Donna J. Fisher
Senior Vice President
Tax, Accounting & Financial Management
(202) 663-5318
[email protected]
September 11, 2015
Theodore D. Setzer
International Business Compliance - Foreign Payments Program
Internal Revenue Service
110 West 44th Street
New York, NY 10036
Dear Ted,
Thank you for meeting with the ABA’s Information Reporting Advisory Group (IRAG) on April
28, 2015. We appreciate your taking the time to have a dialogue with us on some very important
issues. As we promised during the meeting, we are providing a summary of the concerns and
recommendations discussed for your and your colleagues’ consideration.
We strongly believe that the issues summarized below need to be resolved as soon as possible.
Some of them have been raised by the financial services industry as serious concerns for many
years (in one case, back to 1996), and our concerns about these issues continue to escalate. As
legislators increasingly use information reporting and withholding rules as “revenue raisers”, we
think it is important that the IRS make the issues listed in this letter a priority in order to promote
more efficient tax administration and minimize the burden on withholding agents and their
customers. We also believe more collaboration is needed in order to provide a workable structure
from both a privacy and an accuracy perspective, and we look forward to working with you and
your colleagues to resolve the outstanding questions described below, as financial institutions
take their compliance responsibilities very seriously.
Below is a summary of the main issues discussed during our April 28 meeting, and our
recommendations for resolving them.
FATCA (Chapter 4) and NRA (Chapter 3) Form 1042-S Reporting and Withholding
Compliance
IRS Examinations
It is our understanding that FATCA audits of U.S. withholding agents will likely begin in 2016,
with the review of 2014 Forms 1042 and 1042-S filed during the transition period described in
Notice 2014-33. While we appreciate that penalties for imperfect compliance may be waived for
this audit period where there is evidence of good faith efforts to comply, the withholding agent
community remains concerned that withholding tax liability may be assessed by the IRS for minor
errors.
Our experience with Chapter 3 audits has been that small errors on a Form W-8 would often
result in the IRS audit team treating the entire form as invalid and the account as undocumented,
resulting in significant extrapolated withholding tax liabilities for insignificant errors that did not
affect foreign customers’ substantive certifications. Withholding agents did not view these as
significant enough to render the entire form invalid, and did not anticipate that this would be the
IRS’s view until after the IRS made its position known during the initial Chapter 3 audits (which
followed the implementation of the new Chapter 3 regulations and revised Forms W-8 in 2001)
and related Voluntary Compliance Program. Some of the errors identified during initial
examinations, such as abbreviated country names, were ultimately deemed “inconsequential” by
the IRS in published guidance.
Similarly, we are concerned that due to the complexity of FATCA and the resulting significant
changes to the Forms W-8 (including the issuance of the new Form W-8BEN-E), IRS examiners
will again take positions that Forms W-8 are invalid due to insignificant errors that were not
identified as issues by the IRS or communicated to withholding agents in a timely manner.
Recommendation: Audit guidelines for IRS agents, such as the Internal Revenue Manual, should
make it clear that, for all audit years, insignificant errors on a Form W-8 should not render the
entire form invalid and result in withholding liability for customers or withholding agents. We
would be happy to work with you and your team to provide examples of insignificant errors (we
have provided one example below under “RDCFFI or PFFI versus Reporting Model 1 or 2 FFI
status”).
Form 1042-S Code Changes
Implementing system modifications for re-numbered Form 1042-S codes requires significant
efforts by financial institutions; therefore, such changes should be kept to a minimum from year
to year. The practice of re-numbering existing codes whenever new codes are added is especially
problematic, as such changes require both extensive re-programming of systems and
reconciliations between old and new codes and increases the risk of error.
Recommendation: Maintain the current numbering of codes used on Form 1042-S and only add
new codes as needed (e.g., for new income types or statuses).
Form 1042-S Codes and Form W-8 Mapping
Several Form 1042-S codes used for reporting the payee’s FATCA status do not correspond to
the check boxes for “Chapter 4 FATCA Status” on the revised Forms W-8. See attachment
(“Form 1042-S Chapter 4 Codes Not Mapping to W-8 Data Fields”) for a list of our issues and
questions.
