2010 IRPAC Public Report: Burden Reduction Subgroup


Notice: Historical Content

This is an archival or historical document and may not reflect current law, policies or procedures.

A. Announcement 2010-41: New Backup Withholding Procedures:
Social Security Number Validation following Receipt of Second “B” Notice


IRPAC commends the IRS on their release of interim procedures for payees requiring validation of their social security number to prevent or stop backup withholding.  IRPAC will continue working with IRS as additional guidance, including revision of Rev. Proc. 93-37 and Publication 1281, is prepared.


Prior to the release of Announcement 2010-41 the IRS required that an individual receiving a second “B” Notice  go to the local Social Security Administration (SSA) office to have his or her Social Security Number (SSN) validated on Form SSA-7028, Notice to Third Party of Social Security Number Assignment, in order to stop or prevent backup withholding.  Over the last few years payees have found it increasingly difficult to obtain Form SSA-7028 with a growing number of Social Security offices refusing to provide the form.

This issue was originally brought to IRS by IRPAC in 2008.   In 2009 IRPAC continued its efforts to draw awareness and suggest solutions to the problems encountered by individual taxpayers who received a second “B” Notice but had no remedy available to them to stop backup withholding.  

In 2010 the problem became more pronounced when the Social Security Administration posted an FAQ on their website stating that as of January 1, 2010, Form SSA-7028 was no longer available.  The Office of Chief Counsel and IRS Small Business and Self Employed (SBSE) Operating Division continued discussions with SSA toward a workable interim solution which culminated with the release of Announcement 2010-41 on June 2, 2010.  Interim procedures provide that to obtain validation of the payee’s SSN from the SSA for purposes of responding to a second “B” Notice, each individual should now contact the local SSA office and request a Social Security Number Printout.
A copy of Announcement 2010-41 is provided in Appendix D.  Taxpayers may obtain the SSN printout by visiting a local Social Security office.  Taxpayers will be asked to provide their SSN and identifying information such as date of birth, city of birth and mother’s maiden name.

IRPAC appreciates the opportunities it had to share its concerns about second “B” Notice procedures and provide input regarding the interim guidance to the IRS Office of Chief Counsel and IRS SBSE. 

B. Form 1099-INT, Box 10 and Associated Instructions

As published for 2010, Form 1099-INT, Interest Income, includes a new box 10 which is intended to convey the CUSIP (Committee on Uniform Security Identification Procedures), number of each tax exempt bond from which the taxpayer derived tax exempt income.   This new reporting requirement introduces fundamental changes to a payer's data processing routines and the consolidated statement design that most payers use to provide payees with 1099 reports.  These requirements cannot be easily addressed in time for reporting due in early 2011 for the 2010 tax year.

As was explained to IRPAC, the addition of this information to the form comes from IRS’s need to identify taxpayers that are the beneficial owners of tax exempt private activity issues which are in danger of or have lost their tax exempt status.  This application of information reporting differs from the traditional matching of aggregate income from Form 1099 to Form 1040, U.S. Individual Income Tax Return.  Rather, it is a warehousing of data intended to allow IRS to consistently meet its obligation to communicate with these taxpayers when the bond issuer’s tax exempt status is being examined. 

Considering the size of the tax exempt bond market, this approach casts a hugely disproportionate net in hopes of identifying a very small number of bondholders.  Additionally, not all bondholders receive Forms 1099-INT nor do all tax exempt issues have industry-recognized CUSIP numbers, leaving holes in the potential coverage envisioned.

Based on its discussions with IRS Tax Exempt and Government Entities (TEGE) Operating Division, the IRS Office of Chief Counsel and the IRS Wage and Investment (W&I) Operating Division, IRPAC’s recommendations are oriented toward consideration of alternate approaches to communication with bondholders and, if the alternatives are untenable, addressing the structural and logistical shortcomings of the addition of box 10 to the Form 1099-INT.


1. Since the introduction of the revised form 1099-INT there has been insufficient time for IRS to consider the issues identified by IRPAC (on both the form and instructions) or for payers to implement any systematic changes.  It is recommended, therefore, that the obligation to report the CUSIP numbers of tax exempt bonds be deferred for at least one year.

2. IRPAC recommends that IRS look to models currently in place for reporting, Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) and Undistributed Capital Gains as well as the proxy notification process in place in the securities industry as possible reporting approaches that are more likely to capture all the beneficial bond owners and will avoid a massive effort of data collection, storage and mining to identify the small number of cases that are of interest.  The currently proposed approach of data warehousing is an unnecessary departure from the traditional annual matching processes employed by the information reporting program.

3. By including the CUSIP number as a new reporting element on Form 1099-INT, there is an implication that IRS no longer intends it to be a form on which payers report income at an aggregated level (at least for tax exempt interest).  If this approach is retained in lieu of alternate proposals, IRPAC recommends that IRS:

  • Instead of creating an ambiguous Form 1099-INT structure with some elements in aggregate and others in detail at the CUSIP level, consider a form such as the 1099-OID, Original Issue Discount (already a CUSIP level report) as a more appropriate vehicle.  Similarly, a new form, 1099-TEB, Tax Exempt Bond, could be created, as this would separate the tax exempt bond interest (on which CUSIP numbers are desired) from the exempt interest dividends (on which CUSIP numbers would be of no value).  In addition, moving exempt interest dividends, dividend distributions that are reported on an aggregate basis, to new boxes on the Form 1099-DIV would better organize the overall information reporting program.
  • Give consideration to different reporting requirements with regard to the level of detail for exempt interest.  Aggregate totals by income type from a single payer are what a taxpayer needs to complete his or her tax return.  The CUSIP level detail appears to be only a requirement for the IRS which could be satisfied on the payer’s information return filing with the IRS, but not included on the payee statement.  The notion of reporting at different levels of granularity to the beneficial owner of an asset and the IRS is already a part of the reporting regime for Widely Held Fixed Investment Trusts (WHIFIT).
  • Reflect on what the requirement would be for distinguishing reporting of multiple bond issues, within an account, that do not have CUSIP numbers.  Are they aggregated?  Assigned some type of user-defined number to distinguish them as distinct issues?
  • Provide explicit clarification that taxable interest should still be reported as an aggregate amount


Due to limitation of the information reporting requirements, there is significant reason to believe that the new requirement introduced on the 2010 Form 1099-INT will not accomplish its desired goal of facilitating uniform communication to the intended audience.  Simply stated, not all bond holders receive Forms 1099-INT.  With a process that contemplates capturing huge volumes of data in pursuit of a small subset, any consideration of expanding the information reporting requirements to include previously exempt entities in an effort to close this identification gap would mainly exacerbate the inherent shortcoming of this approach.  IRPAC’s dialog with IRS has focused on the potential of a notification process that leverages the proxy process that currently exists as part of the structural framework of the securities industry and potentially incorporates features of the existing reporting practices for FIRPTA and Undistributed Capital Gains.  Both parties have agreed to explore the viability of this approach in future discussions. 

Should the proxy model prove to be impractical, IRS should consider that the new Form 1099-INT presents considerable challenge to the information reporting community due to its uneven approach to reporting.  If this approach is retained, it is important for IRS to contemplate the data processing issues identified in this report.

