IRS Clarifies Several Issues Related to Section 6055 Reporting in Proposed Regulations

On July 29, the IRS issued proposed regulations under Section 6055 that seek to clarify a number of issues raised by commenters in response to the original proposed regulations under Section 6055 and Notice 2015-68.  Filers may rely on the proposed regulations for calendar years ending after December 31, 2013, making them applicable at the option of filers for all years during which Forms 1095-B and Forms 1095-C were required to be filed.  In addition to the clarifications contained in the regulations themselves, the IRS’s comments in the preamble to the regulations provide additional helpful guidance to filers.  Ultimately, the proposed regulations are helpful but continue to overlook some areas where further binding guidance in regulations would be helpful.  Specific changes are discussed below:

Catastrophic Coverage.  Unlike other coverage purchased through an exchange, the proposed regulations implement the change announced in Notice 2015-68, requiring that insurers providing the coverage report it.  This change is effective for catastrophic coverage provided in 2017 and required to be reported in 2018.  Insurers are not required to report catastrophic coverage provided in 2016 (and otherwise required to be reported in 2017), although they are encouraged to do so on a voluntary basis.  A filer who voluntarily reports catastrophic coverage provided in 2016 is not subject to penalties on those returns.

Supplemental or Duplicative Coverage.  Consistent with Notice 2015-68, the proposed regulations simplify the rule contained in the final regulations relating to supplemental coverage. Under the proposed regulations, a reporting entity that during a month provides minimum essential coverage under more than one plan that it provides (such as an HRA and a high-deductible health plan) need only report coverage under one plan.

Truncated TINs.  Consistent with Notice 2015-68, the proposed regulations clarify that a filer may use a truncated TIN in place of the TIN of each covered individual, the responsible individual, and if applicable, the sponsoring employer’s EIN.

TIN Solicitation.  Responding to comments from Section 6055 filers, the proposed regulations clarify how the reasonable cause rules relating to TIN solicitation under Section 6724 apply to Section 6055.  The IRS acknowledged in the preamble, that the existing rules were difficult to apply outside of the financial context for which they were written.  The clarifications include:

  • Under Section 6724, a filer is required to make an initial TIN solicitation at the time an account is opened. Commenters had requested clarification regarding when an account is opened for purposes of applying the TIN solicitation rules to Section 6055.  The proposed regulations specify that the account is “opened” when the filer receives a substantially completed application for coverage, including an application to add an individual to existing coverage.  The application may be submitted either by the individual or on the individual’s behalf (for example, by an employer).  As a result, providers of minimum essential coverage who are required to report under Section 6055 should strongly consider changing their applications forms to include a request for TINs, if they have not already done so. (See the discussion of transition relief below for the treatment of coverage in effect before July 29, 2016.)
  • If the initial solicitation does not result in the receipt of a TIN for each covered individual and the responsible individual, the filer must make the first annual TIN solicitation within 75 days of such date, or in the case of retroactive coverage, within 75 days after the determination of retroactive coverage is made. The second annual solicitation must be made by December 31 of the following year.  (See the discussion of transition relief below for the treatment of coverage in effect before July 29, 2016.)
  • Under Section 6724, initial and first annual solicitations relate to failures on returns for the year in which the account is opened. In other words, to demonstrate reasonable cause for the year in which the account was opened, a filer must generally show that it made the initial and first annual solicitations.  In contrast, the second annual solicitation relates to failures on returns for all succeeding years.  Because the first return required under Section 6055 will often be required for a year after the year in which the account is “opened” (as described above), the proposed regulations provide that the initial and first annual solicitations relate to the first effective date of coverage for an individual.  The second annual solicitation relates to subsequent years.  The IRS did not discuss how these rules related to an individual who has been covered continuously since a date prior to the requirement to solicit a TIN from an individual.  Presumably, the initial and first annual solicitations will relate to the first year for which a Form 1095-B or Form 1095-C would have been required to be filed by the filer.  These changes generally relate only to the solicitation process for missing TINs and not the process for erroneous TINs.
  • An open question was whether a separate TIN solicitation was required to each covered individual on Form 1095-B or Form 1095-C. The proposed regulations provide that a filer may satisfy the TIN solicitation rules with respect to all covered individuals by sending a single TIN solicitation to the responsible individual.  This is welcome news and alleviates the concern about sending separate solicitations to children and other covered individuals.  However, the proposed regulations do not adopt commenters’ suggestion that if an individual is later added to existing coverage that prior annual TIN solicitations, if those solicitations were unsuccessful, made to the same responsible individual would satisfy the annual TIN solicitation requirement with respect to the new covered individual.  Instead, even though a filer may have made an initial and two annual solicitations to the responsible person, the addition of a new covered individual will require the filer to make a new series of solicitations with respect to the new individual’s TIN.
  • Although not addressed in the regulations, the preamble indicates that a filer may solicit TINs electronically consistent with the requirements in Publication 1586. The guidelines for electronic solicitations generally require an electronic system to (1) ensure the information received is the information sent, and document all occasions of user access that result in submission; (2) make it reasonably certain the person accessing the system and submitting the form is the person identified on the Form W-9; (3) provide the same information as the paper Form W-9; (4) require as the final entry in the submission, an electronic signature by the payee whose name is on the Form W-9 that authenticates and verifies the submission; and (5) be able to provide a hard copy of the electronic Form W-9 to the IRS if requested.  Although it is helpful to know that the IRS believes filers may make use of an electronic system for TIN solicitations like filers under other provisions of the Code, it would have been helpful for the IRS to update its outdated regulations under Section 6724 to specifically permit electronic TIN solicitations.  Ultimately, because Forms 1095-B and 1095-C do not report income that an individual may seek to avoid having reported by using an erroneous name/TIN combination, a less complicated means of electronic solicitation would have been appropriate in this case.

