2014 IRPAC Report Executive Summary of Issues
Burden Reduction Subgroup
A. De minimis Threshold for Form 1099 Corrections
IRPAC recommends again this year that the IRS adopt a de minimis dollar threshold for corrections to original information returns in an effort to reduce overall burden to taxpayers, IRS and information return filers. IRPAC recommends that the IRS provide a safe harbor that net changes of $50 or less (up or down) are not subject to the penalty provisions of IRC §§ 6721 and 6722.
B. Business Master File (BMF) and Form 8822-B
IRPAC recommends the IRS send notices to taxpayers before making an address change to help prevent identity theft, and increase efficiencies by having the IRS receive timely responses to its inquiries and notices without repeated mailings. We are happy to report that the IRS is in the process of implementing sending notices (Notice CP 148) to taxpayers when a deemed address change occurs with a different address on the tax return from prior period’s return. The IRS is planning to publicize implementation of this notice on IRS.gov prior to the scheduled implementation in January 2015.
IRPAC recommended that the “old responsible party’s” name and TIN lines be eliminated from the Form 8822-B, Change of Address or Responsible Party - Business. We are pleased to note that the IRS appreciated our concern and has removed lines pertaining to the old responsible party’s information on the recent draft published on IRS.gov.
C. Form W-9 Instructions – Revision
Many small businesses and individuals do not understand the importance of filling out Form W-9, Request for Taxpayer Identification Number and Certification, correctly. This results in unnecessary correspondences between requestors of Form W-9 and payees; and in some cases the IRS has required unnecessary backup withholding.
Accordingly, IRPAC recommends that the IRS make the form easier to understand by referencing line numbers on Form W-9 and providing clearer form instructions. The Burden Reduction Subgroup has been working closely with the IRS and will continue to review and comment as the recommended changes are incorporated in instructions.
D. 1099-MISC - Miscellaneous Income
IRPAC continues to recommend establishing an e-service for small businesses to file Forms 1099-MISC online to help ease the burden and costs associated with filing only a few forms. IRPAC also recommends improving instructions that will assist small businesses to better understand and meet the requirements of Form 1099-MISC reporting. These recommendations will also reduce the burden on the IRS of processing erroneous tax data reported on Forms 1099-MISC and reduce having to devote resources to what are presumed to be underreporting recipients of income.
E. Nonresident Alien Withholding and Reporting of Payments for Truck or Rail Transportation
IRPAC recommends a short addition to the first paragraph under “Transportation income” in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, to clarify that the gross transportation income stated to be “generally not subject to NRA withholding” does not include income from truck or rail transportation.
IRPAC also recommends that withholding agents be permitted to use a 50% - 50% allocation to determine the U.S.-source portion of payments of truck or rail transportation income to ease the burden on withholding agents having to allocate the proper amount subject to Chapter 3 withholding as sufficient data is often not available to them.
F. Instructions for Form 2848, Power of Attorney and Declaration of Representative
IRPAC recommends revising the Purpose of Form section of the instructions. Specifically, we recommend that the other forms listed be grouped together under a section with a common heading that indicates that these are the forms that can be used if taxpayers only want to authorize an individual or organization to inspect the tax documents but do not want representation. This would also allow for some of the repetitive language under each of the other forms to be removed.
IRPAC also recommends clarifying and shortening several paragraphs in the Specific Instructions to make them easier to read and understand.
G. Form 8889 – Health Savings Account
IRPAC thanks the IRS for responding to a recommendation made during 2014 IRPAC meetings to change the description for Line 15 of Form 8889 to avoid inadvertent incorrect reporting. We are happy to report that the 2014 draft form posted on the IRS website is changed to reflect our recommendation.
Emerging Compliance Issues Subgroup
A.-F. Cost Basis Reporting
IRPAC requests several changes to Forms 1099-B and 1099-INT to provide better information for the taxpayer and to the IRS, and to ensure correct payment of tax. Specifically, IRPAC requests that the IRS allow for aggregate sales reporting for one trade order filled on the same day by multiple fills. In order to facilitate Section 1256 option reporting when options are transferred between brokerage firms, IRPAC also requests that the regulations be amended to remove transferors of Section 1256 options contracts as being exempt from transfer statements, and to require that the unrealized profit or loss be reported. In addition, IRPAC suggests that the IRS add Frequently Asked Questions and move the FAQ page to provide easily understandable and accessible information for taxpayers. Finally, IRPAC suggests that the IRS provide draft forms to the subgroups so that the subgroups can provide meaningful feedback to the IRS.
