In our first post on the proposed regulation under section 1446(f), we discussed which party is the withholding agent and outlined the various exceptions to withholding that could apply. Sections 864(c)(8) and 1446(f) were adopted as part of tax reform. Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit. This post addresses the amount the transferee is required to withhold. Our third post on the proposed regulations under section 1446(f) addresses the withholding requirements and “backstop withholding” rules. Continue Reading
This post is the first of three installments providing an overview of recent proposed regulations under section 1446(f) that address withholding on certain sales of partnership interests by foreign partners of a partnerships engaged in the conduct of a U.S. trade or business (a “U.S. trade or business”). Sections 864(c)(8) and 1446(f) were adopted as part of tax reform. Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit. This post focuses on which party is required to withhold under section 1446(f). The second post focuses on determining the appropriate amount to withhold. Finally, the third post focuses on the withholding requirements and the “backstop withholding” rules. Continue Reading
Yesterday, the IRS released final regulations that aim to prevent identity theft by permitting, but not requiring, employers to truncate the taxpayer identification numbers (TINs) on copies of Forms W-2 and Forms W-2c furnished to employees. The regulations finalize proposed rules issued in 2017. Generally, this rule applies to Forms W-2 required to be filed or furnished after December 31, 2020, so employers still have time to decide whether to implement the change. The delayed effective date is intended to allow states and local governments time to update their rules to permit the use of truncated TINs, if they do not already do so.
The TIN for most individuals (and all employees whose income is required to be reported on Form W-2) is his or her social security number (SSN); therefore, instead of including an individual’s full nine-digit SSN, the final rule permits employers to truncate this sensitive personal identifying information. In place of the full SSN, employers may use a truncated TIN, which is in the format of XXX-XX-#### or ***-**-#### with the #’s replaced by the final four digits of the employee’s social security number. Full TINs are still required on copies of Form W-2 filed with the Social Security Administration, however. In addition, payers of third-party sick pay must include full TINs on statements to employers of employees to whom the third-party paid sick pay. However, truncated TINs may be used on Forms W-2 that report third-party sick pay issued by employers to employees.
In 2017, the District of Columbia passed the Universal Paid Leave Amendment Act of 2016 (the “Act”), which called for the creation of a paid-leave program for private sector employees who work in D.C. Earlier this year, the D.C. Office of Paid Family Leave adopted final regulations to implement this new paid-leave program. One of the most notable requirements implemented by the regulations is the imposition of the Act’s 0.62% payroll tax assessed on employers subject to the Act beginning today, July 1, 2019. Employers subject to the Act will have until July 31, 2019, to file the appropriate return and pay the tax without incurring a penalty.
With this upcoming deadline, employers with employees in D.C. need to determine whether they are subject to this tax, and if they are, timely report and pay the tax to avoid potential penalties. Continue Reading
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.
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.
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
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
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.
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.