other distributions on stock.
In 2008, however, the language in the instructions was changed to direct payers to enter creditable foreign tax withheld and paid (within the meaning of IRC Section 901) on dividends and other distributions on stock. Payers have raised concerns with this instruction because they do not possess the type of information required to make a determination as to whether the foreign tax withheld may be taken as a credit by the payee. In order for a payer to reliably determine whether a payee is eligible to claim a tax credit on an amount withheld, much more detailed information about the nature of the foreign tax and the payee’s specific tax situation would be required. The Code generally permits credits to be taken only in respect of foreign taxes that qualify as “income taxes” under complex regulations issued under section 901. The Code also imposes numerous limitations and restrictions on the amount of foreign tax that may be claimed as a credit. The actual amount of foreign tax paid or withheld is only the starting point in determining the creditable tax and the allowable foreign tax credit. Detailed information regarding the payee’s other types and sources of income, other taxes paid, actions in various taxing jurisdictions, the period of time the stock was held, and possible entitlement to tax treaty benefits is necessary to make this determination. It is impossible for a paying agent, which may make tens of thousands of payments on foreign issues and frequently has no direct relationship with the security holders, to determine the amount of creditable tax without all the specific details for each payee’s tax position.
In addition, as a practical matter, reporting any amount other than the actual foreign tax paid may be unnecessarily confusing for payees. Payees know the amount of tax that actually has been withheld from their dividend check, but if Form 1099-DIV reports some other amount as foreign tax paid, the two documents will not reconcile and investors may assume an error has been made. By reporting the actual amount withheld, the payee will be able to reconcile the withholding and accurately calculate his or her allowable foreign tax credit or deduction.
As mentioned above, IRPAC met with members of the IRS Forms and Publications Division in August to discuss this issue. All agreed that reinstating the language provided in the 2007 Instructions for Form 1099-DIV would be appropriate. On August 30, 2010, the IRS published a correction to the 2010 Instructions for Form 1099-DIV in the “What’s Hot” section of IRS.gov because the form instructions had already been published for this year. The IRS also agreed to make the language change for the 2011 Instructions for Form 1099-DIV.