June 18, 2009

TO: Distribution

FROM: Burt, Staples and Maner, LLP

RE: IRS Signals Preference for Interview-Style E-W8 Applications for Purposes of Securing MOU

The IRS recently announced its preference for a “Turbo Tax” interview-style electronic Form W-8 (“E-W8”) from Withholding Agents (“WA”) looking to secure a Memorandum of Understanding (“MOU”) for their E-W8 applications.

Last week, at the Executive Enterprise Institute 21st Annual International Tax Withholding and Information Reporting conference in New York City, IRS representatives said they favored an E-W8 application that guides beneficial owners through a series of interview questions as they complete and certify an electronic Form W-8. These officials indicated they favored an interview-style approach because it improves efficiencies in the overall certification process, assists taxpayers in choosing the correct tax form, and reduces many common errors made by beneficial owners who complete the Form W-8 manually.

Also, while the IRS stressed its willingness to approve MOUs for applications that meet their expectations, they suggested WAs should consider a pre-submission conference and follow-up sessions to review any technical issues and/or give a demonstration of their E-W8 application. These meetings would be followed by a formal written submission document from the WA containing detailed information on the E-W8 application’s certification and due diligence capabilities. The IRS also reminded any WA entering into an MOU that they would need to provide process flows and must be able to demonstrate their systems for the IRS (ideally both Beta and Production level versions.)

In other discussions with IRS representatives, they have indicated that, although in the short-term MOUs will only cover Forms W-8BEN, it was their long-term goal to expand the MOU process to include all Forms W-8 as well as the Form W-9.

E-W8 applications hold many benefits for WAs, including considerable efficiencies in compliance and resource costs. Also, E-W8 applications may be used to enhance the client-service experience by providing such benefits as real-time feedback for modifying and “curing” responses, offering alternate language preferences, and utilizing the E-Sign Act provisions. An interview-style application greatly increases these benefits by using built-in logic that tailors the form completion and certification process to meet individual client specific needs and circumstances.

WAs may wish to secure an MOU with the IRS for their E-W8 applications in order to ensure they are in compliance with cross-border withholding rules and regulations, and to reduce the costs associated with misinterpreting IRS requirements. Securing an MOU also removes the possibility of, and the costs associated with, an IRS directive to upgrade an existing E-W8 application under audit.

Based on our experience negotiating MOUs for our clients’ E-W8 applications, the MOU submission document should include, but not necessarily be limited to, the following information:

• WA information (Name, business units included, WA Status (QI v. USWA), EIN, payee and income types);
• Overview of the E-W8 application capabilities;
• List of assumptions behind E-W8 application;
• Implementation of E-Sign Act;
• Descriptions of the following procedures and capabilities:
  
  • Authentication;
  • Security IDs and passwords;
  • Substantial presence test;
  • Validation, including interaction of E-W8 application and WA Account Master Systems;
  • Validation results/output;
  • Changes in circumstance;
  • Presumption rules;
  • Joint accounts;
    
• List of interview questions (for form completion), including screenshots;
• List of accepted capacities;
• User preferences and help functions;
• List of output reports and error messages;
• Information retention and data storage capabilities; and
• Adherence to substitute Form W-8 requirements.

WAs should also expect the IRS to require the E-W8 application to include specific questions asking clients directly to self-identify themselves as a U.S. person for U.S. tax purposes, for example, including:

• Whether the individual was born in the U.S.;
• Whether the individual has renounced his or her U.S. citizenship; and,
• Whether the individual is presently subject to taxation in the U.S. as a U.S. citizen or resident.

The IRS expects the E-W8 application to operate dynamically and guide the client toward completing the correct Form W-8BEN or Form W-9 based on his or her responses to such questions.

RECOMMENDATION 1: WAs should work closely with the IRS to understand what should be included in their specific submissions. Based on the information requirements set forth by the IRS, WAs should consider creating appendices that satisfy important details, thereby making the MOU submission document concise and not unwieldy.

RECOMMENDATION 2: WAs should take advantage of the IRS outreach and willingness to negotiate MOUs for E-W8 applications that conform to IRS expectations. We have advised and assisted numerous clients with the development of E-W8 applications, and can help guide clients through the process of securing an MOU with the IRS.