IRS increases audit efforts relating to withholding and other information reporting

The IRS has announced a new nationwide Compliance Initiative Project (“CIP") to address noncompliance by "non-traditional" withholding agents (i.e., non-financial institutions). A CIP is an examination of specific taxpayers within a group, using internal and external data to identify potential areas of noncompliance within the group, for the purpose of correcting the noncompliance. The IRS decided to undertake this initiative based on information uncovered during its administration of the Voluntary Compliance Program (VCP) that was available to withholding agents with respect to the payment, withholding, and reporting of certain taxes due on payments to foreign persons (see prior Inbound Newsalerts, dated October 1, 2004 and March 9, 2005). The VCP originally was available for submissions made on or before December 31, 2005. The filing date was later extended to March 31, 2006.

Although the compliance program primarily was developed to address problems experienced by financial institutions in reporting payments to foreign account holders, the IRS realized there was noncompliance with withholding rules by non-financial institutions based on submissions under the VCP program by these non-traditional withholding agents. IRS Computer Audit Specialists and International Examiners are being trained to conduct more directed “surgical audits” of taxpayers with the highest audit potential. Examiners will be analyzing information reported on Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations), Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation), and withholding agents’ accounts payable records to identify payments to foreign persons.

The Audits:
According to the IRS, the audits will be a three-step process:
Step One: Determine payments to foreign vendors.
Step Two: Examine amounts paid by expense types that may generate reporting or withholding responsibilities.
Step Three: Determine U.S. source vs. foreign source income.

Companies that conduct business with foreign entities and that make payments of both U.S. and non-U.S. source income may wish to discuss withholding requirements with their accounts payable departments.

Observations:
This initiative could be significant for U.S. entities that make payments of certain kinds of income to foreign persons but that may not be familiar with the complex withholding regulations under sections 1441 and 1442. This will affect U.S. withholding agents making payments of fixed or determinable annual or periodical income such as interest, dividends, royalties, and payments for services performed in the United States to foreign persons.

Information provided by our international resource.

Ryan L. Losi, CPA, REALTOR
Business Development Manager
Piascik & Associates, P.C.
4470 Cox Road, Suite 250
Glen Allen, VA 23060
Direct: (804) 228-4179
Main: (804) 527-1815
Facsimile: (804) 527-1816
E-mail: rlosi@piascik.com