The preamble declines to make four changes requested by commenters:

  • First, the preamble declines to amend the regulations to clarify that a renewal application satisfies the requirements for annual solicitation. Instead, the preamble states that the provision of a renewal application that requests TINs for all covered individuals “satisfies the annual solicitation provisions” if it is sent by the deadline for those annual solicitations.  Although the rule stated in the preamble would be helpful, it is not the rule contained in the regulations.  The regulations under Section 6724 include detailed requirements for annual solicitations including that they include certain statements, a return envelope, and a Form W-9.  Accordingly, a renewal application is unlikely, on its own, to satisfy the annual solicitation requirements as stated in the preamble.  Commenters had requested some changes to these rules, but as discussed below, the IRS declined to adopt such changes in the proposed regulations.
  • Second, the proposed regulations do not remove the requirement to include a Form W-9 or substitute form in a mailed annual solicitation. The preamble indicates that this change was not needed because filers are already permitted to include a substitute Form W-9 with a TIN solicitation.  Although this is true, it sidesteps the concerns raised by commenters relating to the inappropriateness of a Form W-9.  The preamble indicates that an application or renewal application would be an acceptable substitute.  However, the IRS drafters do not seem to understand what constitutes a substitute Form W-9  because an application under the new proposed rule would have to meet several requirements that such documents are unlikely to meet.  For example, a substitute Form W-9 must include a statement under penalties of perjury that the payee is not subject to backup withholding due to a failure to report interest and dividend income and the FATCA code entered on the form indicating that the payee is exempt from FATCA reporting is correct.  Neither of these certifications is relevant to Section 6055 reporting.  Moreover, the references to a “payee” is confusing in the context of Section 6055 reporting, which does not involve a payee (and to the extent there is a payee at all, it would be the filer).  The reference to FATCA exemptions is also not relevant, especially given that only individuals would be completing the form and no U.S. person is exempt from FATCA reporting even if it were relevant.  Moreover, because an application would likely require the applicant to agree to provisions unrelated to these required certifications (such as their age being correct, gender being correct, and other information on the application being correct), a separate signature block or conspicuous statement that the IRS requires only that they consent to the certifications required to avoid backup withholding would have to be included on the form.  It seems doubtful that any applications would satisfy these requirements currently.  Given the misleading nature of the statements and the simple fact that the discussion of backup withholding is completely irrelevant to Section 6055 reporting, it even seems doubtful that many filers will redesign their application forms to satisfy the substitute form requirements even though the drafters of the proposed regulations seem to believe that such forms would be acceptable substitutes.
  • Third, the proposed regulations do not remove the requirement that a mailed TIN solicitation include a return envelope. While retaining the rule in the existing Section 6724 regulations, the preamble does, however, clarify that only a single envelope is required to be sent consistent with the decision to allow a single TIN solicitation to the responsible individual to satisfy the TIN solicitation requirement for all covered individuals.
  • Fourth, commenters had requested that the IRS adopt rules specifically permitting filers to rely on the sponsors of insured group health plans to solicit TINs from their employees on the filer’s behalf. Although the IRS indicated that a filer may use an employer as an agent for TIN solicitation, it declined to provide a distinct ground for reasonable cause when the filer contracted with the employer-sponsor to perform the TIN solicitations.  As a result, the employer’s failure to satisfy the TIN solicitation requirements will leave a filer subject to potential penalties.

