IRS Issued Draft Forms and Instructions in W-8 Series
September 3, 2021 | by Martin Mueller and Cyrus Daftary | Over the past week, the Internal Revenue Service (IRS) has issued draft versions for its Form W-8 series, in particular Forms W-8ECI, W-8IMY, and W-8BEN and related instructions. The updates were necessary, in part, due to the Tax Cuts and Jobs Act of 2017 (TCJA). Specifically, the TCJA added Section 1446(f), which generally requires a transferee purchasing an interest in a partnership from a non-U.S. transferor to withhold 10% of the amount realized if a portion of the gain must be treated as effectively connected gain, unless an exception to withholding applies.
Included below are the pertinent updates to each of the forms:
Form W-8ECI Updates:
- Part I: Line 4: Type of Entity: The draft form separated the “government” box in the entity type field (Line 4) into two boxes, one for integral parts of foreign governments and one for controlled entities of foreign governments. The IRS advises taxpayers to review Temp. Reg. § 1.892-2T for assistance if they are unsure which box applies.
- Part I: Line 8b: FTIN: The draft form bifurcated the Foreign Tax Identifying Number (FTIN) line (Line 8) into Lines 8a and 8b to allow taxpayers to certify when an FTIN is not legally required.
- Part I: Line 12: Section 1446(f) checkbox for dealers: The draft form added a checkbox for a dealer in securities that is transferring an interest in a publicly traded partnership (PTP) and is claiming an exemption from withholding under Section 1446(f) to certify this status. The certification also requires the dealer to certify that any gain from the transfer is effectively connected with the conduct of a trade or business in the U.S. without regard to Section 864(c)(8).
- Signature: Certification of Capacity Checkbox: Due to the addition of Line 12, the spacing on Line 11 has been significantly reduced. Persons completing the form are instructed to write in items of income that have been received, or are expected to be received, that are effectively connected to the beneficial owner’s U.S. trade or business. To the extent that more space is required, a separate attachment may be used. The IRS also moved the signature checkbox, certifying that the signor has the capacity to sign, ensuring that authorized representatives do not miss this final requirement when filling out the form.
Form W-8IMY Updates:
- Part I: Line 9b: FTIN: The draft form now includes a line to include a Foreign Taxpayer Identification Number (FTIN), if required.
- Part III: Qualified Intermediary (QI) Certifications:
- The certifications generally contain updated language clarifying that the certifications apply to all accounts identified on the withholding statement or, if no withholding statement is provided, then to all accounts.
- Line 14a: Contains the general certification of QI status. The draft form has been updated to state that the QI will also provide documentation required for Sections 1446(a) and 1446(f), as required.
- Added Line 15b: Allows a QI to certify that it is assuming all withholding responsibilities for transfers of PTP interests for Section 1446(f) purposes.
- Added Line 15c: Allows a QI to certify that it is acting as a nominee for Section 1446 purposes for a distribution by a PTP.
- Moved 15f to 15d: Former Line 15f, addressing a QSL that is assuming withholding and reporting for substitute dividend payments, was moved to Line 15d. The IRS also modified the certification to make clear that the QSL is assuming primary withholding and reporting for the substituted dividend payment (whereas previous language merely stated that the entity was acting as a QSL).
- Moved 15g to 15e: Former Line 15g, which addresses the assumption of withholding and reporting for substitute interest, was moved to Line 15e.
- Part IV: Nonqualified Intermediary (NQI) Certifications:
- Added Line 17e: The draft form includes a checkbox for an NQI to make the required certification when providing an alternative withholding statement (i.e., a certification that the NQI does not have information in its files that conflicts with the information provided on the withholding certificates).
- Part V: Territory Financial Institution (FI) Certifications:
- Added Line 18d: Certification that the Territory FI agrees to be treated as a US person under Section 1446(f) for amounts received on sales of interest in PTPs.
- Added Line 18e: Certification that the Territory FI agrees to be treated as a US person under Section 1441 and as a nominee with respect to distributions by PTPs.
- Added Line 18f: Certification that the Territory FI is not acting as nominee for distributions from PTPs and is providing a withholding statement for the distributions.
- Part VI: Certain US Branch Certifications:
- Updated Line 19a: Certification was updated to address distributions from PTPs and amounts realized on sales of interests in PTPs.
- Added Line 19d: The US branch certifies that it is acting as a US person under Section 1446(f) for amounts received on sales of interest in PTPs.
- Added Line 19e: The US branch is acting as a US person under Section 1441 and as a nominee with respect to distributions by PTPs.