As it existed prior to 2010, Form 1099-INT conveyed the aggregate interest income (taxable, tax-exempt and private activity portion) for a taxpayer, earned at a reporting institution, for a given year.  Beyond deposit interest, the reportable amounts represent income earned throughout the year from a variety of financial instruments.  Systems that are designed and built for the purpose of reporting annually must capture these disparate amounts, but do not necessarily maintain the details in a way that allows for reporting in the manner and timeframe required by the new version of Form 1099-INT.  Reporting at a detailed level is a fundamental change that would require extensive modifications to the data base structure, the overhaul or rewrite of entire systems, the creation of greatly enhanced data storage capacities, changes to printed statement designs and the modification of electronic filing routines.

Among the Forms 1099, the 1099-B, Proceeds From Broker and Barter Exchange Transactions and 1099-OID are unique in that they report (to the taxpayer and IRS) with greater granularity than the other forms such as 1099-DIV, Dividends and Distributions and 1099-INT.  In short, the 1099-DIV and 1099-INT are summary level forms and the 1099-OID and 1099-B are detail level forms.  The existing designs of composite substitute statements must tread very carefully to present data in a consistent way (summaries together, details in dedicated sections) while staying within the framework for composite forms provided in Publication 1179.  This makes clear to the taxpayer which information is being provided to the IRS.  The newly introduced requirements for Form 1099-INT for 2010 stretch the limits, taking this balancing act to the breaking point by creating a single form that is sometimes granular (tax exempt interest at the CUSIP level) and sometimes summary (taxable interest and exempt interest dividends).

Why is this so challenging?  Currently, a filer of Form 1099-INT, in a single section bearing the appropriate Office of Management and Budget (OMB) number and box headings, may report all the appropriate totals.  In the new approach this is not possible; boxes 8 and 9 no longer represent totals and, if for clarity and consistency the filer wants to display summary totals of boxes 8 and 9, they are not permitted to appear in the section that is identified as 1099-INT, bears the OMB number and notifies the recipient that the information is being reported to the IRS.  Further, a different section of the composite substitute statement (addressing the individually reportable items for boxes 8, 9 and 10) must now become a Form 1099-INT, with the heading (and associated information) indicating that the amounts are being separately reported to the IRS.  Pair this with the fact that the filer may provide, as a customer service, similarly detailed information for taxable interest income (which should not be identified as a Form 1099-INT), the stage has been set for considerable investor confusion.

Information that is reportable on Forms 1099 often originates in disparate systems due to the varying types of activity and different business units in which the transactions take place.  With Publication 1220, Specifications for Filing Form 1098, 1099, 5498, and W2-G Electronically, only recently published for 2010, and greater guidance needed from Publication 1179, General Rules and Specifications For Substitute Forms 1096, 1098, 1099, 5498, W-2G and 1042-S to effect the needed programming changes, there is no time left to reprogram the reporting process to capture the new data, making the challenge of implementing a change like this tantamount to impossible.

Moving from reporting interest totals by type (taxable, tax exempt, private activity, Treasury) to totals for each security implies a large increase in the volume of records captured, processed, stored and transmitted.  For these requirements to be met, firms must have enough time to build a process to evaluate the impact of these changes and to analyze historical data.  IRPAC notes such retroactive data gathering is a time consuming process in the best of circumstances much less one done without the proper timeframe allotted.  For new data to be safely captured to support the reporting change, the process needs to be set up, tested and running effective on the first day of the year to which the change relates.  Until the reporting rules are finalized and released, payers are unable to determine the additional resources that will be required to comply.

The number of firms with securities operations that would report tax-exempt interest is probably far exceeded by the significant number of banks, thrifts and credit unions that use Form 1099-INT solely to report deposit interest. These payers and, more importantly, their customers/taxpayers are accustomed to the 1099-INT reflecting deposit interest in a simple, easy to understand fashion.  Maintaining the simplicity of this form is important to assuring proper income recognition on Forms 1040.  Adding more tax-exempt interest elements to this form brings additional complexity that may be the source of some confusion to their customers/taxpayers.  Additionally, every payer who is required to use this form, including not just banks, thrifts, credit unions and brokers, but also corporate treasury and accounts payable operations, will be required to modify systems (at least for electronic filing) for changes that are not applicable to their businesses.

Issues that do not have standard industry CUSIP numbers will still, for the purpose of processing, have unique identifiers on the books of each processing firm.  With the form’s instructions saying to leave box 10 blank when no CUSIP number exists, it is unclear whether an aggregation of income for all such issues is expected or separate Forms 1099-INT should be filed for each distinct bond issue, each with box 10 blank.  Instructions assume that only one bond is held with interest reported in Box 8, and are unclear regarding how to report if there are several bonds.

Boxes 8 and 9 of the 1099-INT are devoted to tax exempt interest and original issue discount (OID) and the portions thereof that are attributable to private activity bonds.  In addition, these boxes capture exempt interest dividends from mutual funds.   The box 10 requirement, however, applies only to the tax exempt bonds.  While the tax exempt mutual funds will have CUSIP numbers, those numbers will provide no direct correlation to bond issues held in the fund’s portfolio.   This presents another tangled approach to reporting; there appears to be no need for detail level information for the mutual funds, but they are grouped into the same boxes as the tax exempt bonds.  There ought to be a consistent approach and requirement to boxes 8, 9 and 10 which is devoted strictly to tax exempt bonds.  Detailed reporting of exempt interest dividends will be superfluous, adding tremendous volumes to processing and data storage, while conveying no useful data with regard to private activity bonds.   Consideration needs to be given to clarifying how these dividends are to be reported, whether CUSIPs are required, whether the amounts may be aggregated and whether such dividends even belong on a Form 1099-INT that is designed to report interest.

The proposed change to Form 1099-INT introduces inconsistencies to the information reporting process that are difficult to reconcile with existing data structures, processes, procedures, transmission and storage provisions.  Also of great concern is the incompatibility of the requirements with logical and consistent design of composite substitute statement that will provide clarity to the taxpayer and is manageable for the payer.  Finally, the proposed change to reporting is not likely to consistently fulfill its objective.  IRPAC’s recommendations are intended to fulfill IRS’s requirements while minimizing the burden and disruption to all stakeholders by providing alternative approaches that are targeted to the situations of interest and do not introduce to the payer or taxpayer any superfluous reporting.