Transition Relief. The preamble provides that if an individual was enrolled in coverage on any day before July 29, 2016, the account is considered opened on July 29, 2016. Accordingly, reporting entities have satisfied the requirement for the initial solicitation with respect to already enrolled individuals so long as they requested enrollee TINs at any time before July 29, 2016.

As discussed above, the deadlines for the first and second annual solicitations are set by reference to the date the account is opened.  Accordingly, the first annual solicitation with respect to an individual enrolled in coverage before July 29, 2016, should be made at a reasonable time after that date (the date on which such account is considered open) consistent with Notice 2015-68. Accordingly, a filer that makes the first annual solicitation within 75 days of July 29, 2016 (by October 12, 2016), will be treated as having made such solicitation within a reasonable time.

The preamble states that filers that have not made the initial solicitation before July 29, 2016, should comply with the first annual solicitation requirement by making a solicitation within a reasonable time of July 29, 2016. The preamble reiterates that as provided in Notice 2015-68, a filer is deemed to have satisfied the initial, first annual, and second annual solicitations for an individual whose coverage was terminated prior to September 17, 2015, and taxpayers may continue to rely on this rule as well.  Because a filer is not required to make an annual solicitation under Section 6724 during a year for which it is not required to report coverage, presumably, a filer need not make any solicitations with respect to an individual for whom coverage was terminated at any time in 2015.

AIR System Messages.  The preamble to the proposed regulations formalizes the position of the IRS with respect to TIN mismatch messages generated by the ACA Information Returns (AIR) filing system.  In a footnote, the preamble states that such error messages are “neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message.”  However, given the IRS’s stated position that error correction is a necessary part of demonstrating “good faith” required for penalty relief, it is unclear what, if anything, a filer should do in response to these error messages.  In any event, filers may wish to demonstrate good faith by making an effort to obtain correct TINs from responsible individuals and head-off future errors by working to do so now, rather than later, when such efforts will likely be required.

IRS Simplifies Filing Requirements for Section 83(b) Elections

On July 25, the IRS released final regulations eliminating the requirement that taxpayers making a Section 83(b) election file a copy of the election notice with their federal income tax return.  Under Section 83, the fair market value of property received (less any basis in the property) for the performance of services is generally included in income when the property is no longer subject to a substantial risk of forfeiture or when the taxpayer’s interest in the property is transferable.  However, taxpayers may elect under Section 83(b) to include the property’s fair market value (less any basis in it) as of the date of transfer in income in the year of transfer.  Despite the upfront tax liability, this election may actually defer taxation on the appreciated value of the property and subject the appreciation to capital gains rates rather than ordinary income rates.  Under the prior regulations, taxpayers who make an 83(b) election must submit to the IRS a copy of the election notice not only within 30 days after the date of the transfer, but also with their federal income tax return for the year of the transfer.  Last summer, the Treasury and the IRS proposed to eliminate the latter filing requirement, and after receiving no comments, adopted the final regulations without modification.

The requirement to file an election notice with the annual return was duplicative and easy to miss because taxpayers making an 83(b) election were already required to submit to the IRS the election notice within 30 days after the date of the transfer.  Further, as the IRS explained in the preambles to the proposed regulations, this requirement had become an obstacle to electronic filing of returns for certain taxpayers, since commercial e-filing software does not consistently allow for submitting an 83(b) election notice with the return.  The final regulations apply to transfers on or after January 1, 2016, and taxpayers can also rely on these regulations for transfers in 2015.  As a result, taxpayers are not required to file a copy of any 83(b) election made in 2015 with their 2015 tax returns.

