The 32nd Annual International Tax Withholding and Information Reporting Conference was held in New York City on November 14–15, 2019. This forum offered industry professionals the chance to interact directly with counterparts at other financial institutions and with the U.S. Internal Revenue Service (IRS) on recent developments impacting withholding and reporting regimes.
Over the course of the two-day conference, several panel discussions provided representatives from the IRS the opportunity to offer guidance and insight on a variety of emerging topics, highlighted below.
With the deadline for many foreign financial institution (FFI) certifications having passed earlier this year, the IRS provided the following post-certification reminders:
- No formal approval of FATCA certifications will be posted to indicate acceptance of completed certifications. Instead, an FFI should consider the submission confirmation note received on their FATCA message board as a completion notice, notwithstanding any direct follow up by the IRS in the event that additional information is needed.
- FFIs should refrain from using “unable to certify,” “not applicable,” or some equivalent response in its certifications unless absolutely necessary. Use of these responses will generally be flagged for follow-up.
- Certified deemed compliant FFIs (CDCFFIs) that are generally not required to obtain Global Intermediary Identification Numbers (GIINs) except for certain local jurisdictional requirements will need to indicate this in each FATCA certification cycle in order to maintain the GIIN.
The IRS noted that it has begun issuing Events of Default (EOD) notices where appropriate.
- For FFIs resident in countries with either a Model 1 or Model 2 Intergovernmental Agreement (IGA) in force, the IRS will communicate with local tax authorities to initiate EOD processes as described in the respective IGA.
- For participating FFIs and FFIs in jurisdictions where a Model 2 IGA is not yet in force, the IRS has been posting EOD notifications to those FFIs’ FATCA message boards and providing sixty (60) days for response. Where no response has been received, the IRS has provided a final thirty- (30) day reminder, at which point any unresponsive FFI will have its FFI agreements terminated and its GIIN removed from the IRS FFI List. The IRS currently estimates that approximately 1,000 FFIs will have their GIINs removed from the FFI list effective January 1, 2020.
- As a reminder, withholding agents are required to complete a GIIN validation annually for each FFI. Withholding agents can continue to rely on these existing processes and are not required to complete a new validation against the January 2020 IRS FFI List; however, they may want to consider incorporating this into their policies and procedures as a leading practice.
KPMG comments: Those withholding agents who rely on the results of any recent GIIN verification exercise instead of performing a year-end FFI reconciliation should ensure that their existing GIIN verification process is carefully documented as part of its policies and procedures. The IRS will provide its field agents with guidance for upcoming FATCA audits around this issue, and withholding agents who relied on the verification rules set forth in regulations should have this evidenced by documented GIIN verification policies and timelines.
The IRS does not anticipate frequent batches of GIIN removals and will try to mitigate operational burdens by consolidating future initiatives to the extent possible. Moreover, when a withholding agent identifies that an FFI’s GIIN has been removed, the FATCA regulations provide a grace period to re-document the FFI. Significant to a GIIN removal, FATCA withholding is only required prospectively and is not applied retroactively.
With regards to those qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts (collectively, QIs) that were required to file compliance certifications by July 1, 2019, for the review period of 2016 or 2017, the IRS confirmed that it has started sending EOD notifications as of this summer. Currently, the IRS is working with impacted QIs to bring them back into compliant status in order to avoid terminating QI agreements where possible. For approved QI certifications and waivers, the IRS will communicate the status via the QI Portal message board. The IRS stated that it will no longer send an acceptance letter as it has in the past.
The IRS also addressed certain points that should be factored into upcoming certifications (including the upcoming December 31, 2019 deadline for those QIs with a periodic review year of 2018):
- Where a QI identifies a material failure or event of default, the IRS expects the situation to be addressed and a remediation plan to be provided as part of the certification. The remediation plan should identify the cause of default and include a reasonable timeline for remediation.
- Where reporting variances are discovered and cannot be reconciled, the QI should provide detailed explanations for each variation and detail corrective actions where warranted.
- The IRS encourages pulling tax transcripts and reviewing filing records to double-check the accuracy of information on certifications to avoid IRS follow-up requests for additional information.