Recommendation: Ensure that the Chapter 4 FATCA status codes in the Form 1042-S
instructions are clearly defined and correspond to the Form W-8 checkboxes or other information
readily ascertainable from customers’ documentary evidence, account-opening or AML/KYC
documentation, or other supporting documentation. Additionally, to reduce the risk of Form
1042-S reporting errors, the list of codes should only be changed as any new codes are added.
2
RDCFFI or PFFI versus Reporting Model 1 or 2 FFI status
The Chapter 4 status boxes in Line 5 of Part I of the Forms W-8BEN-E and W-8IMY are not
consistent with the IRS Foreign Financial Institution (“FFI”) registration portal. In addition, we
specifically request that the IRS provide clarification for the following example:
Pub. 5118 (p. 18) instructs FFIs that are “Reporting FIs” in Model 1 or Model 2 InterGovernmental Agreement (“IGA”) countries to register as Registered Deemed Compliant
FFIs (RDCFFIs) or Participating FFIs, respectively. However, the IRS Form W-8BEN-E/W8IMY instructions for Line 5, FATCA Status, (“FFIs Covered by an IGA and Related
Entities”, p.7) direct a Reporting IGA FFI in a Model 1 or Model 2 country to check either
Reporting Model 1 FFI or Reporting Model 2 FFI, respectively. Further, the Form W-8
instructions direct an FFI that is a RDCFFI under an applicable IGA to check “Nonreporting
IGA FFI” rather than RDCFFI. This results in errors by FFIs in completing the Form W8BEN-E/W-8IMY Line 5 FATCA Status, due to the fact that FFIs located in IGA countries
are required to register as an RDCFFI or a PFFI with the IRS, but aren’t allowed to complete
the Form W-8 with that status and must instead indicate a FATCA status of Reporting Model
1 or Model 2 FFI or Nonreporting IGA FFI.
Recommendation: Clarification of the instructions is needed from the IRS, so that the
requirements for completing the Form W-8BEN-E or Form W-8IMY FATCA status are clear.
Further, withholding agents that have accepted Forms W-8 completed by FFIs located in IGA
countries with a FATCA status of RDCFFI or PFFI consistent with the FFI’s registration status
prior to issuance of written clarification should not be penalized, and such forms should remain
valid through their normal life (indefinitely or 3+ years, depending on the W-8 form type).
Withholding agent acceptance of Forms W-8 in this manner could be treated as an insignificant
error.
Countries Removed From IGA In-Substance List
In a situation where a country is removed from the IGA “in substance” list (because of a failure to
demonstrate firm resolve to sign the IGA), additional time is needed beyond the “the first day of
the month following the month of removal” allotted under Announcement 2014-38 for FFIs to
update their status on the FATCA registration website. Additional time is also needed to enable
withholding agents to collect and validate updated Forms W-8 for these FFIs.
Recommendation: The government’s changes to IGA lists should not trigger immediate or
retroactive withholding agent responsibilities. There should be a reasonable period of time
allowed – possibly six months – for FFIs within de-listed countries to sign FFI agreements and
become PFFIs, and for withholding agents to obtain any required updated documentation.
3
Electronic Forms W-8 Collected from Third Parties and Intermediaries, and E-Signature of Forms
W-8 and W-9
Withholding agents are uncertain as to whether they can accept certain Forms W-8 provided
electronically. Examples include:



Forms W-8 that clients provide by referring withholding agents to third parties (e.g.,
Markit or Clarient) that collect them from foreign persons and maintain them in a
database (i.e., warehouse) of forms. [Note: The new IRS FATCA General Compliance
FAQ#11 posted on August 14, 2015 was very helpful in addressing this uncertainty, and
we appreciate the IRS’s quick response and guidance on this issue.]
Forms W-8 or W-9 from underlying beneficial owners provided to withholding agents by
an intermediary (or flow-through entity) along with a Form W-8IMY, that were received
electronically by the intermediary (or flow-through entity) and do not have a physical
signature but were signed electronically by the beneficial owners using the intermediary’s
(or flow-through entity’s) electronic signature system.
Forms W-8 and Forms W-9 signed through electronic signature programs such as
Docusign.