C. IRC §1441 and §1442 Documentation and Withholding Issues on Freight, Shipping and Other Transportation Expenses


  1. Instructions to Form W-8BEN, Beneficial Owner's Certificate of Foreign Status for U.S. Tax Withholding, should be updated to clarify that the no effectively connected income (ECI) certification on the form is broad enough to cover terms of ECI for transportation income defined under IRC §887(b)(4) as well as the more general definitions of ECI under IRC §882 and §864.  Absent ECI as defined under IRC §887(b)(4), income subject to gross transportation income (GTI) excise tax would be exempt from Chapter 3 withholding under IRC §1441 and §1442 (Form 1042 withholding).  To date, no documentation has been specified for use in claiming exemption from this withholding on U.S. source shipping or air transportation income otherwise subject to the GTI 4% excise tax where the income is not ECI. 
  2. Instructions to Form W-8ECI, Foreign Person's Claim of Income Effectively Connected with the Conduct of a Trade or Business in U.S., should be updated as to the application of the form to transportation income. It is important that the instructions clearly explain that ECI is defined broadly enough to cover terms of ECI for shipping and air transportation defined under IRC §887(b)(4) as well as ECI for other forms of transportation such as trucking and railway defined under the general rules found in IRC §882 and §864. 
  3. Instructions for identifying income falling under the GTI exception, and related methods of documenting these items, need to be developed for payers to better understand their responsibilities when making these payments and that can be relied upon for withholding purposes. 
  4. Adopt the special sourcing rules used for GTI under IRC §863(c) for purposes of withholding under Chapter 3, IRC § 1441 and 1442, and extend the application beyond air and vessel services to include rail and trucking services.  Accounts payable (AP) professionals have extreme difficulty in sourcing transportation services due to the impossible tasks of examining road, container logs, shipping schedules, dates of ports of service, etc.  Even if logs are found, there is no clear method in the regulations or elsewhere to assist in allocating these services to the proper sources when they are partially within and without the U.S.  IRPAC believes that the IRS has broad statutory discretion to develop sourcing rules for other types of income where sourcing is not clearly established and can adopt the IRC §863(c) rules for other transportation income.  
  5. Exempt "freight" from IRC §1441 and §1442 withholding when billed as part of goods purchased as with the present exception from reporting freight on Form 1099-MISC, Miscellaneous Income.  The cost and burdens of withholding on freight far outweigh the revenue collected.  An exception should be considered for freight charges particularly if associated with purchase of goods that is already exempt from withholding under IRC §871 or §881. 
  6. Users and providers of transportation services need written guidance and education on the related compliance process.  Examples of transportation income with an explanation of requirements for related compliance need to be added either to Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, instructions, IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities or a publication dedicated to transportation.  Instructions need to consider the use of Forms W-8ECI and W-8BEN where required, treaty applications, income codes on Form 1042-S and withholding requirements in general.  Foreign suppliers of transportation services with places of business in the U.S. fail to understand the need to supply Form W-8ECI to claim exemption from IRC §1441 and §1442 withholding.  Others fail to understand the need for providing Form W-8BEN.


IRPAC has met with IRS Office of Chief Counsel to discuss the absence of a clear withholding process for payments for transportation services made to foreign persons.  All parties recognized early on the significance of the issues surrounding this topic and recognized that resolutions could impact most every AP function with a global interface across many diverse industries.  IRPAC’s recommendations have been refined through those conversations and IRPAC intends to continue to work with the IRS in making the changes needed to ease the confusion that now exists in making these payments.

Unlike Form 1099-MISC reporting, there is no blanket exemption from withholding and reporting on freight expenses under Chapter 3, IRC §1441 and 1442.  There is, however, a similar exemption in Reg. §1.1441-2(b)(2)(i) that exempts gains derived from the sale of property from Chapter 3 withholding.  Where freight is actually part of the cost of acquiring the property, some have treated the freight charges as part of the purchase price of the property and exempted the payment from IRC §1441 and §1442 withholding.  There appears to be no direct authority to support this position, but IRPAC notes that it is a street practice.  For the most part, payments for freight, shipping and other transportation expenses are generally fixed and determinable, annual or periodic gains, profits or income (FDAP) subject to withholding under IRC §1441 and 1442. 

The application of IRC §1441 and §1442 withholding on transportation payments will vary depending upon whether the services are classified as ship and air transportation subject to the 4% excise tax on U.S. source GTI or classified as trucking or rail transportation.

1.   Ship and air transportation: There is a 4% excise tax on U.S. source gross transportation income (GTI) when earned by a nonresident or foreign corporation.  U.S. payers do not withhold this tax.  It is paid by the shipper.  When the GTI excise tax applies, there is a statutory exception from IRC §1441 and §1442 withholding.
The GTI excise tax applies to income derived from or in connection with the use, hiring or leasing of a vessel or aircraft and includes services directly related to the use of the vessel or aircraft as well as the use of containers with the vessel or aircraft.  It is noted that to be "directly related", the services must be incidental to the operation of the vessel or aircraft.

Where the GTI excise tax does not apply, IRC §1441 and §1442 withholding will apply.  The GTI tax has several complex exceptions; if the income is exempt from the excise tax and U.S. sourced IRC §1441 and §1442 withholding will apply.  The most significant exception where the GTI tax does not apply is for transportation income taxable as effectively connected income (ECI) with the taxpayer's trade or business in the United States pursuant to section IRC §887(b)(4).  

For the most part, it is the determination of the ECI exception from GTI that is critical to the IRC §1441 and §1442 withholding compliance process as it will always involve some U.S. source income where the ship docks or plane lands in a U.S. port and may require 30% withholding if a W-8ECI has not been provided.

ECI has a different meaning in the context of GTI than in the normal course of IRC §1441 and §1442 withholding rules and will attach if the vendor merely has a fixed place of business in the U.S. and substantially all its shipping income is attributable to that fixed place.  Unlike the general rules for ECI under IRC §882 and §864, for water and air transportation ECI will attach even if the income is not in any way related to that fixed place of business.   Facts necessary to make this determination are mostly unknown to the payer.  Payers are also unable to identify payments to which these rules attach.

Payers have no way of evaluating whether the payment they make is subject to the GTI ECI exception and thus, whether they need to withhold 30%, unless they receive either a Form W-8ECI from the shipper that specifies the income or a W-8BEN that certifies no ECI. 

It is important that the instructions to the W-8ECI clearly explain that ECI is defined broadly enough to cover terms of ECI for shipping and air transportation defined under IRC §887(b)(4) as well as ECI for other forms of transportation such as trucking and railway defined under the general rules found in IRC §882 and §864.

Instructions to W-8BEN need to clarify the application of GTI and exemption from IRC §1441 and §1442 withholding.  Where there is no ECI, and GTI attaches to the income being paid, the IRS Form W-8BEN (Part I and the signatory) should be approved for use to determine foreign status of the vendor when the vendor is willing to provide it.  Today, many payers do try to obtain this form from shippers, but with significant push back.  This form is mostly used for air and water transportation, and docking or landing occurs at a U.S. port, unless the AP professional is aware that the operator has a U.S. business site and they attempt then to acquire a Form W-8ECI.  No U.S. TIN should be required on the W-8BEN for an exemption claim, but it does need to be renewed if received without the TIN.  Currently, there are no Form 1042-S instructions as to proper coding where the GTI exemption may apply and many believe that such income is not reportable on Form 1042-S unless there is withholding or a Form W-8ECI is received.

W-8BEN does provide for a general certification that the related income is not effectively connected with the conduct of a trade or business in the United States (read to mean ECI as defined under IRC §882 and §864).  However, the concern is that because ECI is defined differently for GTI purposes under IRC §887(b), the general certification of no ECI on Form W-8BEN may not cover all transportation income needs.  On the urging of several accounting firms, many AP departments are attempting to supplement the W-8BEN certification with a separate express declaration of no shipping ECI, for example:

"Under penalties of perjury, I declare that to the best of my knowledge and belief the following is true, correct, and complete:  ____________does not have income effectively connected with a U.S. trade or business within the meaning of IRC §887(b), and does not have a fixed place of business, office, branch or agent in the U.S. through which transportation income is earned."

As a solution, it would be an easy fix to amend the instructions to the W-8BEN to clarify that the no ECI certification includes both ECI under IRC §882 and §864 as well as when involving ship or air transportation ECI under §887(b). 

Many foreign airlines and vessel operators are declining to provide a W-8ECI that includes their U.S. TIN in the context of ECI, citing application of GTI or that they pay U.S. taxes.  Others decline to provide the W-8BEN clarifying that they do not have ECI.  As a solution, clear language on the application of IRC §1441 and §1442 withholding and reporting to these services needs to be added to the instructions to Form 1042, to Publication 515, or to some other formal written notice made widely available.  In addition, an IRS publication or notice needs to be developed that can be shared with service suppliers so they understand the need to provide the right documentation.

