IRS to Launch FATCA Compliance Campaign for FFIs

Last week, the Acting Director of IRS of Field Operations for the LB&I Foreign Payments Practice (“FPP”) announced that the IRS will launch a compliance campaign this summer focused on foreign financial institutions (“FFIs”) that are not satisfying their reporting obligations under the Foreign Account Tax Compliance Act (“FATCA”). Speaking at a tax controversy forum at NYU, Kimberly Schoenbacher indicated that the IRS will be sending notices to FFIs that failed to file Forms 8966 (FATCA Report) reporting assets held in accounts by U.S. persons.

FFIs are generally required to file Forms 8966 if they are not in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the Treasury Department (Russia and many Central American and African nations) or in a Model 2 IGA jurisdiction (Austria, Armenia, Bermuda, Chile, Hong Kong, Iraq, Japan, Macao, Moldova, Nicaragua, Paraguay, San Marino, Switzerland, and Taiwan). FFIs in Model 1 IGA jurisdictions provide similar information to tax authorities in the local jurisdiction, which are obligated to share the information with the IRS. Forms 8966 for 2018 were required to be filed with the IRS by April 1, 2019. (A list of countries with IGAs in force, signed, or agreed to in substance is available on the Treasury Department website.)

FFIs that fail to file the required form may result in the FFI losing its status as a participating FFI or Reporting Model 2 FFI. If an FFI loses its status and is treated as a nonparticipating FFI, it is subject to 30% withholding on payments of U.S. source FDAP income made to it.

Kim Schoenbacher’s warning last week was the second such warning regarding compliance failures in as many weeks. Her comments regarding a FPP correction program for Forms 1042 and 1042-S are discussed in our blog post of June 13. The announcement of this new compliance campaign serves as a warning to not only FFIs that have not filed the required Forms 8966, but also to U.S. persons who have failed to file FBARs or Forms 8938 (Statement of Specified Foreign Financial Assets) that time may be running out.

IRS Warns Withholding Agents to Consider FPP Correction Program to Avoid Penalties

By Pooja Shah Kothari, Michael M. Lloyd and S. Michael Chittenden on June 13, 2019 Posted in Chapter 3, FATCA, IRS

Last week, Kimberly Schoenbacher, the Acting Director of Field Operations for the LB&I Foreign Payments Practice (“FPP”), sent a message to taxpayers who may be noncompliant with Chapter 3 and FATCA withholding and reporting: the IRS is actively honing in on Form 1042 nonfilers, Form 1042 failures, and Forms 1042 and 1042-S that do not reconcile. Schoenbacher remarked at the International Tax Withholding and Information Reporting Conference in New York that the IRS has sent letters to thousands of taxpayers across the country regarding compliance failures related to Forms 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding). The letters were issued under the Form 1042/1042-S compliance campaign announced by LB&I in 2018. The campaign seeks to address withholding, deposit, and reporting noncompliance on the part of withholding agents making payments of U.S.-source income to foreign persons.

Draft 2020 Form W-4 Addresses Some Privacy Concerns

By S. Michael Chittenden, Marianna G. Dyson and Michael M. Lloyd on June 11, 2019 Posted in Employment Taxes, IRS

On May 31, the IRS released a draft 2020 Form W-4 that addresses some, but not all, of the privacy concerns that led the IRS to abandon the redesigned form for 2019. According to an accompanying news release, the IRS anticipates releasing a near-final form in July to allow payroll processors and employers to begin work on programming updates to their systems. Minor changes may be made based on comments to that draft form, but stakeholders are encouraged to submit their comments on the released draft by the end of June to ensure they can be taken into account. Draft form instructions are expected to be released in the next few weeks for stakeholder comment.

The new draft directs filers to the IRS withholding calculator to determine how to complete the form without disclosing all of the personal information that would be disclosed on the form if it were fully completed. It also requires less information to be shared with employers, even if the employee does not use the withholding calculator. As with the 2019 draft, the 2020 draft eliminates the concept of withholding allowances to reflect the elimination of personal exemptions under tax reform. Continue Reading

IRS Legal Memo Addresses Payroll Compliance when Employer Appoints Agent in the Middle of Calendar Year

By Michael M. Lloyd and S. Michael Chittenden on June 6, 2019 Posted in Employment Taxes, Information Reporting, IRS

On May 31, the IRS released a legal memorandum, ILM 201922026, regarding the information return obligations of a common law employer when it appoints a pay agent in the middle of a calendar year. In general, an employer may appoint a pay agent under section 3504 by using IRS Form 2678 (Employer/Payer Appointment of Agent) to appoint an agent. An agent includes a fiduciary, agent, or other person (collectively an “agent”) that has control, receipt, custody, disposal, or otherwise pays the wages of an employee or group of employees, employed by one or more employers. An agent is appointed to perform certain specified acts required by employers. Continue Reading

Proposed 3405 Withholding Regulations Three Decades in the Making

By S. Michael Chittenden and Michael M. Lloyd on June 3, 2019 Posted in Employment Taxes, IRS

In 1987, the IRS released Notice 87-7 providing guidance on whether certain recipients of payments from employer deferred compensation plans, individual retirement plans, and commercial annuities are subject to federal income tax withholding under section 3405. The notice provided that:

payors must withhold on periodic and nonperiodic payments under section 3405(a) or 3405(b), respectively, to payees that provide a residence address outside the United States;
payors must withhold on periodic and nonperiodic payments under section 3405(a) or 3405(b), respectively, to payees that provide a residence address inside the United States, unless the payee has elected no withholding in accordance with section 3405; and
payors must withhold on periodic and nonperiodic payments under section 3405(a) or 3405(b), respectively, to payees that provide a residence address outside the United States.

