TIN Management - Form W-9 and Form W-8 Solicitation, Certification and Withholding Requirements
The IRS, U.S. Treasury, and Congress recently passed several new pieces of legislation that have a significant impact to information reporting and withholding, that will reduce the current "Tax Gap". The new legislation is focused on the effort to enforce current requirements and expand information reporting and mandatory withholding regulations, significantly broadening the application of tax law. Full information reporting audits are now being conducted which will include all 1099, 1098, W-2G and 1042-S forms / payment transactions.
Current regulatory law requires any U.S. organization issuing U.S. Source income payments to properly obtain the tax identification number (TIN) and legally related name from each payee along with their tax status - individual, corporation, LLC, LLP, partnership, or other designation. In many cases, depending on the type of payment, the payer is required to obtain a certified copy of Form W9 from a U.S. Payee or a Form W-8 from a foreign payee.
Failure to obtain the TIN, legal name and status places the payer in the position of being required to withhold federal tax and possibly state tax from each payment. This withholding must continue until the payer receives the required information and proper documentation, as required (Form W-9, Form W-8).
Many organizations issuing such payments should understand that failure to initiate the required withholding transfers the financial liability for the amount of withholding to the company. Therefore, a payer who fails to obtain the proper TIN and name certification and fails to withhold can incur penalties for failure to withhold, timely deposit of the tax withheld and the correct amount of the tax required to be withheld.
If your company finds itself in the position where a payee has not provided the TIN, name and status when requested or has not completed the required documentation (Form W-9/Form W-8) - a determination of U.S. or foreign status must be made based on the knowledge of the payee's information.
Is the payee a U.S. person or is the payee a foreign payee?
- If you are certain that the payee is a U.S. person and the payee has not provided the required information and/or certification - withhold 28% federal tax and any applicable state tax. If you have any reason to believe that the payee is a foreign individual or entity and the payee has not provided the required Form W-8 which includes a US generated TIN - you must withhold 30% federal tax and any applicable state withholding tax.
- When issuing payments to a foreign payee - there is almost always a requirement to withhold some percentage of tax.
- If the payee provides the Form W-8 and it is completed correctly, you are then required to comply with the tax country's withholding treaty (if there is a treaty with the U.S.), which could be a lower percentage than the 30% rate.
- For countries that do not have a treaty with the United States - you must withhold 30%, even if the payee provides a correct and complete Form W-8.
- If the payee provides a Form W-8 and it is not completed with all of the correct information such as exemption codes and/or does not provide a U.S. TIN or ITIN treaty rates and exemptions do not apply - you must withhold 30%.
- Form W-8's may expire every 3 years and you are required to be re-solicited.
- For payments for services, an individual foreign payee may fill out additional documentation, exempting them from withholding.
- When issuing U.S. Source income payments to a payee who has a foreign residence address, the payer is required to determine via documented certification whether the payee is a foreign person or a U.S. resident living abroad. For U.S. citizens living abroad, re-certification is required and withholding on payments may be required.
- Keep in mind that unlike reporting and withholding for U.S. Payees and Corporations, all entities are subject to reporting and withholding if foreign.
Organizations must ensure that any area within the organization issuing payments, keep informed of regulatory changes and apply the proper procedures to account openings, obtaining the required documents containing the TIN/Name/Status information and initiate withholding when required prior to any payment being issued.
US Code Â§ 6672. Failure to collect and pay over tax, or attempt to evade or defeat tax.
- If the payee is U.S. and completes the Form W-9 giving a status of corporation, the name of the payee should contain Corporation, Incorporated, INC., etc. LLC's (in most cases) , LLP's, Partnerships, etc. are not corporations and must be reported according to the regulations pertaining to the type of payment.
- Payments issued to corporations for medical, legal services and gross proceeds paid to an attorney are required to be reported.
- Each Payer (FEIN) is required to comply with TIN certification and withholding requirements Any change
- in status, even an address change of country requires new solicitation of any U.S. or foreign payee.
- Several types of payments are not included on the B-Notice (CP2100 or CP2100A) but may be included on the TIN Penalty (972CG). In the event that a payment issued to a payee is present on the Penalty Notice Letter but did not appear on the B-Notice, it is recommended that the payer sends a letter and Form W-9 to the payee and requires the payee to properly fill out and comply with a re-certification request.
Any organization that intentionally does not comply with the requirements to properly document U.S. or foreign payees, implement withholding when required or report could face criminal proceedings. In a criminal case, the officers of the company can be held personally financially liable for the findings of the court.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
Why risk financial liability to your organization for failure to certify, identify, and withhold?
New regulations significantly impact filers beginning this year-end and continue in the years to come.
New legislation passed into law:
Preparing to Comply:
- Increased Penalty Structure - Significant increases to assessed penalties - double or more and raising the cap from $250,000 up to $1,500,000. Any returns filed January 1, 2011 and after are subject to the increased penalties.
- TIPRA 2005 - All government agencies (with annual overall budgets of $100 million) will be required to withhold 3% federal tax on all payments for goods (materials) and services, for any payments issued after December 31, 2012 (TIPRA 2005). This law applies to all federal, state and local agencies.
- IRC 6050W - Information returns, TIN Certification and Backup Withholding for merchant card reimbursements. Requires institutions that reimburse merchants in settlement of reportable card transactions beginning January 1, 2011 to file information returns with the Internal Revenue Service showing the grand total of reimbursements issued for transactions related to goods and services. The entity reimbursing the merchant for such transaction is responsible to obtain the correct Tax ID and Name of the Merchant and apply backup withholding of 28% federal tax to those merchants who fail to provide the correct information.
IRS Compliance can assist your organization with this process by soliciting certifications, TIN Matching and the management of responses to all or new vendors/payees. IRSCompliance can track all activity that occurs with your payees and manage the B-Notice and TIN Penalty processing as well. This process will provide you with reasonable assurance that you have obtained the correct TIN/Name combinations from your W-8 / W-9 forms and/or begun the process of withholding or payment suspension.
Contact IRS Compliance at 1-877-tax-regs ext. 0 or 410-914-5470 for more information on our regulatory services and consulting or email us at email@example.com