A revenue procedure under IRC §1441 establishing a method for identifying relevant reportable transactions should also be explored.  Revenue Procedure 91-12 spells out what qualifies as income derived from the use or hiring of a vessel for GTI purposes, but this procedure is directed to shippers and relies heavily on the shipper's actual knowledge of its own treatment of the item to which the expense relates.  These matters are unknown to payers.  From a payer's standpoint, extrapolation can be difficult even from detailed invoices and when they ask the shippers, shippers are making very broad declarations of income types they believe fall under the exemption.

2.   Trucking and railing:  The GTI excise tax does not apply to trucking or rail transportation.  Other taxes such as the federal road use tax will apply, and NAFTA has a provision for Canadian and Mexican transportation that exempts or allocates even these road use taxes.  NAFTA also grants special treatment to Canadian and Mexican employees regarding U.S. wage withholding involved in the covered transportation.  However, unlike GTI, there is no express statutory exemption from the general IRC §1441 and §1442 withholding if the road use taxes apply.  So, AP is required to handle the transportation income under the general withholding rules.

Many foreign companies that operate trucks or that provide railroad shipping services in the U.S. have ECI, have U.S. EINs usually beginning with "98" and file U.S. income tax returns, so they can provide a W-8ECI if asked.  Others with limited U.S. intrusion might be able to claim treaty benefits, e.g., under Article VIII (Business Profits Article) of the Canadian tax treaty.  AP professionals frequently receive Forms W-8BEN claiming treaty benefits where the rail or trucking firms have U.S. offices and where there are permanent U.S. employees operating the service.  These are very difficult forms to manage without a better understanding on the part of AP of the treaty applications to these services.  In addition, it is not unusual for the foreign provider of these services to give a W-9 certifying U.S. status even though not incorporated or formed in one of the 50 United States or under U.S. federal laws. 

There is considerable confusion on the part of transportation services and payers under the withholding rules.  In addition, dispatchers are frequently used and they also collect the payments, sometimes in an agent capacity. As a solution, clear language on the application of IRC §1441 and §1442 withholding and reporting to these services needs to be added to the instructions to Form 1042 or to Publication 515 or in some other formal written notice made widely available. In addition, an IRS publication or notice needs to be developed that can be shared with service suppliers so they understand the need to provide the right documentation and when they will experience withholding.

3.  Sourcing transportation for withholding purposes:  AP professionals have extreme difficulty in sourcing transportation services due to the lack of any instructions as to the proper methods for so doing.  They face impossible tasks of examining road, container logs, shipping schedules, dates of ports of service, etc., and even if logs are found, there is no clear method in the regulations or elsewhere to assist in allocating these services to the proper sources when they are partially within and without the U.S.

IRPAC strongly suggests that the IRS adopt the process outlined in IRC §863(c) for sourcing GTI for use in sourcing other transportation income.  IRC §863(c)(1) currently sources transportation income that does not involve an individual's personal services when beginning and ending in the United States as derived from sources within the United States. IRC §863(c)(2) sources 50 percent of all transportation income attributable to transportation which begins OR ends in the United States as from sources in the United States. These are fairly easy rules to follow and should be widely applied to all transportation income. Currently, IRC §863(c) only applies to income derived from, or in connection with, the use (or hiring or leasing for use) of a vessel or aircraft, or the performance of services directly related to the use of a vessel or aircraft, and includes any container used in connection with a vessel or aircraft. 

IRPAC believes that the IRS has broad statutory discretion to develop sourcing rules for other types of income where sourcing is not clearly established and can adopt the IRC §863(c) rules for other transportation income.  The sourcing regulations are limited and if a category of income is not listed, case law tells us to proceed by analogy. Certainly, the IRS can also develop sourcing rules by analogy. Regulations should be able to address this matter without statutory constraint. See Hunt v. Commissioner, 90 T.C.1289, 1301 (1988).

4.  Freight as an exemption from Form 1042 process:  AP professionals have long screened out transportation expenses from IRC §1441 and §1442 withholding and reporting because AP systems are designed around Form 1099 reporting processes where "freight" is exempt from reporting.  The IRS has consistently defined very broadly the term “freight” in numerous private letter rulings under IRC §6041 as the cost of transporting goods.  This interpretation results in a general exception from reporting of payments on Form 1099-MISC for truck, rail, ship, and air freight services no matter their context, allowing the exemption even if the truckers are paid directly.  The exception to information reporting for payments of “freight” under Reg. §1.6041-3 includes not only a taxpayer's payment of incidental freight costs during the taxable year, but also payments of freight that are an integral part of a taxpayer's business.  This exception for freight has not been eliminated by the new legislation on reporting of goods and merchandise and may survive the regulation process as an exception. 

Many times "freight" has not been separately invoiced and where freight becomes part of the purchase price of goods from a foreign provider, it is very difficult to identify the specific charge and even more difficult to coax the correct documentation from the foreign vendor, usually a third party to the actual shipper, resulting in a 30% withholding on a $100 shipping charge, the collection costing far more than the revenue it derives.  As in the context of domestic goods, a regulation should be considered that exempts "freight" from withholding under Form 1042 rules as part of the purchase price of the goods.  It is not necessary that the ruling be as far reaching as the 1099 exemption for freight, but to avoid the unduly burdensome difficulties involved in isolating these expenses when involved in purchases of goods, such an exemption may be warranted.

Finally, foreign providers of transportation services have a significant presence in the U.S., and IRS increased audit activity in this area has lifted up concerns where little information is available.  AP organizations urgently need transportation items addressed so they can learn to handle the payments correctly and make sure the appropriate processes are in place to support the compliance needs.  

D. Comments on Proposed Cost Basis Regulations and the Draft 2011 Form 1099-B


IRPAC notes that with the late release of cost basis regulations, the necessary guidance will not have been made available in time to guide required system development and provide time for testing of system changes.  In addition, there will not be sufficient time to educate financial institution staff and their customers.  There are many implementation details that remain ambiguous or that are impossible to implement in the remaining time frame.  IRPAC continues to recommend that serious consideration be given to delaying the implementation of these provisions to 2012, particularly as they apply to transfer statements, and to deferring enforcement of the gift and inheritance provisions to 2013.  

IRPAC published four comment letters in 2010 and participated in many meetings and conference calls on cost basis reporting with IRS Office of Chief Counsel.  See copies of the comment letters in Appendix E, F and G for detailed discussion.  
Highlights of IRPAC’s comments and recommendations:

1. Need for final rules quickly: There is an urgent need to issue final rules quickly, and consideration should still be given to extending the effective date for equities to 2012.

2. Need for penalty relief in the first years of new regulations:  The Service should grant penalty relief during the initial stages of implementation of the final regulations for the following reasons:

  • Complex systems development will take several years, and in some cases will require changes to the underlying trade processing systems.
  • The recent economic downturn has affected the financial services industry particularly hard so that funds needed for systems development and training are limited or not available.
  • Developmental issues are fairly complex, even on matters as simple as determining who owns needed data, and it will take time to work through the interrelated processes.
  • Financial service providers are traditionally not tax return preparers. 

3. Revision of Form 1099-B:

  • Eliminate reporting of number and class of shares in an acquisition of control or substantial change in capital structure.
  • Address differences in adjusting for commissions and transfer taxes.
  • Address option premium reporting concerns as to both cost basis and gross proceeds.
  • Clarify whether reporting for disallowed wash sale losses is independent of the gain/loss reportable in Box 7.  Form 1099-B reporting treatment and transfer statement sharing of the carryover of the holding period in a wash sale also needs to be clarified.

