IRS Approves Final Regulations on Gambling Withholding

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September 28, 2017

The IRS has finalized regulations under section 3402(q) simplifying the withholding regime applicable to certain gambling winnings, which were issued in proposed form in December 2016 (prior coverage here).  The IRS issued the regulations in response to complaints about the withholding system previously applicable to horse races, dog races, and jai alai.  Commenters explained that newer methods of gambling on such events often caused the amount withheld to exceed the actual tax liability.  The key change made by the regulations relates to the method of calculating the amount of the wager in the case of parimutuel wagers, a type of bet that differs from the typical straight wager.  Under the new rules, all wagers placed in a single parimutuel pool and represented on a single ticket are permitted to be aggregated and treated as a single wager.  One point clarified in the preamble to the final regulations is that electronic bettors may aggregate wagers made at different times, so long as the wagers are represented on a single electronic record.  To allow industry participants time to update their systems to accommodate the new rules and seek any necessary state regulatory approval, the final regulations will take effect 45 days from the date of publication.

IRS Makes Good on Promise to Issue Guidance Loosening Certain FATCA Reporting Requirements

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September 26, 2017

Yesterday, the IRS issued Notice 2017-46, representing a welcome reprieve for U.S. financial institutions with respect to the collection of foreign taxpayer identification numbers (FTINs) required of them by the Foreign Account Tax Compliance Act (FATCA) to avoid Chapter 3 withholding.  As we discussed in a prior post, an official with the IRS Office of Chief Counsel previewed this forthcoming guidance earlier this month and communicated that it was intended as a response to comments received by the IRS from withholding agents.  The new guidance delays the date on which U.S. financial institutions must begin collecting FTINs to January 1, 2018, provides a phase-in period for obtaining FTINs from account holders documented before January 1, 2018 that will end on December 31, 2019, and limits the circumstances in which FTINs are required.  For example, withholding agents will not be required to obtain FTINs on Forms W-8 that the withholding agent would otherwise obtain solely to avoid Form 1099 reporting or backup withholding, or in situations where a payment is not otherwise subject to reporting on Form 1042-S.  Additionally, withholding agents will not be required to obtain FTINs from an account holder in a jurisdiction that has not entered a reciprocal tax information exchange treaty with the United States or in a jurisdiction that does not issue FTINs to its residents.  Finally, withholding agents need not acquire FTINs for governments, international organizations, foreign central banks of issue, or residents of a U.S. territory.  The IRS will revise the Instructions for Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” to reflect the amended FTIN requirements.

In addition, Notice 2017-46 also provides a reprieve for certain Model 1 FFIs with respect to their reporting requirements, extending the time by which they must obtain and report U.S TINs for preexisting accounts that are U.S. reportable accounts.  For such accounts, the U.S. Competent Authority will not determine that there is “significant non-compliance” with obligations under a Model 1 intergovernmental agreement solely because of a failure to obtain and report a U.S. TIN, provided that the Model 1 FFI follows certain alternative procedures specified in Notice 2017-46.

The IRS intends to amend the regulations to reflect the rules announced in Notice 2017-46, but taxpayers may rely on the Notice until it issues such regulations.

Graham-Cassidy Bill Eliminates Premium Tax Credit But Retains ACA Information Reporting Requirements

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September 21, 2017

With the September 30 budget reconciliation deadline looming, Senate Republican leaders recently released the Graham-Cassidy proposal, which would repeal and replace the Affordable Care Act, but retain most of its information reporting requirements.  A departure from previous GOP proposals (see discussions here and here), the Graham-Cassidy proposal would completely eliminate federal premium tax credits by January 2020, and not provide any other health insurance tax credits.  The legislation would instead put in place a system of block grants to the states which states could use to increase health coverage, but would not be required to use for that purpose.  The proposal would also zero out penalties for the individual and employer mandates beginning in 2016.

The information reporting rules under Code sections 6055 and 6056 would be retained under the proposal, but it is unclear what purpose the Form 1095-B would serve after 2019 when there is no penalty for failing to comply with the individual mandate and no premium tax credit or other health insurance tax credit.  The bill likely does not repeal the provisions because of limitations on the budget reconciliation process, which requires that changes have a budgetary impact.  The proposal would also keep in place the 3.8% net investment income tax, as well as the 0.9% additional Medicare tax on wages above a certain threshold that varies based on filing status and that employers are required to withhold and remit when paying wages to an employee over $250,000.

The Senate has until the end of this month to pass a bill with 51 Senate votes under the budget reconciliation process, before rules preventing a Democratic filibuster expire.  A vote is expected next week.