Significantly, the final regulations ease compliance for non-resident alien employees of multinational companies.  Although foreign tax consequences can make transfers of restricted stock to such employees undesirable from the employee’s perspective, it may be desirable for the employee to make a section 83(b) election when restricted stock is transferred.  This is particularly true for start-ups and other companies where the value of the shares is small when granted and is likely to increase.  (It is often undesirable to make an 83(b) election for a mature company where the value of the stock is high at transfer and may decline.)

When nonresident alien employees working outside of the United States receive non-vested equity compensation, they may have no obligation to file a U.S. tax return, and could easily neglect to file a return for purposes of filing the election notice.  (Because the employees are nonresident aliens working outside the United States, the income from their 83(b) elections would presumably be foreign source income resulting in no U.S. income tax due in the year of transfer.)  But if these employees become U.S. residents between the grant and vesting dates, their failure to file nonresident returns and attach the 83(b) election notices would invalidate their 83(b) elections, thereby subjecting the value of the property to U.S. income tax upon vesting based on their U.S. resident status at the time of vesting.  Under the final regulations, these employees – and any other service providers – must simply file an election notice with the IRS within 30 days after the date of the transfer.

Although the final regulations simplified filing obligations under Section 83(b), the IRS emphasized taxpayers’ recordkeeping responsibilities under Section 6001, especially to show the basis of property reported on taxpayers’ returns.  Thus, to protect themselves from tax-return audit liability, executives and other service providers who receive restricted property under an 83(b) election must be careful to keep records of the original cost of the property received, and retain the records until at least the period of the limitations for the returns expires.

Proposed Regulations Impose Reporting Obligations on Foreign-Owned U.S. Entities

Today, the IRS published proposed regulations that would impose reporting obligations upon a domestic disregarded entity wholly owned by a foreign person (foreign-owned DDE).  Specifically, the proposed regulations would amend Treasury Regulation § 301.7701-2(c) to treat a foreign-owned DDE as a domestic corporation separate from its owner for the limited purposes of the reporting, recordkeeping, and other compliance requirements that apply to 25 percent foreign-owned domestic corporations under Section 6038A of the Internal Revenue Code.  These changes broaden the IRS’s access to information that would help the IRS enforce tax laws under the Code and international treaties and agreements.

The proposed regulations would render foreign-owned DDEs reporting corporations under Section 6038A.  Accordingly, a transaction between a foreign-owned DDE and its foreign owner (or another disregarded entity of the same owner) would be considered a reportable transaction for purposes of the reporting and recordkeeping rules under Section 6038A, even though the transaction involves a disregarded entity and generally would not be considered a transaction for other purposes (e.g., adjustment under Section 482).  Thus, a foreign-owned DDE would be required to file Form 5472 for reportable transactions between the entity and its foreign owner or other foreign-related parties, and maintain supporting records.  Further, to file information returns, a foreign-owned DDE would have to obtain an Employer Identification Number by filing a Form SS-4 that includes responsible party information.

This rulemaking project is still in its infancy, and it remains to be seen if and how the IRS harmonizes the proposed regulations with existing rules.  For example, the proposed regulations impose a filing obligation on a foreign-owned DDE for reportable transactions even if its foreign owner already has an obligation to report the income resulting from those transactions (e.g., transactions resulting in income effectively connected with the conduct of a U.S. trade or business).  The Treasury Department and the IRS sought comments on possible alternative methods for reporting the disregarded entity’s transactions in these cases.  In the preambles, the IRS also stated that it is considering changing corporate, partnership, and other tax or information returns (or their instructions) to require foreign-owned DDEs to identify all the foreign and domestic disregarded entities it owns, consistent with the proposed regulations.

These proposed regulations will apply for tax years ending on or after May 10, 2017.  Comments and public hearing requests are due by August 8, 2016.