- Added Line 19f: The US branch is not acting as a nominee for distributions from PTPs and is provided a withholding statement for the distributions.
- Part VIII: Nonwithholding Foreign Partnership (NWP) Certifications:
- Updated Line 21b: Certification was updated to apply to foreign grantor trusts that are partners in lower tier partnerships and are providing the form for Section 1446 purposes.
- Added Line 21c: Certification that the entity is a foreign partnership receiving an amount realized on a transfer of an interest in a partnership for Section 1446(f) purposes.
- Added Line 21d: Certification that the entity is a foreign partnership providing a withholding statement for a modified amount realized from the transfer. This box should only be checked if Line 21c is also checked.
- Added Line 21e: Certification that the entity is a foreign grantor trust providing the form for each grantor or other owner of the trust to allocate the amount realized by each owner for Section 1446(f) purposes.
Form W-8BEN Updates:
- Part I: Line 6b: FTIN: The draft form bifurcated the Foreign Tax Identifying Number (FTIN) line (Line 6) into Lines 6a and 6b to allow taxpayers to certify when an FTIN is not legally required.
- Signature: Certification of Capacity: The current form requires authorized individuals to write in the capacity in which they are acting, when signing on behalf of the beneficial owner. The draft form eliminated the write-in box and now includes a checkbox for the authorized individual signing the form to certify that they have the legal capacity to sign on behalf of the beneficial owner.
For further information, see:
Past quick tips & updates
August 25, 2021 | Upcoming Cayman Islands CRS Compliance Form Deadline
Upcoming Cayman Islands CRS Compliance Form Deadline
August 25, 2021 | by Jigna Patel | On April 16, 2020, the Cayman Islands Tax Information Authority (TIA) updated the Common Reporting Standard (CRS) (Amendment) Regulations requiring reportable financial institutions (FI), tax resident in the Cayman Islands, to provide additional information annually to the Authority to ensure compliance with the reporting and due diligence requirements as required under the CRS. This additional information is required to be reported on the new CRS Compliance Form and will be required for reporting years FY19 onward. The forms will be completed via the Department for International Tax Cooperation (DITC) Portal, so the same mechanism as the annual CRS reporting.
Which entities fall under the reporting obligations? All Cayman reportable FIs, with the exception of investment managers and advisers are required to submit the annual CRS Compliance Form.
What is the deadline? The annual deadline will be September 15. However, in its initial year of reporting, both FY19 and FY20 CRS Compliance Forms will be due by September 15, 2021. An extension has not been made as of August 24, 2021.
What will be required? Information to be collected will revolve around five sections, for which we have noted some key observations:
- FI Profile Data. Section 1 covers the FI's logistical and licensing information. If you are a reporting FI licensed with the Cayman Islands Monetary Authority (CIMA), then you will update the form in this section with the CIMA license number and you may skip Section 3. If the FI was a reportable FI in both FY19 and FY20 reporting years but did not obtain their license number until calendar year 2020, then the FI Compliance Form should be marked "no" for FY19 and "yes" for FY20.
- Financial Account Data. This is really the crux of the Compliance Form. Section 2 dives into the total numbers of reportable versus nonreportable account holders, and the values of the FI broken down into those of reportable and nonreportable accounts. Thus, even if you submitted CRS nil returns for the reporting years, you would still need to complete the Compliance Form. Be wary of double-counting and over or under valuing accounts. Any mismatches between the Compliance Form and the filed CRS annual returns may trigger an inquiry from the DITC.
- AML/KYC and Accounting. Section 3 is a short section with administrative questions regarding outsourced service providers and anti-money laundering (AML)/Know Your Client (KYC) procedures. As previously mentioned, if the FI is licensed with CIMA, this section is not required.
- CRS Process. Section 4 further covers administrative aspects of the FI's obligations include due diligence and health checks along with confirmation of the FI's obligation to maintain written policies and procedures, as set out under the CRS legislation.
How to submit. As previously mentioned, the submission of the CRS Compliance Form will be made, similar to the annual CRS return, via the DITC Portal. The submission can be completed by the FI's Principal Point of Contact (PPoC) or an assigned Secondary User. There are two options for submission: the Smart Form and the Bulk Upload CSV file. The long-awaited bulk upload option is a welcome one for those clients that have more than a few FIs in their structure. This option to submit the CSV file in the Portal has gone live as of Wednesday, August 25, 2021. There are some anticipated errors for this new option; the DITC has released an FAQ available on their website.
Overall observations. The Cayman CRS Compliance Form is mandatory for reporting years FY19 onward. As the Cayman Authority will likely be administering penalties to FIs that have missed any filing obligations for this new form, we strongly urge all FIs to reach out to your KPMG contacts if you require assistance with your questions and/or reporting needs.”