Proposed Regulations Would Allow Truncated SSN on Forms W-2 Furnished to Employees

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September 20, 2017

The IRS recently issued proposed regulations that would allow employers to truncate employees’ social security numbers (SSNs) on copies of Forms W-2 furnished to employees, to help protect employees from identity theft.  The truncated SSNs must appear in the form of IRS truncated taxpayer identification numbers (TTINs): the first five digits of the nine-digit SSN are replaced with Xs or asterisks.  For example, a TTIN replacing an SSN appears in the form XXX‑XX‑1234 or ***‑**‑1234.  Employers may also use TTINs on Forms W-2 furnished to employees for payment of wages in the form of group-term life insurance.  But as with information returns filed with the IRS, employers cannot use TTINs on copies of the Forms W-2 filed with the Social Security Administration.   If finalized, these regulations would be applicable to Forms W-2 required to be furnished after December 31, 2018, due to concerns with providing state tax administrators sufficient time to accommodate TTIN usage on Forms W-2.  Comments on the proposed regulations are due by December 18, 2017.

The proposed regulations reflect statutory changes made in late 2015 by section 409 of the Protecting Americans from Tax Hikes (PATH) Act.  Section 409 of the PATH Act amended Code section 6051(a)(2) by striking “his social security account number” from the list of information required on Form W-2 and inserting “an identifying number for the employee” instead.  The IRS already permitted the usage of TTINs on a number of information returns furnished to payees including Forms 1095, 1099, 1098, and others.  The use of TTINs is intended to help reduce identity theft by reducing the number of documents that include both an individual’s name and TIN.

Tax Relief for Leave-Based Donation Programs and Qualified Plan Distribution Extended to Hurricane Irma Victims

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September 18, 2017

The IRS recently announced favorable tax relief for “leave-based donation programs” designed to aid victims of Hurricane Irma, as well as easier access to funds in qualified retirement plans for these victims.  These forms of relief were provided to victims of Hurricane Harvey last month (see prior coverage), and as expected, were promptly extended to victims of Hurricane Irma.

Specifically, under Notice 2017-52, employees may forgo paid vacation, sick, or personal leave in exchange for cash donation the employer makes, before January 1, 2019, to charitable organization providing relief for the Hurricane Irma victims.  The IRS will not treat the donated leave as income or wages to the employee, and will permit employers to deduct the donations as business expenses.  Similarly, in Announcement 2017-13, the IRS extended to employees affected by Hurricane Irma the relaxed distribution rules announced following Hurricane Harvey for plan loans and hardship distributions from qualified retirement plans.  The relief generally permits plan sponsors to adopt amendments permitting plan loans and hardship withdrawals later than would otherwise be required to provide such options, waives the six-month suspension of contributions for hardship withdrawals, and allows the disbursement of hardship withdrawals and plan loans before certain procedural requirements are satisfied.

As we discussed with respect to Hurricane Harvey, employers looking to provide further relief to their employees have other long-standing options, as well.  For example, Notice 2006-59 provides favorable tax treatment similar to that provided under Notice 2017-52 for “leave-sharing plans” that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been harmed by a major disaster.  Additionally, section 139 permits individuals to exclude from gross income and wages any “qualified disaster relief payment” for reasonable and necessary personal, family, living, or funeral expenses, among others; and the payments may be made through company-sponsored private foundations (see our recent Client Alert on section 139 disaster relief payments).

Hurricane Harvey Prompts IRS to Provide Tax Relief for Leave-Based Donation Programs

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September 7, 2017

The IRS recently released Notice 2017-48, providing favorable tax relief for “leave-based donation programs” designed to aid victims of Hurricane Harvey.  Under these programs, employees may elect to forgo vacation, sick, or personal leave in exchange for payments that the employer makes to charitable organizations described under section 170(c).  Under this notice, payments employees elect to forgo do not constitute income or wages of the employees for federal income and employment tax purposes if the employer makes the payments, before January 1, 2019, to charitable organizations for the relief of victims of Hurricane Harvey.  The IRS will not assert that an opportunity to make this election results in employees’ constructive receipt of the payments.  Thus, the employer would not need to include the payments in Box 1, 3 (if applicable), or 5 of the Forms W-2 for employees electing to forgo their vacation, sick, or personal leave.

With respect to employer deductions, the IRS will not assert that an employer is permitted to deduct these cash payments exclusively under the rules of section 170, applicable to deductions for charitable contributions, rather than the rules of section 162.  Accordingly, the deduction will not be limited by the percentage limitation under section 170(b)(2)(A) or subject to the procedural requirements of section 170(a).  Thus, payments made to charitable organizations pursuant to leave-based donation programs are deductible to the extent the payments would be deductible under section 162 if paid to the employees (i.e., the payments would have constituted reasonable compensation and met certain other requirements).