Recommendation: Written guidance that clarifies the rules for accepting forms signed, stored or
transmitted electronically is requested to ensure that withholding agents are applying these rules
correctly and consistently. The ABA would be glad to work with the IRS on these issues.
Negative Interest
So-called “negative interest” payments are becoming more prevalent due to the current economic
environment of low interest rates. The payments arise in a variety of transactions, yet the current
U.S. tax rules do not provide any guidance on the characterization or source of these payments.
Questions that have been raised include the following:



What is the characterization and source of negative interest for tax information
reporting purposes by the bank that is holding customers’ deposit accounts on which
the negative interest is computed and charged?
How should negative interest be treated for tax information reporting purposes by a
bank when applied to a customer’s deposit account (e.g., should the negative interest
be netted against “positive interest” paid by the bank to the customer and, if so,
should the amounts be netted over the entire calendar year or over some shorter
period, such as monthly, or should the negative interest be treated as a separate fee
paid by the customer to the bank that has a character other than interest?)
If “negative interest” is accrued and written off, how should the write-off be treated
for tax information reporting purposes?
4
Recommendation: The IRS should clarify the treatment of so-called “negative interest”
payments. There are several potential options, including treating them as interest, fees, or some
other type of payment not subject to withholding (e.g., premium). Alternatively, the IRS could
implement a residence-of-the-recipient based sourcing rule. At a minimum, the IRS should
clarify the withholding and reporting implications so there is correct and consistent, industrywide treatment.
FIRE (Electronic Filing)
There are customer privacy and fraudulent return filing risks associated with the electronic filing
process. We believe the IRS should institute additional controls to help mitigate these risks. We
discussed this during our meeting with you, and because any specific examples by their very
nature would contain sensitive information that might compromise the integrity of the IRS’s or
banks’ systems, we prefer to discuss such examples with you or others at the IRS rather than
describe them in detail here.
Recommendation: The IRS should institute additional safeguards to prevent customer privacy
breaches and fraudulent returns in connection with electronic filings. For example, a user
security administration process, similar to the existing security administration process for the IRS
TIN Matching service, could be adopted.
Business Addresses
The current IRS practice of using only one business address – the last known business address –
of a financial institution (FI) for all types of correspondence may result in significant risk to
customers, the IRS and withholding agents. For example, several financial institutions have
reported that their B-Notice files were sent to incorrect addresses inside or outside their
organizations. In some cases B-Notice files were sent to customers of the FI; in other cases they
were sent to a third party that had no association with the FI.
This creates the risk that the FI will not be able to process B-Notices and mail B-Notice
solicitations to taxpayers in a timely fashion, and taxpayers may not have sufficient time to
respond to a B-Notice solicitation and avoid withholding. Improperly addressed B-Notice files
also create a significant privacy risk. Taxpayer information delivered via paper is immediately
exposed, and even encrypted electronic information could potentially be hacked. Although an
address for file delivery can be provided via an encrypted form, the IRS has not yet adopted that
process.
Recommendation: Just as taxpayers themselves cannot rely on a single business address for
correspondence/filing with the IRS, the IRS should not rely solely on either a single business
address or the last known business address of an FI for all communications. The IRS procedures
5
should be modified to allow the use of a distinct address for any information reporting
communications sent to an FI.
Form 1042-S “account-by-account reporting” for US-source Bank Deposit Interest Paid to
NRAs
We are concerned that the following “What’s New” rule on page 1 of the 2015 Form 1042-S
instructions may apply to US-source bank deposit interest subject to reporting that is paid on or
after January 1, 2016 to nonresident alien (NRA) individuals whose tax residence is in a country
listed in Rev. Proc. 2014-64 (or applicable superseding Revenue Procedure):
“Account-by-account reporting for U.S. financial institutions. For amounts paid on or
after January 1, 2016, a U.S. financial institution will be required to report payments of
the same type of income (as determined by the Income code in box 1) made to multiple
financial accounts held by the same beneficial owner on separate Forms 1042-S for each
account.”