August 12, 2021 | Senate Infrastructure Bill Expands Cryptocurrency Tax Reporting
Senate Infrastructure Bill Expands Cryptocurrency Tax Reporting
- Broker Definition Expanded. IRC Section 6045 would be amended to define a broker as including “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Industry participants and a number of Senators had voiced their concern that this provision was overbroad and could bring into scope certain non-custodial actors within the crypto ecosystem such as blockchain validators, sellers of hardware and software wallets and software protocol developers. But several proposed amendments to limit the scope of the definition of broker never made it into the final bill.
- Digital Assets Defined. Amended Section 6045 would also define digital assets as “any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” This definition includes common cryptocurrencies but could have broader application to other (and newly developed) digital assets such as nonfungible tokens or NFTs.
- Covered Securities. Digital assets are treated as “covered securities” if acquired on or after January 1, 2023. Covered securities under Section 6045 are subject to cost basis reporting by the broker.
- Transfer Reporting. Section 6045A which currently governs the production of transfer statements when accounts are transferred between brokers would also cover transfers of digital assets. In addition, new Section 6045A(d) would require a broker to report transfers of digital assets to an account or address not maintained by a broker – for example, private wallets.
- Receipt of Digital Assets. Through an amendment to Section 6050(I), digital assets would also be treated as “cash” for purposes of the statutory requirement to report receipts of cash in excess of $10,000. The provision applies to any person engaged in a trade or business and who, in the course of such trade or business, receives more than $10,000 in cash in one transaction or two or more related transactions. There is, however, an exception to Section 6050I reporting for certain financial institutions already subject to similar Title 31 currency transaction reporting rules.
The Senate bill next goes to the House, which is due to reconvene in September. It is expected that there will be continuing lobbying by industry participants to limit the scope of the “broker” definition.
What seems more and more evident from the new Senate bill and the current regulatory project under Section 6045 is that crypto tax reporting for exchanges and institutions that fall within the definition of “broker” would utilize a Form 1099-B or a new form with a similar format, rather than a Form 1099-K as may have been considered by crypto exchanges in the past. Moreover, the new bill specifies that digital assets would be “covered securities” subject to cost basis reporting if acquired on or after January 1, 2023. This will leave relatively little time for institutions to incorporate cost basis functionality into their core systems.
Developments in regard to the progress of the Infrastructure Bill and the associated IRS regulatory project need to be monitored. For those institutions that would likely fall within the broker definition (e.g., centralized exchanges), it may be an opportune time to begin assessing existing systems and procedures for cost basis and broader broker tax reporting readiness.
July 26, 2021 | Treaty Claims and the Form W-8BEN-E
Treaty Claims and the Form W-8BEN-E
July 26, 2021 | by Kelli Wooten | With August quickly approaching, it’s never too early to start thinking about Form W-8 resolicitation efforts. A significant number of institutions begin this process in early September to ensure as many updated Forms as possible are collected and validated by the time the clock strikes midnight on New Year’s Eve.
One of the most frequent questions we see is what makes for a valid claim of treaty benefits on the Form W-8BEN-E. The answer will vary depending upon the type of income.
Let’s first look at a claim for treaty benefits on actively traded dividends or interest. To be valid, the beneficial owner must:
- Tick box 14a
- Write in the country for which treaty benefits are being claimed on Line 14a
- Tick box 14b
- Select the appropriate limitation on benefits (LOB) provision. For those few treaties in which there is no LOB provision, the beneficial owner should tick the “Other” box and indicate N/A; this field should not be left blank.
We often receive questions on how withholding agents should validate the claimed LOB provision. The IRS actually included the requirement to identify the relied-upon LOB provision as an effort to ensure the beneficial owner completing the form was reviewing the treaty to help ensure it qualified under one of the provisions, not as a “gotcha” for weary withholding agents. Therefore, as per the regulations, withholding agents would only invalidate a form based on the claimed LOB provision if they have actual knowledge the claim is incorrect.
Withholding agents are also responsible for validating that there is no address either on the Form or in the related books and records that is not in the claimed treaty jurisdiction and that there are no standing instructions to pay amounts to an account in a country other than the claimed treaty jurisdiction.
