IRS Provides Transitional Relief for PATH Act’s Changes to Form 1098-T Reporting for Colleges and Universities

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April 28, 2016

On April 27, 2016, the IRS issued transitional penalty relief to colleges and universities under Announcement 2016-17 with respect to new reporting requirements implemented as part of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Prior to the PATH Act, eligible educational institutions were required to report annually on Form 1098-T either (i) the aggregate amount of payments received for qualified tuition and related expenses, or (ii) the aggregate amount billed for such tuition and expenses. Section 212 of the PATH Act eliminates the option to report payments billed, meaning that colleges and universities must report the amount of payments received each year on a prospective basis.

If a college or university fails to properly file correct or timely tuition information with the IRS or furnish a proper written statement to the recipient, reporting penalties will apply under sections 6721 and 6722. Numerous eligible educational institutions notified the IRS that the law change would require computer software reprogramming that could not be completed prior to the 2016 deadlines for furnishing Forms 1098-T, which would trigger widespread penalties. Accordingly, Announcement 2016-17 permits eligible educational institutions to report the aggregate amount billed on all 2016 Forms 1098-T, effectively providing one year of transitional relief.

IRS Corrects FIRPTA Final Regulations

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April 27, 2016

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.

Government Files Brief Opposing Supreme Court Review of Bankers Associations’ Challenge to FATCA Reporting Requirements

The government filed its brief in opposition to a petition for certiorari seeking Supreme Court review of a decision holding that the Anti-Injunction Act prevents two banking associations from challenging a Treasury regulation requiring banks to report the amount of interest earned by nonresident alien account holders.  The banks are concerned with the substantial numbers of nonresident customers that have closed their accounts out of fear that the banks will disclose their information to the customers’ home governments.  As discussed in greater detail in a previous post, the bankers associations have gained support in the form of three amicus briefs, which generally highlight the tendency of the IRS to overstep its statutory authority and the unfairness that would result if banks are required to violate the rule and expose themselves to possible civil and criminal penalties in order to legally challenge the substance of the rule.

The government’s brief in opposition argues that the Court of Appeals for the D.C. Circuit was correct to deny the challenge on the grounds that the Anti-Injunction Act prevents the suit, stating that the holding does not conflict with any existing court of appeals decision.  However, the government had to address a new argument raised by the bankers associations in its petition for certiorari—that the Anti-Injunction Act does not apply because the alternative method of judicial review, to pay the penalty and then sue for a refund, is inadequate.  The government argued that this position was not raised until the petition for rehearing, and thus the position is time-barred.

Court Dismisses Sen. Rand Paul’s Challenge to FATCA

The U.S. District Court for the Southern District of Ohio dismissed a challenge to the Foreign Account Tax Compliance Act (FATCA) brought by Senator Rand Paul and several current and former U.S. citizens living abroad on standing grounds (Crawford v. United States Department of the Treasury).  The plaintiffs had argued that FATCA’s withholding and reporting requirements imposed on individuals and foreign financial institutions (FFIs), certain intergovernmental agreements (IGAs) negotiated by the Treasury, and the requirement to file a foreign bank account report (FBAR) by U.S. persons with financial accounts that exceed $10,000 in a foreign country were unconstitutional.

The court evaluated the requirements necessary for Article III standing and concluded that none of the individuals named in the suit had suffered or was about to suffer injury under the FATCA withholding tax, and, since all were individuals, none of the named plaintiffs could be FFIs subject to the requirements imposed on such entities.  Instead of asserting concrete particularized injuries, such as penalties brought for failure to comply with FATCA or FBAR requirements, the plaintiffs argued general “discomfort” with the disclosure requirements (Senator Paul also asserted a loss of political power), which the court deemed too abstract and thus insufficient to confer Article III standing.

DOJ Repeatedly Signals Intent to Ramp Up Criminal Prosecutions for Employment Tax Failures

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April 14, 2016

The U.S. Department of Justice has recently proposed amendments to the U.S. Sentencing Commission Guidelines Manual (the “Guidelines”) to sharpen criminal prosecution of willful tax violations. Code section 7202 provides that any person who willfully fails to collect or truthfully account for and pay taxes when required shall be guilty of a felony and, if convicted, subject to a fine up to $10,000 and up to five years’ imprisonment. Since 1987, the background commentary in the sentencing guidelines has stated that Code section 7202 violations are “infrequently prosecuted.” In its annual letter to the Sentencing Commission, the Justice Department explained that defense attorneys have been citing this language to argue for more lenient sentences in Code section 7202 cases. The Justice Department recommended that the sentence be deleted because it is no longer true: Prosecutions have grown from three cases in 2002 to 46 cases in 2014. The Sentencing Commission subsequently recommended that the Guidelines be amended to delete the sentence as a requested.

At a Federal Bar Association Tax Law Conference on March 4, 2016, two attorneys from the Justice Department confirmed that the proposed change reflects the Justice Department’s commitment to employment tax enforcement and is dedicating additional resources to Code section 7202 cases. Employment tax withholdings represent 70 percent of all revenue collected by the Internal Revenue Service, and rampant violations are prompting the U.S. Department of Justice to prosecute employment tax violations more aggressively. Speaking at the Federal Bar Association Tax Law Conference on March 4, 2016, Caroline. D. Ciraolo, the Department of Justice Tax Division Acting Assistant Attorney General, said that the Justice Department will seek more civil injunctions in employment tax cases, which involve employers who fail to collect, account for, and deposit employment wage withholdings. Employers subject to a civil injunction must pay employment taxes on time, notify the IRS when the taxes have been paid, refrain from assigning property to or paying creditors until the taxpayers have paid employment tax obligations accruing after the date of the injunction, and inform the IRS if they establish a new business.