The requirements of Notice 2017-48 are straightforward, but if an employer fails to comply, the general tax doctrines of assignment of income and constructive receipt would apply.  Under these doctrines, if an employee can choose between receiving compensation or assigning the right to that compensation to someone else, the employee has constructive receipt of the compensation even though he or she never actually receives it.  (These concepts also create difficulties for paid-time off programs under which employees can choose to use PTO or receive cash.)  Thus, without special tax relief, an employee who assigns the right to compensation to a charitable organization would be taxed on that compensation, and the employer would have corresponding income and employment tax withholding and reporting obligations.  Although the employee would be entitled to take an itemized deduction for charitable contributions in that amount, this below-the-line deduction only affects income taxes (and not FICA taxes), and would not fully offset the amount of the income for non-itemizers who claim the standard deduction ($6,300 for single filers in 2016).

The devastation caused by Hurricane Harvey and the impending threat of Hurricane Irma, which is currently affecting islands in the Eastern Caribbean islands, have renewed interest in favorable charitable contribution tax rules that extend beyond the parameters of section 170.  Apart from Notice 2017-48, the IRS has also previously provided certain special tax treatment for disaster relief payments employers provide to their employees.  On August 30, the IRS provided for easier access to funds in qualified retirement plans in IRS Announcement 2017-11.  The rules generally permit plan sponsors to adopt amendments permitting plan loans and hardship withdrawals later than would otherwise be required to provide such options, waive the six-month suspension of contributions for hardship withdrawals, and allow the disbursement of hardship withdrawals and plan loans before certain procedural requirements are satisfied.  Although the relief provided in Announcement 2017-11 applies only to those affected by Hurricane Harvey (and Notice 2017-48 applies only to charitable contributions designed to aid such individuals), it is likely the IRS will provide similar relief to those affected by Hurricane Irma if it makes landfall in the United States, as appears likely at this time.

Employers looking to provide further relief to their employees have other long-standing options, as well.  For example, Notice 2006-59 provides favorable tax treatment similar to that provided under Notice 2017-48 for “leave-sharing plans” that permits employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been harmed by a major disaster.  Additionally, section 139 permits individuals to exclude from gross income and wages any “qualified disaster relief payment” for reasonable and necessary personal, family, living, or funeral expenses, among others; and the payments may be made through company-sponsored private foundations (see our recent Client Alert on section 139 disaster relief payments).

First Friday FATCA Update

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September 1, 2017

Since our previous monthly FATCA update, we have addressed the following recent FATCA developments:

  • The Sixth Circuit issued an opinion on August 18, 2017 upholding the dismissal of a challenge to FATCA brought by Senator Rand Paul and several current and former U.S. citizens living abroad who hold foreign accounts (see prior coverage).
  • The IRS posted draft instructions to the Form 8966 (FATCA Report) dated August 9, 2017, with some changes pertaining to participating foreign financial institutions (PFFIs) and other changes reflecting the final and temporary Chapter 4 regulations released in January of this year (see prior coverage).

Additionally, an official with the IRS Office of Chief Counsel recently stated that the IRS will delay the date on which U.S. financial institutions must start treating an otherwise valid Form W‑8 as invalid merely because it does not include a foreign taxpayer identification number (FTIN) or a reasonable explanation for its absence, to avoid Chapter 3 withholding.  Specifically, a valid Form W-8 obtained before January 1, 2018, will not be treated as invalid on that date if the form simply lacks the FTIN or a reasonable explanation for its absence (e.g., the account holder’s country of residence does not provide TINs).  It is unclear what form the relief will take, but it is possible the IRS will continue to allow a U.S. financial institution to treat a Form W-8 as valid if the financial institution does not have actual knowledge that the beneficial owner has an FTIN for some period of time.

This informal relief from the new FTIN requirement (issued in final and temporary regulations in late 2016) is welcomed by banks and withholding agents that report income for foreign account holders.  The relief is still reflected in FAQs on the IRS website (see prior coverage).  But since Form W-8s expire on three-year cycles, banks and agents still have to update their withholding policies and annual re-solicitation processes to comply with the new FTIN requirements.  Additionally, banks and agents are still waiting for further guidance on how they can update Form W‑8s issued before 2018 with the newly‑required FTIN or reasonable explanation.  An IRS FAQ posted in April 2017 specifies that the information can be provided in a written statement, including an email, but it is unclear what other requirements might apply to such a statement.

Since our previous monthly FATCA update, the IRS has also released the Competent Authority Agreements (CAAs) implementing intergovernmental agreements (IGAs) between the United States and the following treaty partners:

  • Anguilla (Model 1B IGA signed on January 15, 2017);
  • Italy (Model 1A IGA signed on January 10, 2014).

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 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.