 |
||||||||
|
||||||||
 |
||||||||
|
Dramatic New Expansion of US Tax Withholding and
Reporting Rules? September 19, 2006 Congress recently held hearings to look into the effectiveness of the US backup withholding and reporting rules to police offshore tax shelter abuses by US taxpayers: Congress did not like what it heard. The Senate's proposed cure for the problem contained in its report, "Tax Haven Abuses: The Enablers, The Tools and Secrecy", would require financial institutions to look to the US owners of certain offshore entities, rather than the entities themselves, for backup withholding and Form 1099 reporting purposes. If this rule were adopted, it would present financial institutions with major new operational challenges and potential liability if they unsuccessfully integrate their tax r.eporting and anti-money laundering ("AML") functions. Application to Qualified Intermediaries ("Ql")? Since 2001, QIs have been able to use certain "know your customer" ("KYC") documentation, rather than Forms W-8 and W-9, for tax withholding and reporting compliance. The rules do not require a QI to look through an entity to identify its owners even though this information is collected. While the Senate report proposes new look through rules only for US financial institutions, QIs should note that there is no discernable policy rationale for limiting this rule to domestic US withholding agents only. Recent IRS Audit Activity: The IRS has used the Form 1042 audits of some financial institutions this year as a pretext to request AML information to ferret out the US owners of offshore entities. . Some institutions have successfully countered these efforts by arguing that the inquiries are not relevant to the Form 1042 audit. The IRS, however, likely could use its summons authority if necessary. Some IRS officials even have suggested holding financial institutions liable for intentional disregard of US rules by "misidentifying" US individual accounts as foreign entity accounts. It is questionable whether the IRS has a valid legal basis for this position. Recommendations: 1. Financial institutions should review their account opening procedures in light of IRS audit activity. 2. Financial institutions should consider the desirability of better integrating their AML and tax withholding functions. 3. The industry should ensure that Congress and the IRS understand the operational burdens associated with these proposals. Disclaimer: We call these "client letters" because we use them to keep our clients informed. We also send them to friends of the firm and other people who have asked to receive them. We have posted these items on our website so people can get an idea of what kind of firm we are. Your reading of these letters does not create an attorney-client relationship with us. Please contact us if you have any questions. |
||||||||
| Back to Client Letters | ||||||||