Now, if you think that was challenging, let’s look at a claim for treaty benefits on services income earned by a non-U.S. entity, e.g., business profits. To be valid, the beneficial owner must do all of the above PLUS:
- Provide either a U.S. or foreign taxpayer identification number on the Form W-8BEN-E
- Complete Line 15 and indicate that the income is not attributable to a permanent establishment in the United States. Line 15 must be completed when the beneficial owner is claiming treaty benefits that require it to meet conditions not covered by the representations otherwise included on the Form. As the business profits treaty clauses require that the income for which the treaty claim is made is not attributable to a permanent establishment in the United States, the beneficial owner must certify to this on Line 15. While some may argue that this is not required, it has consistently been our experience—both on audit and in discussions with IRS examination teams—that Line 15 should be completed.
These rules are complex. That is why withholding agents should not to leave the validation process to chance and should either create a robust validation checklist that is reviewed periodically to ensure it reflects the most current validation standards or choose an electronic form validation system that automates these requirements.
Now let’s start resoliciting and validating those Forms W-8! What are some other form validation challenges you would like to see discussed in future posts? Email us your ideas at firstname.lastname@example.org.
June 25, 2021 | New TCC Process Presents Hurdles for Nonresidents
New TCC Process Presents Hurdles for Nonresidents
June 25, 2021 | by Martin Mueller and Cyrus Daftary | The IRS recently announced changes to its process for submitting information returns through the Filing Information Returns Electronically (FIRE) system. Specifically, the IRS noted that the application process for Transmitter Control Codes (TCC) will be updated in September to eliminate Form 4419 and Fill-In Form 4419. In place of the forms, users will be required to create accounts through IRS Secure Access Account to obtain a TCC. As discussed below, new users, particularly nonresident filers, should seek to obtain a TCC before the changes go into effect to avoid problematic hurdles unintentionally imposed by the IRS.
As a bit of background, the IRS requires taxpayers that file 250 or more information returns to file electronically through FIRE, including Forms 1097, 1098 series, 1099 series, 3291, 3922, 5498 series, 8027, 8955-SSA, and W-2G. Additionally, the IRS requires financial institutions that are submitting Forms 1042-S, regardless of number, to file electronically through FIRE. Taxpayers seeking to submit information returns electronically must currently request authorization to file electronically by submitting Fill-In Form 4419 or Form 4419, Application for Filing Information Returns Electronically (FIRE). Upon successful submission, the IRS assigns a TCC to identify the transmitter of all electronic files, which is then used by the taxpayer for all files submitted through FIRE. Beginning in September, the IRS will retire Fill-In Form 4419 and Form 4419, requiring new users to apply for an account through the IRS Secure Access Account. Notably, the IRS is requiring all Responsible Officials (ROs) listed on the information return application for the TCC to authenticate their identity and create a new account through the Secure Access Account process.
The IRS states that the new application process will automate the TCC application for new users, allow users to manage their account status online, and improve the speed of the application process. However, in creating one efficiency, the IRS may have inadvertently created several issues, particularly for nonresident filers. IRS Secure Access requires a number of items that may not be available to all filers. For example, to create an account, taxpayers must submit a Social Security Number (SSN) or Individual Tax Identification Number (ITIN) and provide their U.S. tax filing status and mailing address from their most recently filed tax return. This is problematic for non-U.S. filers that do not have an ITIN or a U.S. tax filing status.
This issue was raised at the recent International Tax Withholding Virtual Conference (hosted by Kaplan Financial Education), discussing IRS enforcement updates. The IRS representative noted that customers can have companies file on their behalf or purchase software to file. Ignoring the additional costs, this option may not be sufficient in light of security issues posed when dealing with third-party providers in some locations. Despite clarification from the IRS, there are still outstanding questions. For example, it is not clear whether non-U.S. individuals that are not filing U.S. tax returns can obtain an ITIN purely to register with IRS Secure Access, though this raises other timing and administrative issues to consider.
The IRS will need to address other U.S.-centric requirements, such as the list of accounts from which filers must provide a financial account number. Additionally, filers must submit a U.S.-based cellphone in the name of the applicant to receive an activation code. If the applicant does not have a U.S.-based cellphone, they may provide a mailing address. However, the activation code is only good for 30 days, which may be an insufficient amount of time for nonresident filers to receive the code, given current IRS delays seen by non-U.S. persons when correspondence is delivered overseas.
During the conference, the IRS representative indicated that the IRS will take these issues into consideration, but it is not clear that timely answers will be forthcoming. Given the upcoming switch in September, it is highly recommended that any potential information return filers for the 2021 tax year secure a TCC, or revise/update current TCCs, as soon as possible through the historical Form 4419 process. After the forms are retired, it is not clear how quickly the IRS will address these issues, but it appears likely there may be unintended hurdles for nonresident filers.