Final CPEO Rules Signal Loosened Bond Requirements, Clarify Other Provisions

By Marianna G. Dyson and S. Michael Chittenden on May 29, 2019 Posted in Employment Taxes, IRS

On May 23, the IRS and Treasury released final regulations governing certified professional employer organizations (“CPEOs”). CPEOs were created by the Tax Increase Prevention Act of 2014, P.L. 113-295, which added new Code sections 3511 and 7705 that contain certification requirements for, and the federal employment tax consequences of, being a CPEO. The measure, passed with support from the PEO industry, eliminates the requirement for a CPEO to restart the FICA and FUTA wage base when an employee is onboarded from the worksite employer to the CPEO pursuant to a new contract between the worksite employer and the CPEO. The same applies when the contract is terminated and employees move from the payroll of the CPEO to that of the worksite employer. The regulations also clarify that the CPEO is solely liable for employment taxes due on remuneration paid by the CPEO.

Tax Court Reverses Course on TFRP after Remand from Eleventh Circuit

By S. Michael Chittenden and Michael M. Lloyd on May 24, 2019 Posted in Court Cases, Employment Taxes, IRS

On remand from the Eleventh Circuit, the Tax Court, in Romano-Murphy v. Comm’r, determined that the failure of the IRS to provide a pre-assessment appeals hearing invalidated the IRS’s assessment of trust fund recovery penalty under section 6672 and proposed levy to collect the same. In July 2006, the IRS sent a letter to the chief operating officer of a healthcare staffing company proposing assessment of a trust fund recovery penalty against her for the business’s failure to withhold and pay over employment taxes. The letter indicated that the COO had the opportunity to protest the decision to the IRS Office of Appeals. The COO sent a response requesting an Appeals conference in September of 2006, but the IRS failed to act on it and then subsequently assessed the penalty. The COO later requested a collection due process hearing after receiving a notice of intent to levy and notice of federal tax lien filing. As is typically the case, the Settlement Officer issued a determination that the assessment and collection activity, including the proposed levy, were valid, leading to the COO’s challenge in Tax Court.

TIGTA Chides IRS for Lax Non-Payroll Withholding Enforcement

By S. Michael Chittenden and Michael M. Lloyd on May 24, 2019 Posted in Information Reporting, IRS

The Treasury Inspector General for Tax Administration released a partially redacted report on May 20 asserting that the IRS has failed to take steps to address nearly $2 billion in discrepancies between withholding reported on withholding tax returns and withholding reported on information returns. The TIGTA report found that 7,265 taxpayers reported nearly $925 million in withholding on Forms 1099 and W-2G in 2016 but failed to file a Form 945, Annual Return of Withheld Federal Income Tax. In the same year, another 3,163 taxpayers reported $760 million more in withholding on Forms 1099 and W-2G than they reported on the Form 945. Conversely, the report found 3,527 taxpayers who reported a total of $241 million more in withholding on the 2016 Form 945 than they reported on Forms 1099 and W-2G.

Is a Circuit Split Brewing over FBAR Willfulness Penalties?

By Michael M. Lloyd on May 8, 2019 Posted in Court Cases, FBAR

A question appears at the bottom of Schedule B (Interest and Dividend Income) of the Form 1040 (U.S. Individual Income Tax Return) that asks individual taxpayers if during the taxable year they had any interest in or signature or other authority over a bank, securities, or other financial account in a foreign country during the tax year. Based upon a review of historical tax forms, the question first appeared on the 1976 Schedule B. The historic Form 1040 instructions for 1976 and 1977 indicate that the FBAR was originally a designated a Form 4683 for 1976 and subsequently revised and renumbered as the Form 90-22.1 in 1977.

Justice Department Announces Employment Tax Enforcement Actions

By Michael M. Lloyd and S. Michael Chittenden on May 7, 2019 Posted in Court Cases, Employment Taxes

Consistent with its ongoing employment tax enforcement efforts, the Justice Department recently announced developments in two cases involving the failure to properly withhold and remit federal employment taxes from employee wages.

On April 25, the Justice Department announced that Kae Wook Lee, the sole owner and CEO of Mona Lisa 7 Corporation, was sentenced to twelve months and one day in prison for failing to collect and remit federal employment taxes related to his operation of a karaoke bar in Queens, New York. The Justice Department’s press release states that Lee manipulated receipts from operations and paid employees in cash without collecting, accounting for, or remitting employment taxes to the IRS. The press release also states that he concealed the cash payroll from his accountant and executed false tax returns underreporting wages and the amount of employment taxes owed. In addition to the prison sentence, Lee was ordered to serve two years of supervised release and pay $612,500 in restitution.