4. Eliminate Qualified Intermediaries (QIs) from cost basis reporting requirements:  In light of the Congressional decision to eliminate from FATCA provisions that would treat all qualified intermediaries (QIs) as U.S. payers required to file Forms 1099-B, the IRS should strongly consider exempting QIs that are not U.S. payers from the cost basis reporting requirements except to the extent otherwise currently applicable. 

5. Continue to allow the corporate "eyeball" test:  Consideration should be given to allowing the existing Treas. Reg. §1.6049-4(c)(1)(ii)(A)(1) "eyeball" test to continue to be applied as is, granting exemption unless the payer has actual knowledge of S corporation status since the population of these entities with investment accounts is so small.  This approach should be considered at least for existing accounts with a coupling of a new rule for prospective new accounts opened after 2011 to be screened for S corporation status.  At a minimum, use of the "eyeball" test should be allowed to continue for entities that could never qualify as S corporations, such as foreign “per se” corporations under Treas. Reg. §301.7701-2(b)(8)(i) and large public entities.  This will cut back on the wave of inappropriate backup withholding that could occur should the proposed regulations be finalized as written.

6. Expand TIN Matching to cover identification of S Corporations: IRPAC reiterates the recommendation made in its report dated October 28, 2009,  that the IRS consider expanding its TIN Matching program to allow payers to use the program for identifying S corporation status.

7. S corporation reporting:  The IRS should reconsider its initial denial of commenter’s requests that S corporation reporting apply only to accounts opened after December 31, 2011, when S corporations can be appropriately identified going forward and after a new Form W-9 has been developed that helps to identify S corporations. 

8. Existing inconsistent treatment of certain substantive transactions and available taxpayer elections has negative impact on cost basis tracking.  IRPAC recommends:

  • Greater simplicity and uniformity with respect to the application of available cost basis adjustments and taxpayer election options.  
  • Limitations on a taxpayer's ability to elect or change basis calculation methods for reporting purposes.
  • Standardization of long-term holding period for uniform system application.
  • Clarification of tax reporting requirements for distributions in the context of tax-free reorganizations and IRC §302 transactions, including stock tender offers, particularly where distributions can be either a dividend, partial liquidation or a return of capital.
  • Clarification regarding a long list of other transactions described in IRPAC's letter dated March 3, 2010, Part IV, B that require standardized rules that will need to be adopted to permit the effective implementation of the new tax reporting requirements.

9. The application of any inheritance and gift provisions once finalized should have a deferred effective date until 2013, and refinement of these regulations should come after details are worked out for transfer statements in general.  The proposed regulations addressing inheritance and gifts are complex and will impact a broad range of persons not likely to be accustomed to providing cost basis information.  As a result, before the transfer statement rules related to inheritance and gift provisions are finalized, all parties including estate planning specialists and fiduciaries in the business of handling estates impacted by the provisions should have ample opportunity to comment.  IRPAC believes that many planners and fiduciaries are unlikely to have devoted much attention to the proposed cost basis regulations, under the general belief that they apply only to custody banks and brokers.  In addition, any regulations addressing inheritance and gifts will take more time to fully understand, and related applications will take more time to develop and deploy.  Their effective date needs to take this into consideration. 

10. Need to standardize what is a "tax lot," considering limit and market order processing.

11. Need to standardize foreign currency treatment.  Proposed regulations extend the present foreign currency applications for handling reportable gross proceeds to basis reporting.  For cost basis purposes, currency rules need to consider the possible impact that currency value fluctuations may have over the holding period of the security and any receipt of income in that currency that may require a basis adjustment.  The security will always be denominated in some other currency with currency value fluctuation (gain or loss) in the security independent of the movement of the pricing of the security itself.  Questions that also need to be considered include: what will happen if that security is transferred?  Will the hedge relationship carry over?  Does it need to be specified to the receiving broker in some component of the transfer statement?  See IV.B-7 of IRPAC's March 3, 2010 correspondence.

12. Option and debt obligation rules are needed quickly.  In previous letters to the IRS issued in 2009, IRPAC provided the IRS with a suggested structure for handling option reporting.

13. Transfer Statements - Applicable Persons:  Clarify the meaning of a "person that acts solely as a clearing house” for the transfer and address gaps in transfer statement information.  Brokers should be able to rely on third party information without risk of penalty.  It will be imperative that the "applicable person" accountable for providing the transfer statement be that party best equipped to deliver the appropriate cost basis information even if not the actual party that transfers the security.  It is far better to use the actual business classifications in defining any responsibilities rather than a blanket statement that exempts "any person that acts solely as a clearing house for the transfer" as the present version of the proposed regulations now reads.

14. Transfer statements – DVP and multiple broker rule:  IRPAC worked with the IRS to understand the application of "delivery versus payment" (DVP) exemption rules and the multiple broker rules in existing regulations under IRC §6045 and helped to consider their ramifications under the new transfer statement requirements.  IRPAC recommended that the multiple broker rule be adopted for both IRC §6045(g) and §6045A purposes, designating the party who has accountability for posting the transactions to the holder's account to be responsible for providing transfer statements to a new broker when required.  Further details can be found in IRPAC's June 8, 2010 letter on DVP and multiple broker examples.

15. Transfer statements - wash sales, short sales and other unique basis adjustment considerations:

  • Resolve how to coordinate transfer statement processing with issuer corporate action reporting, as well as with other basis adjustments already required to avoid duplicate broker adjustments when accounts are transferred.
  • Under Prop. Reg. §1.6045-1(d)(2) and §1.6045A-1(b)(2), a transferred security will be presumed to be a covered security unless the transfer statement expressly states that the security is a noncovered security.  Where securities are transferred before the effective date of the regulations for the type of security involved, they should be presumed noncovered.
  • A corrected transfer statement should not always require a corrected Form 1099-B.

16. Technical support of wash sales:  Certain wash sale reporting exceptions are needed and, as outlined in the IRPAC March 3, 2010 letter, other considerations need to be addressed.  Therefore, an extension of the effective date for application of the new reporting requirements to wash sales is needed at least to 2012.

17. Managing the complexities of short sale basis reporting:  New reporting rules that will disallow 2010 reporting on Form 1099-B of short sales opened in 2010 that remain open after 2010 need to be eliminated.   Further, additional time is needed beyond 2011 to handle the unique basis adjustments that short sales require.  Reporting for adjustments in basis from short sales needs to apply when a transaction is entered rather than when it is closed.

18. Communications between brokers and customers/ taxpayers:  Clarity       is needed in how and when to communicate a broker's default cost basis method to customers.

19. Components of dividend reinvestment plan reporting:  Clear guidance is necessary to facilitate a smooth transition for reporting cost basis on equities where reporting in general begins in 2011, but if the equity is subject to a dividend reinvestment plan reporting does not start until 2012. IRPAC supports use of the broader rule in defining dividends that does not restrict the definition of dividends by IRC §316 and that would include any payment or distribution from stock, including ordinary dividends, capital gains dividends or distributions, non-taxable returns of capital, and cash dividends in lieu of fractional shares. 

20. Examples are needed to clarify when communicating specific     identification is in a “timely manner.”

21. Handling high frequency traders:  Further study is required to determine the best way to handle high frequency traders.  Some institutions have designed mechanisms to handle cost basis tracking in high volumes, but many have not and may not be able to handle tax lots and basis adjustments for large volume traders.

22. Issuer action statements not sufficient:  A clearing facility is needed to ensure uniform classification of the same security by multiple brokers.