May 28, 2021 | TIGTA Report Details Backup Withholding Compliance Issues
TIGTA Report Details Backup Withholding Compliance Issues
May 28, 2021 | by Martin Mueller | President Biden recently announced an aggressive plan to upscale the IRS workforce to combat tax evasion and noncompliance. The proposal would provide $80 billion in funding to hire nearly 87,000 workers over a period of 10 years, effectively doubling the size of the IRS. The proposal comes as part of a wider effort to secure funding for President Biden’s American Families Plan. As noted in a recent study by the Treasury Department, The American Families Plan Tax Compliance Agenda, found here, the difference between taxes owed to the government and taxes actually paid was $600 billion in 2019 and is expected to rise to about $7 trillion over the next decade. The study attributes 80% of that tax gap to underreporting, i.e., those that underreport income or overclaim deductions and credits on tax returns. The study attributes an additional 9% of the tax gap to those who fail to file in a timely manner. Of the underreporting group, the largest culprit is classified as income subject to little or no information reporting, which the study states includes nonfarm proprietor income and “other income.”
Coincidentally, on May 17th, the Treasury Inspector General for Tax Administration (TIGTA) released its results of a study on backup withholding noncompliance, Backup Withholding Noncompliance and Underreported Employment Taxes Continue to Contribute Billions of Dollars to the Tax Gap, found here. The TIGTA study analyzed information returns for the 2018 tax year and found over 440,000 information returns with missing or incorrect Taxpayer Identification Numbers (TINs), for which the payers failed to backup withhold $13.3 billion on $55.6 billion of reported income. The TIGTA study goes on to provide reasons for the noncompliance, pointing out that recent efforts to step up compliance have helped. However, the study indicates that backup withholding noncompliance remains a problem, with Form 1099-MISC (and now Form 1099-NEC) contributing a disproportionate share of that issue, accounting for over 77% of all noncompliant forms filed and almost 99% of all unique payers. As a reminder for readers, Form 1099-MISC, Miscellaneous Income, and Form 1099-NEC, Nonemployee Compensation, capture income not reported under standard Forms W-2, including “other income payments.”
President Biden’s tax compliance proposal seeks enforcement through an increased IRS workforce, leveraging information that financial institutions already collect to find taxpayers that misreport income, and updating IRS technology and data analytic tools. Notably, the proposal highlights an opportunity that would permit the IRS to require payees to certify their TIN to payers that issue third-party information reports. Ultimately, it appears that the Treasury has narrowed in on revenue raising measures and may soon have funding under the tax compliance proposals. Thus, payors may need to begin updating their due diligence processes and compliance systems soon in order to avoid penalties.
April 9, 2021 | Responsible Officer Periodic Certifications Extended
Responsible Officer Periodic Certifications Extended
April 9, 2021 | by Martin Mueller | On April 8, 2021, the Internal Revenue Service (IRS) updated its Qualified Intermediary (QI), Withholding Foreign Partnership (WP), and Withholding Foreign Trust (WT) Frequently Asked Questions (FAQs) to provide an additional extension for periodic certifications. Specifically, the IRS updated Question 10 in the “Certifications and Periodic Reviews” section.
March 5, 2021 | IRS Releases Draft 2021 Forms W-4P and W-4R
IRS Releases Draft 2022 Forms W-4P and W-4R
March 5, 2021 | by Cyrus Daftary | Recently, the IRS published an updated draft of Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, and a draft of new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, for the 2022 calendar year. Form W-4P was previously titled Withholding Certificate for Pension or Annuity Payments. The IRS explains in a cover letter that the 2022 Form W-4P has been split into two forms, Form W-4P for periodic pensions and annuities, and new Form W-4R.
February 19, 2021 | Form 1042 Compliance Tip
Form 1042 Compliance Tip
February 19, 2021 | by Kelli Wooten | Now is the time to order a transcript from the IRS to validate withholding deposits have been applied appropriately and that any credit carryovers from prior years have been posted to the taxpayer’s account.
Not sure how to order a transcript? Here are two methods to utilize:
- Use Transcript Delivery Systems (TDS). You will need to ensure that the user has a valid Form 2848 in place. A new version of the Form 2848 was rolled out in January 2021, so make sure you are using the most recent version.
- Complete Form 4506-T and fax to the IRS. Fax numbers are included on the accompanying instructions. You will want to ensure that you include Form 1042 on Line 6, tick box 6b for account transcript, and include the appropriate year(s) on Line 9. Remember to use a MM/DD/YYYY year format.
Remember to allow plenty of time to receive given potential delays in processing given COVID-19.