This week the IRS announced several IRS Large Business and International division tax compliance campaigns. Two of these campaigns impact FATCA compliance. To help you decipher the IRS description of the two campaigns, I have broken down some of the terminology used in the IRS announcement.
Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign
The IRS described this campaign as:
“designed to verify withholding at source for 1120-Fs claiming refunds. To make a claim for refund or credit to estimated tax with respect to any U.S. source income withheld under chapters 3 or 4, a foreign entity must file a Form 1120-F. Before a claim for credit (refund or credit elect) is paid, the IRS must verify that withholding agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A). This campaign focuses upon verification of the withholding credits before the claim for refund or credit is allowed. The campaign will address noncompliance through a variety of treatment streams including, but not limited to, examinations.”
Chapter 4: This section of the IRS regulations implements FATCA. FATCA is actually the acronym for the statute – Foreign Account Tax Compliance Act. However, most people refer to the Chapter 4 regulations as “FATCA”.
Chapter 3: This IRS section regulates the withholding of tax on nonresident aliens and foreign corporations.
Form 1120-F: The title of this IRS form is “U.S. Income Tax Return of a Foreign Corporation”. A foreign corporation files this form:
To report its income, gains, losses, deductions, credits, and to determine its U.S. income tax liability;
To claim any refund that is due;
To transmit Form 8833 (“Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)”); or
To calculate and pay a foreign corporation's branch profits tax liability and tax on excess interest, if any, under 26 USC § 884 (“Branch Profits Tax”).
Form 1042: The title of this IRS form is “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”. This form is used to report:
The tax withheld under IRS chapter 3 on certain income of foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts;
The tax withheld under FATCA on withholdable payments;
The tax withheld pursuant to IRS section 5000C (“Excise Tax on Specified Federal Foreign Procurement Payments”); and
Payments that are reported on Form 1042-S under chapters 3 or FATCA.
Form 1042-S: The title of this IRS form is “Foreign Person's U.S. Source Income Subject to Withholding”. It is used to report:
Income and amounts withheld which are described in the Instructions for Form 1042-S;Specified Federal procurement payments paid to foreign persons that are subject to withholding under IRS section 5000C; and
Distributions of effectively connected income (“ECI”) by a publicly traded partnership or nominee.
Form 8804: The title of this IRS form is “Annual Return for Partnership Withholding Tax (Section 1446)”. This form is used to report the total liability under IRS section 1446 (“Withholding tax on foreign partners’ share of effectively connected income”) for the partnership's tax year. This form is also a transmittal form for IRS Form 8805.
Form 8805: The title of this IRS form is “Foreign Partner's Information Statement of Section 1446 Withholding Tax”. This form is used to show the amount of effectively connected taxable income and the total tax credit allocable to the foreign partner for the partnership's tax year.
Form 8288: The title of this IRS form is “U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests”. The form is used to report and transmit tax owed by a foreign person with respect to the acquisition of a U.S. real property interest.
Form 8288-A: The title of this IRS form is “Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests”. This form is used by buyers and transferees to report withholding on each foreign person that disposes of U.S. real property interests.
Swiss Bank Program Campaign
The IRS provided the following statement to describe the Swiss Bank Program Campaign:
“In 2013, the U.S. Department of Justice announced the Swiss Bank Program as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks that are participating in this program provide information on the U.S. persons with beneficial ownership of foreign financial accounts. This campaign will address noncompliance, involving taxpayers who are or may be beneficial owners of these accounts, through a variety of treatment streams including, but not limited to, examinations.”
The Swiss Bank Program has allowed Swiss banks not under criminal investigation to obtain resolution of their status related to the U.S. Department of Justice’s (DOJ) investigations. This program does not apply to individuals.
Swiss banks which were eligible to enter the program were required to advise the DOJ by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.
Under the program, banks are required to:
Make a complete disclosure of their cross-border activities;
Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
Cooperate in treaty requests for account information;
Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
Pay appropriate penalties.
Swiss banks meeting all of the above requirements have been eligible for a non-prosecution agreement.
Coordinate with your in-house compliance team to ensure your compliance program is up to date and actually being followed.
Consult your in-house or external tax team to confirm that all necessary tax filings have been made.
Speak with an attorney to understand the details of these IRS compliance campaigns and whether they may impact you.