More recently, Noreene Stehlik, a recently appointed Senior Litigation Counsel at the Department of Justice Tax Division, also affirmed the Justice Department’s commitment to employment tax enforcement. At a D.C. Bar Taxation Section conference on April 13, 2016, Stehlik stated that the Justice Department has, in the first quarter of 2016, sought almost as many civil injunctions as it sought in all of 2015. She added that employers not complying with civil injunctions may be subject to criminal prosecution.

The Justice Department’s more aggressive approach seems to embrace the idea that when an employer, payor, or withholding agent makes the decision to use trust fund taxes (i.e., taxes withheld from employees, taxes withheld for backup withholding purposes, and taxes withheld under Chapters 3 and 4 of the Code) to pay other creditors, the use of such funds is tantamount to theft. Businesses that engage in this practice tend to be in dire straits financially and should not make matters worse by using funds held in trust for the government. Engaging in such practices often leads to personal liability for the individuals approving or making the decisions to improperly use the funds, but may also lead to criminal prosecution based upon recent comments from the Justice Department.

IRS Releases New W-8BEN-E and Instructions

On April 13, the IRS released a revised version of Form W-8BEN-E, which is used by foreign entities to report their U.S. tax status and identity to withholding agents. Accompanying updated instructions were also released. The new Form W-8BEN-E, which had not been updated since 2014, includes several notable new items. First, 10 check boxes have been added to Part III, Item 14b, “Claim of Tax Treaty Benefits,” to require the foreign entity to identify which limitations on benefits provision it satisfies. The updated instructions include substantial information on these limitations on benefits provisions.

The second significant change relates to the requirement that certain disregarded entities complete Part II. Disregarded entities generally do not complete Form W-8BEN-E, but disregarded entities that receive withholdable payments and either (i) have a Global Intermediary Identification Number (GIIN) or (ii) is a branch of a foreign financial institution (FFI) in a country other than the FFI’s country of residence. Part II previously did not state that a disregarded entity with a GIIN must complete Part II.

The third notable change is in Part IV and Part XII, which now contains a place for sponsored entities and sponsoring entities to provide their GIINs. In Notice 2016-66, the IRS extended the deadline for sponsored entities to obtain their own GIINs to December 31, 2016, from December 31, 2015. In October 2015, the IRS updated the FATCA registration portal to allow sponsoring entities to register their sponsored entities and obtain GIINs for them. The change to the Form W-8BEN-E reflects the increase in sponsored entities receiving their own GIINs as the deadline approaches.

The FATCA regulations permit withholding agents to accept prior versions of Form W-8BEN-E for up to six months following the revision date shown on the new form, and withholding agents may continue to rely on prior versions of the form for the validity period provided under the FATCA regulations. Accordingly, withholding agents may accept the February 2014 version of the Form W-8BEN-E through October 2016. For Form W-8BEN-E, the validity period generally starts on the signature date and ends on the last day of the third subsequent calendar year, absent a change in circumstances.

Tax Court Lacks Jurisdiction to Review IRS Employment Classification Determination

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April 5, 2016

Today, the U.S. Tax Court held that it lacked jurisdiction to review a Form SS-8 determination that a father was an employee, not an independent contractor, of his son. In B G Painting, Inc. v. Commissioner, the son, a painting contractor, issued Forms 1099-MISC to his workers, including the father. The father filed a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding), requesting that the IRS determine his employment status. In response, the IRS SS-8 Unit notified the parties that the father is the son’s “employee.” The son petitioned the court to review this determination.

The Tax Court held that it lacked statutory jurisdiction to review this determination because the Form SS-8 process is not an “examination.” Section 7436(a) of the Internal Revenue Code grants the Tax Court jurisdiction over employment status if “in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination.” But the Form SS-8 process is not an “audit” or “examination”; rather, it is a voluntary compliance process involving no specific tax liabilities or assessments. Therefore, the Tax Court dismissed the case for lack of jurisdiction.

Once the IRS rules that an individual is an employee on the basis of a Form SS-8 submission, the employer has no right to appeal the determination. The IRS will send a follow-up letter to the employer asking whether the employer has filed Forms 941-x to pay the applicable FICA taxes based on the determination, whether the employer is eligible for Section 530 relief, and whether the employer has reasons for believing the IRS determination is incorrect. Given the obligation to provide health insurance to employees or face a potential tax penalty, the employer should expect an increased number of Form SS-8 submissions by independent contractors and increased focus on worker classification issues by the government.

If the employer fails to treat the individual as an employee following a Form SS-8 determination, the individual may file Form 8919 to report his or her share of FICA taxes. The same form can be used while a Form SS-8 is pending for the individual or if the individual was provided both a Form 1099-MISC and a Form W-2 and believes the income reported on the Form 1099 should have been included on Form W-2.

First Friday FATCA Update

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April 1, 2016

Recently, the Internal Revenue Service released the Competent Authority Agreement (CAA) between the United States and Turkey.  This CAA implements the Model 1A Intergovernmental Agreement (IGA) the parties entered into on July 29, 2015.

Since our last monthly FATCA update, we have also addressed other recent FATCA developments:

  • The Canadian government expressed support for FATCA despite concerns about how FATCA impacts Canadian citizens’ privacy rights (see previous coverage).
  • New Zealand released guidance explaining how FATCA applies to New Zealand trusts that maintain or hold financial accounts (see previous coverage).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.