Withholding agents should be allowed to aggregate reportable bank deposit interest on a single
combined Form 1042-S when reporting to NRA customers, the same way they are allowed for
Form 1099-INT deposit interest reporting. Because bank deposit interest is not subject to Chapter
3 withholding, Forms 1042-S filed with NRA customers to report bank deposit interest will not
reflect withholding, and will only reflect income that is not taxable in the U.S.
Recommendation: The IRS should clarify the Form 1042-S instructions to explain that
withholding agents can either aggregate and report bank deposit interest paid to multiple accounts
on the same combined Form 1042-S, or report interest paid to each account on a separate Form
1042-S (similar to the current Form 1099-INT rules in IRS Regulation 1.6049-4T(b)(1)) when
reporting to NRA customers for 2016 and future years.
Again, we thank you for meeting with us. We respectfully request that the IRS address these
critical issues as soon as possible, and we will be happy to meet with you and your colleagues for
further discussion. In the meantime, please feel free to contact John Kinsella
([email protected]; 202-663-5317) or me ([email protected]; 202-663-5318).
Sincerely,
Donna J. Fisher
Cc:
Rosemary Sereti – Industry Director, Financial Services - LB&I Financial Services
Candace Cromling – Director, National Public Liaison
Caryl Grant – IRPAC Program Manager, National Public Liaison
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2015 Form 1042-S (posted 12/18/14): Chapter 4 Codes Not Mapping to W-8 Data Fields
Chapter 4 status
Current Chapter 4 Status Code
Comments
code - 1042-S
Description
1
2
3
U.S. Withholding Agent - FI
U.S. Withholding Agent - Other
Territory FI - not treated as U.S.
Person
4
Territory FI - treated as U.S. Person
5
6
Participating FFI - Other
Participating FFI - Reporting Model
2 FFI
Registered Deemed-Compliant FFI Reporting Model 1 FFI
7
Should code 3 be used for all territory FIs except those
treated as US persons on IMY?
Can work this out using the Territory FI option on a W8IMY.
Inconsistent - Shown as Participating FFI on W-8s.
Inconsistent - Shown as Reporting Model 2 FFI on W-8s.
Inconsistent - Shown as Reporting Model 1 FFI on W-8s.
8
Registered Deemed-Compliant FFI Sponsored entity
Inconsistent - Shown as Sponsored FFI that has not
obtained a GIIN on W-8s.
9
Registered Deemed-Compliant FFI Other
Inconsistent - Shown as Registered deemed-compliant FFI
(other than a reporting Model 1 FFI or sponsored FFI that
has not obtained a GIIN) on W-8BEN-E and W8IMY (slightly
different language on W-8EXP).
10
Certified Deemed-Compliant FFI Other
11
Certified Deemed-Compliant FFI FFI with Low Value Accounts
Inconsistent - Only other option on W-8s is Certified
deemed-compliant limited life debt investment entity. Are
there others?
Inconsistent - Shown as Certified deemed-compliant FFI
with only low-value accounts on W-8s.
12
Certified Deemed-Compliant FFI Non-Registering Local Bank
Agrees - except for absence of "FFI" reference.
13
Certified Deemed-Compliant FFI Sponsored entity
14
Certified Deemed-Compliant FFI Investment Advisor or Investment
Manager
Inconsistent - Shown as Certified deemed-compliant
sponsored, closely held investment vehicle on W-8s. Too
similar to Registered Deemed Compliant - sponsored
entity status.
Agrees - except for absence of "FFI" reference.
15
Nonparticipating FFI
16
17
Owner-Documented FFI
Limited Branch treated as
Nonparticipating FFI
Inconsistent - W-8BEN-Es includes limited FFIs or FFIs
related to a Reporting IGA FFI other than a registered
deemed-compliant FFI or Participating FFI (slightly
different language on W-8IMY).
Agrees.
Inconsistent - Would code 17 only be used if "Limited
Branch" is checked on Part II of W-8BEN-E/IMY?
18
Limited FFI treated as
Nonparticipating FFI
Inconsistent - Just treated as nonparticipating on W-8s. No
way to confirm whether an NPFFI is a Limited FFI.
19
Passive NFFE identifying Substantial
U.S. Owners
Will need to refer to part XXVI of W-8BEN-E but otherwise
agrees.
