H. Jacob Lager

Posts Tagged ‘IRS regulations’

IRS slooooowwwlllly acknowledging electronic docs; Supreme Court takes on windfall tax circuit split

In IRS regulations, Windfall tax, You heard it here first on November 2, 2012 at 9:05 am

“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.

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Forget the Olympics; Boycott This!

In IRS regulations, U.S. Tax policies on August 24, 2012 at 7:32 am

Pop Quiz:  what do Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the UAE, and Yemen have in common?

Exemplary human rights record?  Demonstrated historic dedication to religious tolerance? Main streets named after George W. Bush?

Nope.  But if you answered “routinely named by the US Government as countries which require participation in, or cooperation with, an international boycott,” you win.  So, what exactly does this mean?

Well, in 1976, Congress sought to deter participation in non-U.S.-sanctioned boycotts by the imposition of the tax penalties codified at Code Section 999.

Generally speaking, the section features two parts:  the risk of losing certain income tax benefits from boycott participation and (surprise!) a reporting requirement.

Taxpayers who actually participate in a boycott risk losing certain foreign tax credit and DISC benefits, increasing their Subpart F income, and may be fined.

But what about that reporting requirement?  That rule is surprisingly broad.  If a taxpayer has operations in or related to a boycotting country and that country is on the above-mentioned list, those operations must be reported.  And by “operations,” Treasury really means “any meaningful commercial contact.”  Also, a taxpayer must report any operations in a non-listed country when the taxpayer “has reason to know” that participation in or cooperation with an international boycott is a condition of such activities.  Needless to say, this “has reason to know” qualifier greatly expands the world of potentially reportable transactions well beyond the Middle Eastern countries listed above.  Failure to report could subject a taxpayer to a fine of $25,000 plus a year in jail.

Iraq’s re-emergence on the list is notable, given that it had been removed as recently as August, 2010.  Other notable “alumni” include Bahrain and Oman.

While not as onerous as an FBAR report, or as frightening as the looming FATCA requirements, the Section 999 reporting requirement should not be ignored.  The generality with which it may be applied makes it a dangerous IRS weapon, even if rarely wielded.

Image provided by 8jin_design.

EPIC: “Fails charges” guidance provided by IRS

In Fails charges, IRS regulations on February 27, 2012 at 8:00 am

Which sovereign jurisdiction can tax an item of income?

This eternal question arises whenever Wall Street creates a new financial product involving multinational parties.

For “fails charges,” the Service just issued a new batch of rules (found at Regulation Sec. 1.863-10) to determine whether these fees should be treated as US or foreign income.

So, uh, what’s a “fails charge?”

These payments developed in the world of high-stakes bond trading as a response to persistent failures to deliver Treasury securities in 2008.  Under certain arrangements, if one party fails to deliver Treasury securities to another by an agreed-upon date, the failing party pays an amount (the “fails charge”) to the other party. For US taxpayers, the treatment of these fees are relatively straightforward.

However, until this week, the general income-sourcing rules provided little guidance for foreign traders who become entitled to such fees.

Now, the final IRS regulations provide that the source of income from a qualified fails charge is generally determined by reference to the residence of the recipient.

With two exceptions.

First, qualified fails charge income earned by a qualified business unit of a taxpayer will be sourced to the country in which the qualified business unit is engaged in a trade or business.  Second, qualified fails charge income arising from a transaction effectively connected to a U.S. trade or business will be sourced to the United States.

Oddly, the final IRS regulations do not address the proper sourcing of a non-qualified fails charge, which begs the question of the “qualified” designation’s relevance.

Er, slight “regulation fail?”

Photo provided by Chris Griffith.