23. Rules for tracking and reporting cost basis for equity-based compensation:

  • IRS should carefully consider the long-standing basis and reporting positions of equity-based compensation before requiring any separate reporting of exercises of compensation-based options and before requiring any basis disclosures on Form 1099-B pursuant to IRC section 6045(g) or subjecting such compensation to the transfer statement requirement of IRC section 6045A.  Any such reporting should be reviewed in light of the existing reporting under Forms W-2, Wage and Tax Statement, 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., 1099-MISC, Miscellaneous Income, 3921, Exercise of a Qualified or Restricted Stock Option and 3922, Transfer of Stock Acquired by Certain Options in order to avoid duplication and misleading data.  Also, any change should be coordinated and reflected in the various IRS guidance available for participants to calculate income resulting from equity-based compensation, including Publications 15-B, Employers Tax Guide to Fringe Benefits, 525, Taxable and Nontaxable Income, and 575, Pension and Annuity Income (Including Simplified General Rule).  
  • The current exception for Form 1099-B reporting for certain noncash exercises pursuant to Revenue Procedure 2002-50 should be retained and interpreted to exempt such compensation from any new cost basis reporting or transfer statements under Code sections 6045(g) and 6045A.
  • Any guidance should be made effective prospectively, with a delayed effective date with good faith transition relief.  Brokers, plan sponsors and third-party administrators will need ample time to update plan documents (including award letters, prospectuses, and participant statements) and coordinate systems, which historically have not been integrated or designed to support additional data.

24. The effect of a customer’s passive acceptance of a broker’s default method:  IRPAC believes that a customer’s passive acceptance of the average basis method as the broker’s default method should be considered an effective election as long as the default method has been communicated to the customer in some manner.

25. Single Account Election:  The effect of a single-account election during the period in which a customer can revoke its average basis method calculation should be clarified in the regulations, as well as the application of the single-account election in general as to joint account holders. 

E. K-1 Matching Program


1. Modify the automated Schedule K-1, screening program to compare net ordinary income, including IRC section 179 deductions, reflected on the K-1 to the net amount reported on Form 1040 Schedule E in addition to the current line by line screening.

2. Develop a mandatory worksheet to be used when the manual K-1 screening procedures identify a mismatch, to compare the amounts from the K-1, including amounts on attachments, to the amounts reported on the return, including supporting schedules, and require a manager review prior to sending a letter or deficiency notice.

3. Develop a method to evaluate the effectiveness of the automated and manual screening processes by tracking the number of erroneous K-1 mismatches identified.

4. Modify the policies and procedures used to determine that a return is frivolous based on a claimed fuel tax credit to consider pass-through income and credits reported on K-1s and to require a second level of review prior to the issuance of frivolous return letters.


The K-1 matching procedures are part of the Automated Underreporter Program (AUR),  and are designed to identify underreported income from S Corporations, Partnerships and Trusts passing to individual taxpayers and required to be reported on their 1040 returns.  When a discrepancy is found, the IRS contacts the taxpayer for additional information and/or to propose a deficiency.  Taxpayers often receive K-1 mismatch deficiency notices, even though the K-1 information is correctly reported, which creates unnecessary burdens on the resources of taxpayers and the IRS to resolve the asserted discrepancy.          

IRPAC met with IRS SBSE to discuss the IRS K-1 Matching procedures, specifically to determine what was causing the erroneous mismatch notices and what the IRS and practitioners can do to alleviate the false mismatches.  Prior to the meeting, several examples of erroneous K-1 mismatch notices were submitted to the SBSE.  Although the K-1s in each example were correctly reported, the taxpayers received notices that their K-1 income was substantially underreported, and additional tax and penalty deficiencies were proposed.  These examples demonstrated that deductions reported on statements attached to the K-1 were not included in the IRS calculation.  In each case the taxpayers had attached a summary schedule to their returns reconciling the income and deductions on the K-1 to the amounts reported on the Form 1040, Schedule E.  An example of a frivolous return letter related to a credit from a partnership K-1 was also submitted for IRS comment.  The taxpayer in this case correctly reported the pass-through fuel credit on Form 4136, Credit for Federal Tax Paid on Fuels, and attached the supporting documentation that was attached to the K-1.   

SBSE described the K-1 matching procedures.  Potential K-1 mismatches are first identified by an automated computer screening program that is run twice each year and compares dollar amounts on the K-1 to the amounts reported on Form 1040, Schedule E.  This inventory of potential mismatches is then manually reviewed.  SBSE explained that Internal Revenue Manual (IRM), Conduit Income, provides the case analysis procedures for the manual processing of K-1 mismatches.  This procedure specifically requires examiners to thoroughly review the entire return, schedules and attachments before pursuing discrepant K-1 amounts.  The examiner is cautioned to be aware that the taxpayer may have netted several items of income and deductions and to consider if the income has been included on a different line or in the total net amount. The examiner is instructed to ensure that any amounts reported on attachments to the K-1 are properly included on Schedule E.  These procedures were clearly not followed in the K-1 mismatch examples provided by practitioners for discussion with SBSE.  SBSE has agreed to issue a reminder to Tax Examiners to follow all IRM procedures for analysis of K-1 mismatches.  SBSE advised that a revision of IRM, Conduit Income, instructions and procedures for tax examiners is in process.   

The procedures for the processing of frivolous returns are at IRM and 4.10.12., which define a frivolous return as “noncompliance with filing and/or paying tax based on unfounded legal or constitutional arguments.”  In 2008, IRS identified a claim for excessive fuel credits under IRC section 6421 as a frivolous tax return position, and examiners are instructed to forward returns with excessive fuel credits for frivolous return processing.  The credit is considered excessive if the taxpayer claims an amount of credit that is so disproportionately excessive to any business income reported as to be patently unallowable. This clearly was not the position taken on the example case, in which the taxpayer claimed an alternative fuel credit under IRC section 6236(d), not section 6421, and the fuel credit was less than 1% of the income from the K-1 generating the credit.  SBSE has agreed to follow-up on this case to determine where the procedures failed.   

SBSE has noted improvements in compliance from the inception of the program in 2001 measured by the decline in their potential mismatch inventory.  They do not have data to compare the ratio of erroneous mismatch notices to the total number of deficiency notices sent.  The biggest issue encountered by the IRS is the netting of the K-1 information on Form 1040, Schedule E.  Taxpayers and practitioners are encouraged to provide reconciliation schedules with returns.  Another frequent issue noted by SBSE is the mischaracterization of capital gains and losses.  

SBSE pointed out that Form 1040, Schedule E instructions provides guidance for taxpayers and practitioners in an effort to improve the K-1 mismatch results.  For example, Schedule E instructions provide that each separately stated item on the K-1 should be reported on a separate line on Schedule E.  If these items are netted, the electronic screening program will capture this as a mismatch.  SBSE recognizes that many software tax programs present the correct K-1 amounts but net them on one line, in contradiction to the instructions. This is a problem that SBSE will communicate to the programmers for the computer screening process in an effort to recognize other presentation formats and reduce the inventory of potential mismatches and the need for manual screening.

F. Information Reporting for Tax Credit Bonds and Stripped Tax Credits


In response to provisions outlined in IRS Notice 2010-28, Stripping Transactions for Qualified Tax Credit Bonds, IRPAC made the following recommendations:

1. For the purpose of computing and reporting accruals of Original Issue Discount (OID) on stripped tax credits IRS should establish an additional table for Publication 1212, Guide to Original Issue Discount (OID) Instruments, devoted to stripped tax credits.  This would provide the means for middlemen to compute reportable OID when an acquisition transaction does not include the purchase price which would otherwise be used to calculate the yield specific to that investment.