G. IRC §6050W and Form 1099-K Reporting
IRPAC again this year is asking for additional guidance on issues associated with Form 1099-K, Payment Card and Third Party Network Transactions, reporting. IRPAC recommends that the IRS focus on providing clear definitions of confusing terminology that is used in the statute and the Treasury Regulations.
H. Form 1098-T Reporting
IRPAC continues to request a clarification of terms in “Instructions for Forms 1098-E and 1098-T, Student Loan Interest Statement and Form Tuition Statement,” with respect to information that should be reported by colleges and universities in box 5 of Form 1098-T. IRPAC recommends that the service update, and continue to monitor notices sent to taxpayers to ensure that the content is not misleading, or easily misconstrued. Finally, IRPAC recommends Publication 970 be updated to include additional details in the example that will assist taxpayers in accurately claiming education credits.
I. Form 8300
IRPAC again recommends the IRS clarify whether or not public universities that do not have “dual status” exemptions (recognized as both charitable organizations under IRC § 501(c)(3) as well as a college or university that is an agency of, an instrumentality of, owned by or operated by a governmental entity) must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
J. Revenue Procedure 95-48
IRPAC again recommends that the IRS add Revenue Procedure 95-48 to the list of documents modified by Revenue Procedure 2011-15.
Employee Benefits & Payroll
A. Third-party Sick Pay Reporting
The IRS has created Form 8922, Third-Party Sick Pay Recap and will accept paper recap forms for tax year 2014 filed in 2015. IRPAC recommends that the IRS continue to work with IRPAC on all third party sick pay reporting issues.
B. Basis Allocation for Direct Rollovers to IRAs (IRC §402(f))
IRPAC would like to thank the IRS for adopting our recommendation to provide consistent basis allocation rules for direct and indirect rollovers from qualified retirement plans. With the release of Notice 2014-54, the IRS has reunified the treatment of basis allocation for direct and indirect rollovers, which will simplify tax planning for retirees, tax administration for retirement plan administrators, and provide ease of administration for the IRS.
C. Proper Reporting of FSA Overpayments
IRPAC requested guidance/clarification on how the taxable income is reported when an erroneous reimbursement is made to a participant which cannot be offset by other proper payments. The Office of Chief Counsel released a Memorandum on March 28, 2014, describing the correction procedure for improper FSA payments.
D. Patient Protection and Affordable Care Act and Health Reimbursement-like plans
The IRS should clarify that non-HRA integrated plans are not required to satisfy the lifetime and annual rules on a stand-alone basis, provided that the combined benefit satisfies the requirements. These non-HRA plans do not permit unused portions of the maximum dollar amount to be carried forward to increase the maximum reimbursement amount in subsequent coverage periods. These plans should be given the same treatment as integrated HRAs for purposes of the lifetime and annual limit rules.
E. Withholding and reporting for pension payments to NRAs
IRPAC recommends that the IRS clarify the withholding requirements in cases where retirement plan participants, who are nonresident aliens (NRAs), complete in-plan Roth rollovers. Recent modifications to the in-plan Roth rollover rules (found in Notice 2013-74) create uncertainty, as the IRS indicated that funds not eligible for distribution from the retirement plan can now be included in an in-plan Roth rollover.
IRPAC also recommends that the IRS expand the list of “Income Codes” reported in Box 1 of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding to allow for more accurate reporting of pension income and potentially prevent lost tax revenue.
F. ACA Education
The ACA Information Center for Tax Professionals page on the IRS website should be improved to provide clearer guidance about what constitutes minimum essential coverage (MEC). The confusion will be most pronounced for 2014 since the individual shared responsibility provision of IRC §5000A is new for 2014. Special emphasis should be placed on explanations in forms and instructions since no information reporting will exist.
G. Reporting by insurance companies and third parties under IRC §§6055 and 6056
1. IRPAC recommends that instructions for line 61 of Form 1040 discuss the importance of providing social security numbers for responsible and covered individuals to insurance companies and employers as well as the consequence of not providing social security numbers.
2. IRPAC recommends that the 2014-2015 Priority Guidance be expanded to include new or revised regulations under §§6055 and 6056 which address unique new solicitation issues.