20
Passive NFFE with no Substantial
U.S. Owners
Will need to refer to part XXVI of W-8BEN-E but otherwise
agrees.
21
Publically Traded NFFE or Affiliate
of Publicly Traded NFFE
Inconsistent - Shown as "Publicly traded NFFE or NFFE
affiliate of a publicly traded corporation" on W-8s.
22
23
Active NFFE
Individual
24
25
26
Section 501(c) Entities
Excepted Territory NFFE
Excepted NFFE - Other
Agrees.
Would generally be anyone who has submitted a W-8BEN
but could be someone who submitted a W-8IMY or W8ECI. This is not a FATCA classification and an individual
could fall under other FATCA statuses noted as the format
of the W-8IMY illustrates.
Inconsistent - Shown as "501(c) organization" on W-8s.
Agrees.
Inconsistent - Would need knowledge of the different
types of excepted NFFE classification to be able to link the
statuses between 1042-S and W-8 (confirm these are
"Nonfinancial group entity," "Excepted nonfinancial startup company," "Excepted nonfinancial entity in liquidation
or bankruptcy," and "Nonprofit organization").
27
Exempt Beneficial Owner
28
Entity Wholly Owned By Exempt
Beneficial Owners
29
30
31
Unknown Recipient
Recalcitrant Account Holder
Nonreporting IGA FFI
No corresponding W-8 check-box expected.
No corresponding W-8 check-box expected.
Inconsistent - W-8BEN-E includes "(Including an FFI treated
as a registered deemed-compliant FFI under an applicable
Model 2 IGA)."
32
33
Direct reporting NFFE
U.S. reportable account
34
Non-consenting U.S. account
Agrees.
When would this FATCA status code be used? A U.S.
reportable account would be either a specified U.S. person
that would be subject to potential 1099 reporting and not
1042-S reporting or would be a Passive NFFE with
controlling U.S. persons that would apparently be
reportable with the FATCA status code of 19.
If non-consenting, should the account not be reported
under a pooling code?
Inconsistent - Would need knowledge of the different
types of exempt beneficial owner classifications to be able
to link the statuses between 1042-S and W-8 (confirm
there are "Foreign government, government of a U.S.
possession, or foreign central bank of issue,"
"International organization," and "Exempt retirement
plans" on W-8BEN-E (W-8EXP uses slightly different
terms)).
Agrees.
35
36
37
Sponsored direct reporting NFFE
Excepted Inter-affiliate FFI
Undocumented Preexisting
Obligation
US branch - ECI presumption
applied
Agrees.
Agrees.
Pre-existing account that has not been FATCA Classified
yet.
U.S. Branch of foreign bank or insurance company with EIN
- presumed ECI.
39
Account Holder of Excluded
Financial Account
Reporting amounts paid with respect to an account that is
excluded from the definition of a financial account under
Reg. §1.1471-5(b)(2) or under Annex II of the Model 1 or 2
IGAs. Does this code override other applicable Ch. 4 status
codes for the account holder?
40
Passive NFFE reported by FFI
Used to report that FFI withholding statement certifies
that FFI has reported the account held by the Passive NFFE
as a U.S. account. Does this code override the applicable
Ch. 4 status code 19 for the account holder?
41
NFFE subject to 1472 withholding
42
43
44
Recalcitrant Pool - No U.S. Indicia
Recalcitrant Pool - U.S. Indicia
Recalcitrant Pool - Dormant
Account
Recalcitrant Pool - U.S. Persons
Recalcitrant Pool - Passive NFFEs
Nonparticipating FFI Pool
U.S. Payees Pool
QI - Recalcitrant Pool - General
NFFE subject to withholding under §1472 unless the NFFE
is treated as a recalcitrant account holder in which case
code 30 is required. Under what circumstances will an
NFFE be subject to withhholding under §1472 but not be
treated as a recalcitrant account holder?
Should correspond to Withholding Statement.
Should correspond to Withholding Statement.
Should correspond to Withholding Statement.
38
45
46
47
48
49
Should correspond to Withholding Statement.
Should correspond to Withholding Statement.
Should correspond to Withholding Statement.
Should correspond to Withholding Statement.
Should correspond to Withholding Statement.