2. IRS should discard the notion of aggregating tax credit strips with a common origin into a single synthetic instrument for the purposes of OID accruals as this is an unmanageable task that puts excessive burden on the bond owner, the transfer agent and the custodial broker.  Brokers and other middlemen should be required to report on each individual strip as this would provide sufficient information for determining income and the associated tax liability.

3. IRS should clarify whether it expects the “maturity” of a stripped tax credit to be reported on a 1099-B or solely on the new form 1097-BTC.

4. Serious consideration should be given to the viability of the quarterly reporting requirement for tax credits passed through by Regulated Investment Companies (RICs) because there is no mechanism in place within the financial services industry to capture and disseminate this type of information with a quarterly frequency.  Additionally, there would be no way to match the information with the filing by the underlying bond issuer.

5. In developing an information reporting regime for tax credits, IRS should consider all the desired data elements, the timing of their availability, and who has control of each.  Proposals cited in Notice 2010-28 imply a confluence of information at the Service consisting of a taxpayer’s Forms 1040 and 8912, Credit to Holders of Tax Credit Bonds an institution’s Forms 1099-INT, 1099-OID, 1099-B and 1097-BTC and the bond issuer’s Form 8038-TC.  The design and requirements of all of these must be considered in concert to avoid superfluous requirements, wasteful movement of information and time consuming dependencies in the information reporting process.

6. Most types of financial instruments are eventually incorporated into more complex structured products.  IRS should carefully consider what requirements, if any, will be imposed on the issuers of the structured products that incorporate tax credit bonds.

7. With no version of form 1097-BTC yet available to the public for evaluation and comment and no IRS response to the structural impediments to complying with the requirements identified by IRPAC, the Service should modify the effective date of the requirements outlined in Notice 2010-28 to a date substantially in the future that will allow for the appropriate systems and procedural modifications.  Further consideration should be given to the question of whether reporting of the tax credits on a dedicated form annually is necessary when it is already reported as income.


IRPAC’s recommendations are intended to harmonize the statutory requirements with how the securities industry functions while ensuring the availability of the information needed for a robust system of information reporting.  All stakeholders will benefit from the recommendations because they provide the minimum disruption to existing processes.  This translates into smoother and timelier implementation once all the details of the requirements are finalized by IRS.  IRPAC met with IRS Chief Counsel in April and June of 2010 to discuss these issues and also provided two written comment letters (see Appendix H and I).  
IRPAC will continue discussions with IRS Chief Counsel regarding these recommendations.  In addition, IRPAC will provide feedback on Form 1097-BTC, its associated instructions and any further guidance when published.

G. Electronic Power of Attorney (POA) Validation for Business Returns

Rather than requiring personal information related to shareholders, partners  or trustees to validate an electronically filed POA for a business entity, IRS e-Services should develop alternative criteria related specifically to the entity, such as the date of  incorporation, date business started or was created, and the entity’s taxable income or ordinary business income. 


A Power of Attorney (POA) for a business entity allows the IRS to discuss the entity’s returns and other information with the tax preparer or other practitioner to assist with the timely resolution of tax issues.  An electronic POA allows immediate access to taxpayer information and is usually a more expeditious method compared to mailing or faxing the POA and waiting several weeks for access.  It is particularly helpful to resolve business e-file rejections based on EIN/name control mismatches.  IRS assigns a specific four character name control code to each business entity based on a set of complex rules, and requires this exact code to e-file a corporate, partnership, or trust return.  Without a POA, the IRS cannot provide the name control to the practitioner.  If the practitioner cannot secure an electronic POA, the return must either be paper filed, or delayed pending processing of a valid POA.  Conversely, with a valid POA, the name control code would be immediately accessible and the return promptly e-filed.

Currently, to validate an electronic POA for a corporation, partnership or trust, the IRS requires the date of birth and adjusted gross income (AGI) for the person authorized to sign the business return.  This would generally be the shareholder of the corporation, the tax matters partner for the partnership or the trustee for a trust.  This sensitive and personal information is not readily available to the practitioner and is a potential privacy violation with ethical implications. 

IRPAC met with IRS W&I , who acknowledged the intersecting challenges of the need for a specific name control code in order to e-file business returns and the inability to timely access the information without the personal information of the business owner required to validate an electronic POA.  In fact, due to the large number of e-file rejections, particularly for partnerships and trusts, IRS temporarily suspended the requirement for a name control match for e-filed business returns effective April 12, 2010.  A more expeditious method of validating an electronic POA could resolve both issues.  Alternative criteria for validating an electronic POA for a business entity were discussed, including date of entity creation, income and/or balance sheet information from a prior filed return, business activity code, name of the signer and other entity specific information.  IRS agreed to consider the recommendations with the next revision of e-Services.

H. Central Withholding Agreements:  Addressing Needs of Venues and Foreign Performing Artists through a Mini-CWA Program and Problems Encountered by Foreign Artists When Applying for U.S. Social Security Numbers (SSNs)


1. A smaller version of the Central Withholding Agreement (CWA) is needed to support single and limited venues. IRPAC recommends that IRS develop a mini-CWA program that would apply to performers with annual fees of $50,000 or lower. The program should allow the performer to apply directly for a lower withholding rate or a waiver from withholding based on disclosed fees and known expenses. 

2. Allow the CWA Program to issue Individual Taxpayer Identification Numbers (ITIN) to performers who have applied for relief in the CWA Program but have not acquired a U.S. social security number (SSN).

The CWA process is not adaptable to performers who are part of cultural exchanges or to performers whose fees are fixed in smaller dollars (usually under $5,000) and not specified as a percent of gross take.  The majority of international performing artists that accept venues in the U.S. fit in this category.  Many international performers' fees barely cover their travel expenses and certainly are at levels where the cost of applying for the CWA is prohibitive.  With the annual day and dollar limitations that most treaties impose and the cumbersomeness of the Form 8233, Exemption from Withholding on Compensation for Independent (& Certain Dependent) Personal Service of a Nonresident Alien Individual, treaty applications rarely work to give relief at source to these performers.  Moreover, many come from countries where there are no treaties and the Form 8233 process does not even apply to grant relief.

The imposition of the 30% withholding under IRC §1441 to the gross amount of small fees that they are paid can reduce the net take below the performer's legitimate travel expenses.  Venues are not always able to pay the travel expenses through an accountable plan process.  The only recourse performers have is to file a U.S. tax return and then wait, well into the year following their performance, for their refund.  Many international artists do not have the wherewithal to fund their expenses and therefore choose not to accept U.S. performances.  As a result, U.S. cultural exchange suffers. The 30% withholding is significantly higher than other countries’ value added tax (VAT) or use taxes.  Without relief, many throughout the country, who have benefited from the diverse artists exchange programs in the past, will see a marked decrease in cultural exchange programs. 

A smaller version of the CWA is needed to support single or limited venues where the performer can apply for a lower withholding rate or waiver from withholding.  IRPAC recommends the development of a mini-CWA program using a threshold of under $50,000 of expected gross fees as a qualifying guideline.  Applicants should be asked to include any pertinent facts to support the request, including the amount of expected gross fees for the year, schedule of venues, amount of expenses relevant to the services being performed, and any other information the IRS deems important to calculate a proposed reduced withholding amount.  Further, IRS should be able to request all relevant documentation including, but not limited to, a statement from the venue as to contracted fees and related terms, and expense documentation such as receipts and contracts if need be.  IRS written responses to the mini-CWA program applications should provide directions on actions that a withholding agent should take, and should be sent directly to the applicant (foreign performer) and to the venues (withholding agents). 