- Those existing QIs who wish to request QDD status should contact the IRS in order to update their status. No new applications should be made through the QI Portal for currently active QIs.
- Where a responsible officer (RO) or authorized contact person for the QI loses access to the Portal, the QI should reference the troubleshooting guide and instructions available in Publication 5262, Qualified Intermediary, Withholding Foreign Partnership, and Withholding Foreign Trust Application & Account Management, to correct the access issue through the Portal. The IRS should only be contacted in the event that both the RO and authorized contacts have left the QI’s organization and access needs to be restored outside of the system.
The IRS also indicated that upcoming guidance will be released to address the proper application process for consolidated compliance groups (CCGs) that wish to submit one certification for the entire group and address a single sampling plan with the IRS. In a change from current its current position, the IRS indicated that it may consider allowing CCGs to select 2018 as their periodic review year for the 2018–2020 certification period.
Enforcement and compliance initiatives
The IRS announced that the future of its enforcement and compliance campaigns will be focused on data analytics, with the goal of having organizations provide data files to examination teams prior to any visits. In doing so, the IRS can provide preliminary findings and focus on specific transactions of interest. The goal of these efforts is to promote efficiencies in the audit process and facilitate more focused reviews. As part of this effort, the IRS is looking to develop a Form 1042-S reconciliation tool that could be used to flag inconsistencies prior to filing. Notwithstanding any unexpected issues or testing delays, the IRS is targeting a July 2020 release of this tool.
As it relates to FATCA initiatives, the IRS confirmed that it has an ongoing campaign targeting FFIs that do not complete Form 8966 reporting where the IRS has reason to know that such reporting should have occurred. The IRS will be ramping up its efforts to send reporting deficiency notices to these FFIs. Moreover, as part of its upcoming FATCA audit campaign, the IRS said it has been working with a small group of IGA jurisdictions and certain FFIs to better understand industry practices as part of developing a handbook to address implementation, governance, due diligence, and reporting considerations for different FFIs in various jurisdictions. Once completed, the IRS expects to make public certain portions of the handbook.
Additionally, the IRS indicated that, in light of the expiring U.S. TIN relief under Notice 2017-46, Model 1 FFIs should look to the guidance provided under FAQ Number Q3 on the FATCA FAQ page under the “Reporting” section. Further, TIN relief will not be extended past December 31, 2019, and the IRS will begin generating error notices through local Model 1 IGA tax authorities for those FATCA-reported accounts that are missing U.S. TINs, providing an initial 120-day period to correct the deficiency. The IRS confirmed that it would look to information included in corrected filings (if any) prior to issuing subsequent rounds of error notices and will also factor in where accounts without U.S. TINs are deemed reportable due to U.S. indicia. If the IRS determines there is significant noncompliance, the FFI will have at least 18 months from the date of the initial notice to remediate or address the matter before possible revocation of its FFI agreement and removal of its GIIN from the IRS FFI list.
Proposed Section 1446(f) regulations
The IRS acknowledged that it is reviewing the following issues based on industry feedback regarding the proposed regulations under section 1446(f):
- Concerns raised by brokers over the difficulties of assuming withholding responsibility and addressing delivery versus payment settlement exceptions, including questions as to whether those payees can continue to be treated as exempt recipients under the so-called eyeball test
- Impacts on QIs and how the IRS proposes to reconcile 1446(a) withholding requirements with a QI’s ability to elect to assume withholding under other withholding sections (e.g., section 1441)
- Conflicts between QI pooled reporting and the intended transparency cited as a primary purpose of section 1446 and the proposed regulations
- Questions that the proposed regulations pose regarding U.S. income tax treaty relief and intended maximum withholding rates, including whether further guidance is needed specific to Forms W-8 instructions
- Concerns on how to mitigate double withholding currently required under certain scenarios under 1446(a) and 1446(f) to the extent it may be unintentional (e.g., issues involving the qualified notice exception)
The IRS is currently considering these issues and expects to release further guidance at a later date. In the interim, the IRS welcomes additional comments regarding the proposed regulations.