3. Early release drafts of Form 1095-B and 1095-C were issued as “DRAFT AS OF JULY 24, 2014”. Early release draft instructions were issued as “DRAFT AS OF AUGUST 28, 2014.” Software vendors, insurance companies and employers are reluctant to make major programming efforts until final forms are issued with final instructions, the lead time to ensure all needed information is captured as of January 1, 2015 is narrow. IRPAC recommends that the IRS expand the time period for voluntary compliance with IRC §§6055 and 6056 from 2014 to 2015 and provide general transition relief for 2015.
International Reporting and Withholding
A. Carve-Out To Definition of Financial Account
IRPAC recommends that an addition be made to the list of exceptions (provided in Treas. Reg. § 1.1471-5(b)(2)) to the definition of “financial account” under FATCA (Foreign Account Tax Compliance provisions of Subtitle A of Title V of the HIRE Act) for debt interests in investment entities described in Treas. Reg. § 1.1471-5(e)(4)(i)(B) or (C) that result from ordinary course of business transactions rather than from true financial investments in such entities.
B. Retroactive Use of Faxed/Emailed Forms W-8
IRPAC recommends that the effective date for the rule permitting withholding agents to rely upon an otherwise valid withholding certificate or other documentation received by facsimile or scanned and received electronically (such as by pdf attached to an e-mail) be modified to be effective for all certificates/documentation furnished after March 6, 2014, rather than only to payments made on or after that date. Withholding agents seeking to cure past documentation failures, most of which arise inadvertently, should not be subjected to a higher form-delivery mechanism standard.
C. Material Modification to a Grandfathered Obligation
IRPAC recommends that the events constituting a withholding agent’s actual knowledge of a material modification to a grandfathered obligation be limited to specific, identifiable actions, such as (1) the receipt of a disclosure from either the issuer or the issuer’s agent, or (2) the assignment of a new security identifier (such as a CUSIP number), as these are the only two reliable, and practical, indicators that may be used by withholding agents in a consistent manner.
D. “It maintains for retail customers” in Treas. Reg. §1.1473-1T(a)(4)(vi)
IRPAC recommends the elimination of the words “it maintains for retail customers” in Treas. Reg. § 1.1473-1T(a)(4)(vi), as we believe this phrase represents an unintended limitation to the transitional relief from withholding provided for certain offshore payments of U.S. source fixed or determinable annual or periodic (FDAP) income paid prior to 2017. Treasury and the IRS have adopted this recommendation.
E. Application of Coordinating Regulations on Offshore Obligations to Non-financial Entities
IRPAC recommends that the coordinating regulations clarify the extent to which certain provisions in the coordinating regulations that apply to payments made "with respect to an offshore obligation" are limited in their application only to payors that are financial entities.
F. Definition of “banking or similar business” as Applicable to Non-banking Entities
IRPAC recommends that the definition of "banking or similar business" under Treas. Reg. § 1.1471-5(e)(2) be modified to avoid the inadvertent treatment of ordinary non-banking business taxpayers as financial institutions by providing limited exceptions for entities that sell goods and services.
G. Hold Mail Address at Treas. Reg. §1.1441-1T(c)(38)
IRPAC recommends that the definitions of “permanent residence address” contained in Treas. Reg. §§ 1.1441-1T(c)(38) and 1.1471-1(b)(99) be modified to make it clear that a hold mail instruction should not invalidate documentation used to establish a payee's status provided that the hold mail address is not the sole address on file for the payee.
H. Special Rules for PFICs
IRPAC recommends that the IRS modify the rule that eliminates a transfer agent’s Form 1099 reporting obligations when the principal (the fund) provides a statement annually that it is FATCA compliant and a PFIC (Passive Foreign Investment Company) by permitting the transfer agent to rely on such a statement until such time there is a change in circumstances or unless the transfer agent knows or has reason to know the statement is incorrect. The requirement to obtain such a statement annually is unnecessary given how infrequently an entity’s PFIC and FATCA statuses change. IRPAC also recommends that the required statement may be provided by any party authorized to sign documents on behalf of the fund rather than by an “officer” of the fund.
