“Can you just scan that to me?”

If you’re like me, a “no” response to the above question generates nothing short incredulity, animosity, and exasperation.  At times, it can seem there is no logic as to which institutions will get you information easily and which will not.

For example:

• My bank once required that I submit a faxed form to make an IRA contribution, even though I had made the previous 10 months’ contributions by phone without incident;
• Just today, a potential buyer of a client’s real estate would only generate a hard copy offer letter to be transmitted by “snail mail”; and, of course
• I’ve lost count of how many different ways the IRS and California’s FTB have changed their verification procedures for e-filing tax returns.  Some years, I have to actually submit a signature verification.  Some years I just point and click.  This year, for a corporate return, I actually had to print, scan, and upload a form for the first time.

Well, in a victory for people who hate paper, the IRS just recently issued published advice concluding that its Form W-8, “Certificate of Foreign Status,” may, under certain circumstances be successfully scanned into an electronic system and then transmitted directly to a withholding agent through that system.

What does all this mean?

When a foreign person is paid certain types of U.S. income (typically interest, dividends, rents, royalties, premiums, annuities, service income, and other periodic income items), the recipient is often subject to backup tax withholding of 30 percent on the payment.  The U.S. payor is generally charged with withholding and paying over this amount to the IRS.  The U.S. payor is only relieved of this obligation if the foreign payee issues to the responsible party documentation upon which the payor can rely to treat the payment as made to a U.S. person or to a foreign person entitled to a reduced rate of withholding.

The IRS “W-8” family of forms are often used to provide this very documentation.  These forms are generally certifications that either the recipient resides in a treaty-favored country (W-8BEN), a foreign pass-through entity (W-8IMY), receiving the payment as taxable US income otherwise effectively connected with a domestic trade or business, or a foreign government (W-8EXP).

The IRS issued guidance on August 8, 2012 liberalizing the manner in which these forms may be transmitted to payors.

According to the Service, Form W-8 that is signed with a handwritten signature, scanned into an electronic system, and then transmitted directly to a payor through that electronic system (for example, as a PDF or facsimile), may be relied upon to avoid withholding if the following requirements are met:

• The system design and operation must make it reasonably certain that the person furnishing the form is the person named on the form (for example, verifying that the email address of the sender accompanying the electronically transmitted form indicates that the sender is the person named on the form);
• The submitted Form W-8 must provide the payor with exactly the same information as the paper Form W-8 (the Service acknowledges that a complete and legible scanned copy of the form meets this requirement);
• The submitted Form W-8 must contain an electronic signature by the person whose name is on the form (in a further display of profound trust, the IRS notes that signing, scanning, and transmitting a document “constitute a process associated with” the form that reflects that the form is uh . . . signed); and
• The payor must be able to produce, upon IRS request, a hard copy of the electronic Form W-8.

But just before you crazy kids start faxing and scanning all willy-nilly, the Service gave itself an out:  “Whether a withholding agent may accept a Form W-8 that is transmitted to the withholding agent electronically will depend on the facts and circumstances.”

Whew!  That was close.

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From the “you heard it here first” department:

On October 29, 2012 (which just so happened to be my birthday), the Supreme Court granted certiorari to the PPL Corp. decision in an effort to determine the split between the Third and Fifth circuits, which respectively have endorsed and rejected a mechanical framework for determining whether a taxpayer’s foreign tax is creditable under Code Section 901.

(You might remember our brief summary of the split.)

According to the taxpayer, the issue is whether creditability of a foreign tax should be determined using a formalistic or substance-based approach.  The government described the matter much more narrowly, arguing that the 1997 U.K. windfall tax (a one-time assessment) was not a creditable income tax.

PPL Corp. is the only tax case granted certiorari this term, so you know we’ll be following it closely.

Photo provided by jepoirrier.