Individual artists frequently encounter problems in applying for SSNs while they are in the U.S.  Foreign performers receive an ITIN, which is issued for federal tax reporting purposes only.  The problems performers face include:

  • Artists apply for SSNs but never receive a number OR a rejection letter from SSA (it’s as if their application went into a black hole); 
  • Personnel at SSA offices around the country sometimes will not allow individual artists to apply for numbers on the basis that the artist is not eligible. This may result from the fact that the artist is in the country for too few days to qualify, or for other – erroneous – reasons, such as lack of work authorization, even when the artist IS work authorized; 
  • Sometimes artists are booked so tightly during their US tour that it simply is not possible for them to get into a SSA office to apply for a SSN.

IRPAC understands that the CWA Program frequently runs into this concern and allows a CWA to proceed, even if the SSN is not always available, however, the final process is held up until an SSN is assigned.  Ideally, if an SSN were easier to obtain, these problems could be alleviated.  IRPAC recommends that IRS consider an expansion of SSN procedures that would allow the CWA and mini-CWA programs to assist with SSN applications and the processing and issuance of social security numbers for foreign performers.

I. IRS Business Master File (BMF)


1. To avoid privacy breach situations, IRPAC recommends that IRS immediately cease processing an automatic change of business address with every tax filing.  Taxpayers can be instructed to file Form 8822 to change their business address while alternative solutions are investigated.

2. IRPAC recommends that IRS develop alternative procedures for the update of Business Master File addresses, including the creation of a BMF indicator to lock an address, utilization of form address check boxes for business to indicate address change and/or allowing business to opt out of the current automatic address change process. 

3. IRS should update Rev. Proc. 2010-16, Definition of Last Known Address, to provide procedures specific to business taxpayers.

4. IRS should accelerate the development of a system that allows for multiple addresses and contacts.


The IRS Business Master File is the repository for Name and Address information for all of the registered business entities within the United States.  The current technology employed by IRS only allows for one address per business.  This limitation causes many problems, including misdirected correspondence and refunds, for the ever increasing number of multi-location businesses.  The current IRS procedure changes the business address with every tax filing; e.g. income tax, payroll, information reporting.  Therefore, it is extremely difficult for a business to know which address is currently on the IRS Business Master File.  Further, automatic address change raises privacy concerns, e.g., a bank’s customer, who mistakenly used the bank’s EIN on a nominee Form 1099 filing, received the bank’s IRS correspondence.

IRPAC recommended the Business Master File issue for inclusion on the 2010-2011 Guidance Priority List, see Appendix I for details.  IRPAC looks forward to continued discussion of this issue with IRS.

J. Staggered “B” Notices


IRPAC initially raised concerns with IRS in 2009 regarding processing problems experienced by taxpayers receiving randomly staggered “B” Notices.  IRS has responded to these concerns with 2010 changes to the processing of CP2100, Notice of Missing or Incorrect Name/TIN Match for large volume filers.  However, this change does not address the issues with randomly staggered CP2100A Notices which are extremely burdensome for related groups of information return filers.

IRPAC recommends that IRS Martinsburg use the same notice date on all CP2100A Notices regardless of when they are mailed.  Alternatively, IRS should distribute CP2100A Notices for related entities during the same mailing period so that they include the same notice date.


In order to more efficiently distribute the workload at the Payor Call Site, by 2008 IRS had begun to send CP2100 and CP2100A Notices (“B” Notices), on a randomly staggered schedule.  Previously, while the mailings were staggered, they were done by the Service Centers on a specific schedule so a filer could generally plan on when its notices would be mailed and also that most of its notices (for filers with multiple EINs) would be sent at the same time.  Under this new random processing schedule, a filer does not know when its notices will arrive, and multiple notices may arrive at different times.  This makes planning for and processing the “B” Notices very difficult.  Related groups of information return filers share a common “B” Notice processing system.  Receipt of staggered CP2100A notices with multiple notice dates creates excessive burden with multiple mailings and backup withholding start dates.

IRPAC initially discussed this issue with IRS Martinsburg in April 2009.  IRS was not aware of the problem and agreed to investigate whether programming changes were feasible. IRPAC was informed that there was insufficient time for 2009 changes.

In January 2010, IRS Martinsburg reported to IRPAC that for 2010 forward, all CP2100 Notices, Notice of Missing or Incorrect Name/TIN Match for large volume filers (250 or more error documents) will be mailed out the end of October, at the same time with the same notice date.  However, CP2100A Notices, Notice of Missing or Incorrect Name/TIN Match for all other filers, will continue to be staggered with separate notice dates beginning the first week of September to the end of October. 

IRPAC appreciates IRS’s efforts in making programming changes to the CP2100 Notices.  IRPAC looks forward to further discussion with IRS about CP2100A Notice alternatives.

K. Form 8886, Reportable Transaction Disclosure Statement


IRPAC reiterates its 2009 recommendation that IRS should clarify that the reporting requirements under §6011 will terminate for the corporate participants in the Lease-in/Lease-out and Sale-in/Lease-out (LILO/SILO) Settlement Initiative after the year of actual or deemed termination of the tax shelter related transactions.  Further, IRS should consider adding a provision to all closing agreements or settlements related to reportable transactions that specifies the reporting obligation, if any, for that transaction in subsequent years. 

IRC §6707A imposes a severe penalty on the failure to disclose the details of reportable transactions on a properly filed IRS Form 8886 as required by §6011.  For tax shelters, designated by the IRS as “listed” transactions, this is a mandatory penalty without exceptions for reasonable cause or good faith, and is not required to be proportional to the tax benefits derived from the transaction.

A reporting issue identified in the 2009 IRPAC report involves the recent settlement initiative related to Lease-in/Lease-out and Sale-in/Lease-out (LILO/SILO) transactions.  LILO/SILO transactions are listed tax-shelter transactions under Rev. Rul. 2002-69 and Notice 2005-13, respectively, and subject to the reporting penalties.  In October 2008, IRS offered a settlement initiative to approximately 45 corporations and two-thirds agreed to participate.  The terms of the settlement required the participants to terminate the LILO/SILO activity in 2008 and report 80% of the inception to date original issue discount income (OID) related to the LILO/SILO in 2008 and report 100% of the remaining OID in subsequent years.  If the participants are required to continue reporting for each year that OID is accrued, failure to file Form 8886 in those subsequent years would result in a $200,000 annual penalty.  According to the settlement, the activity will be deemed terminated in 2008 notwithstanding the recognition of the OID in subsequent years.  However, absent clarification to the contrary, participants will be compelled to file a complete Form 8886 each year thus burdening the participants and the IRS unnecessarily.  This dilemma was discussed with SBSE representatives on June 16, 2009 and they acknowledged the need for further guidance.
In June 2010, IRS Office of Chief Counsel acknowledged to IRPAC, in an unofficial correspondence, that taxpayers who settled LILO/SILO transactions by closing agreement to the LILO/SILO settlement initiative do not have a continuing obligation under Reg. §1.6011-4 to file Forms 8886 to disclose the LILO/SILO OID transactions for the years after signing the closing agreement.  IRS noted that taxpayers still have to file any forms as specifically required by the closing agreement.  IRS further indicated that they would send letters to the settlement participants explaining this position; however, IRPAC has not received verification whether this has occurred.  There was no indication whether the IRS would consider adding a provision to all closing agreements or settlements related to reportable transactions that specifies the reporting obligation, if any, for that transaction in subsequent years.