I. Per Se Foreign Corporation
IRPAC recommends that Treas. Reg. § 1.1441-1T(b)(3)(iii)(A)(1)(iii) be amended to enable a withholding agent to presume a payee to be a foreign person if the name of the payee indicates that the entity is the type of entity that is on the per se list of foreign corporations, even if the name contains the designation “corporation” or “company.” The FATCA regulations block a withholding agent from presuming an entity with such a designation that is on the per se list of foreign corporations to be a foreign person, presumably to preclude a domestic (U.S.) corporation from being treated as a foreign person. We find the rule unnecessary because a withholding agent would need an indicator that an entity is formed in a jurisdiction other than the U.S. in order to presume the entity is foreign based on the per se list.
J. Source of Brokerage Fees
IRPAC recommends that the IRS and Treasury add a sourcing rule that presumes commissions for trades of securities issued by non-U.S. issuers to be foreign source income if paid to a broker that is a non-U.S. person or can be presumed to be a non-U.S. person, unless the withholding agent knows or has reason to know that the broker executed the trade inside the U.S., such as when the trade is of American depository receipts traded on a U.S. securities market. Such a presumption rule would eliminate any need to collect location of services statements from putative non-U.S. brokers, which is a wasteful undertaking with respect to non-U.S. securities, as the probability of non-U.S. brokers performing services inside the U.S. on non-U.S. securities is remote.
K. Time Period for Acceptance of Pre-FATCA Forms W-8
IRPAC recommends that the IRS issue guidance providing that withholding agents may continue to accept pre-FATCA Forms W-8, Certificate of Foreign Status, through December 31, 2014. This recommendation has been adopted, except with respect to Form W-8BEN, Beneficial Owner's Certificate of Foreign Status for U.S. Tax Withholding, for individuals.
L. “Other income” Example in Line 15 Instructions for Form W-8BEN-E
IRPAC recommends that the last example of when a special treaty claim is needed in the Instructions for Form W-8BEN-E, Certificate of Entities Status of Beneficial Owner for United States Tax Withholding (Entities)for line 15 be eliminated, as the “other income” article of U.S. income tax treaties prescribes only one rate of withholding, and requires no special conditions (e.g., special tax status, classification or ownership percentages) that must be satisfied in order to apply this article. The IRS adopted this recommendation in the Cover Sheet to Update 2014 Instructions for Form W-8BEN-E published October 7, 2014.
M. Instructions for the Requestor of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY Regarding Print Name
IRPAC recommends that the Instructions for the Requester of Forms W-8 be modified to provide that a validation of the new field appearing on Form W-8BEN-E, Form W-8ECI and Form W-8EXP, in which the person signing the form is also required to print their name on the signature line, be optional.
N. Translation of Forms W-8 and Instructions
IRPAC recommends that the IRS issue official foreign language translations of the W-8 series of Forms and Instructions, as this would reduce most errors associated with a non-fluent English speaker preparing the forms.
O. Form W-9: FATCA Jurat, Exempt Payee Code, Exemption from FATCA Reporting Code
IRPAC recommends that the fourth certification of Form W-9, Part II (regarding the FATCA code) be removed. If this recommendation is not adopted, IRPAC recommends that the IRS issue guidance specifying that, for accounts maintained in the United States, a substitute version of Form W-9 is not required to include the fourth certification in Part II of Form W-9. In addition, IRPAC recommends that the Instructions for the Requester of Form W-9 be modified to clarify that the exempt payee code and the exemption from FATCA reporting code are not required fields, and do not affect the validity of the form for purposes of withholding.
P. Self-Certifications For New Accounts Under Intergovernmental Agreements
IRPAC recommends that the IRS and Treasury clarify with FATCA partner countries the consequences of a reporting Model 1 or 2 financial institutions not obtaining a self-certification or, when permitted under Annex I of the applicable IGA, alternative documentation, to establish the FATCA status of a new account. These consequences should be consistent across all IGA jurisdictions, or else opportunities could exist to shift accounts to FIs in partner countries which devise the least harmful consequences.
Q. Effect of Signing FATCA Registration Form
IRPAC recommended that the IRS adopt certain proposed Q&As IRPAC submitted to the IRS for inclusion in its list of Q&As posted on the IRS website, which are intended to clarify the certifications and liability of the person who acts as responsible officer for purposes of registering an FFI. The IRS has adopted the portion of the proposed Q&A which explained the certifications. IRPAC recommends that the IRS fully adopt its proposed Q&A.