IRS To Implement Certification Program For Professional Employer Organizations

May 5, 2016 by  
Filed under Employee Classification, IRS

Today, the IRS released temporary and proposed regulations implementing a new voluntary certification program for professional employer organizations (PEOs).  These regulations set forth the application process and the tax status, background, experience, business location, financial reporting, bonding, and other requirements PEOs must meet to become and remain certified.  The IRS will begin accepting applications for CPEO certification on July 1, 2016, and will release a revenue procedure further detailing the application process in the coming weeks.  We will provide more details on the regulations when we have had the opportunity to review them.

IRS Corrects FIRPTA Final Regulations

April 27, 2016 by  
Filed under FIRPTA, IRS

Income tax withholding under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) applies to a foreign person’s disposition of a U.S. real property interest. On April 26, 2016, the IRS published a correcting amendment to the final regulations (T.D. 9751) addressing the taxation of and withholding on payments to foreign persons on certain dispositions of U.S. real property interests, under Internal Revenue Code Sections 897 and 1445. This correcting amendment is effective on April 26, 2016, and applicable on or after February 19, 2016 – the effective date of the final regulations.

In general, under Code Section 1445(e) and its regulations, certain entities must withhold tax upon certain dispositions and distributions of U.S. real property interests to “foreign persons.” The existing Treasury Regulation § 1445-5(b)(3)(ii)(A) states that “[i]n general, a foreign person is a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate, but not a resident alien individual.” The final regulations affected certain holders of U.S. property interests and withholding agents that are required to withhold tax on certain disposition of, and with respect to, these property interests. While the final regulations initially did not impact the definition of a “foreign person,” the correcting amendment revised the “but not” clause to state that a foreign person is “not a qualified foreign pension fund (as defined in section 897(l)) or an entity all of the interests of which are held by a qualified foreign pension fund.” Code Section 897(l) – recently added by the Protecting Americans from Tax Hikes Act of 2015 – provides that federal income taxation does not apply to distributions received from a real estate investment trust by a qualified foreign pension fund or an entity wholly owned by a qualified foreign pension fund.

Proposed Regulations on Country-by-Country Reporting Raises Concerns for ABA

On March 23, 2016, the American Bar Association (ABA) Section of Taxation commented on proposed Treasury regulations requiring country-by-country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group with annual revenue of $850 million or more in the preceding accounting year.  Issued in December 2015, Proposed Regulation § 1.6038-4 would require these U.S. persons to file annual reports containing information on a CbC basis of a MNE group’s income, taxes paid, and certain indicators of the location of economic activity.

The United States, through bilateral agreements with other tax jurisdictions, may exchange U.S. CbC reports with those tax jurisdictions in which the U.S. MNE group operates. Every information exchange agreement to which the United States is a party requires both parties to treat the information as confidential, implement data safeguards, and use the information only for tax administration purposes. The United States will stop automatic exchange with tax jurisdictions violating those requirements until the violations are cured.

Aimed at combating tax base erosion and international profit shifting, the proposed regulation will give the IRS greater transparency into the operations and tax positions taken by U.S. MNE groups. While the information in a CbC report will not itself constitute conclusive evidence of federal income tax or transfer pricing violations, they may form the basis for the IRS’s further inquiries into transfer pricing practices or other tax matters.

Members of the ABA Taxation Section, while generally supportive of the proposed regulations, urged the IRS to implement changes and provide clarification. Section members expressed concern that the delay of the U.S. effective date to mid-2016 “will cause hardships for U.S. companies because they will be required to submit CbC reports directly to foreign tax authorities for fiscal year 2016 with the concomitant problems of multiple filings and potentially weaker data confidentiality protections.” Further, a mid-year effective date would cause reporting issues for calendar year-end U.S. MNEs with foreign constituents having a 2016 accounting year that begins before the publication date of the final regulations and carries over into 2017.

Regarding the timing and manner of filing reports, section members urged the IRS to allow MNEs (a) to file within a 12-month period after the end of the accounting period to which the report relates, rather than impose an accelerated deadline; and (b) to use mix-source data to generate their CbC reports. Section members also asked the IRS to issue tie-breaker rules for residency determinations, clarify the meaning of “tax jurisdiction of residence” for purposes of determining territorial income, and clarify how partnerships are treated under the $850 million threshold.