On February 27, 2019, LB&I issued a memorandum (LB&I-04-02019-002) outlining a new program administred by the Foreign Payments Practice (“FPP”) that allows withholding agents to report and correct failures under Chapter 3 or 4. The program and its procedures arose based upon the frequency with which taxpayers contact FPP regarding potential corrections for Chapter 3 and 4 withholding compliance failures. The program establishes FPP as the central point of contact for withholding agents wishing to submit delinquent withholding tax returns, remit unpaid taxes, and seek request penalty relief. The program is available to withholding agents other than those that are qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts, but withholding agents may not participate in the program if they are currently under IRS audit for the delinquent filings, or if they are before IRS Appeals or in litigation related to issues involving noncompliance with Chapters 3 or 4 of the Code. Although multiple years may be included in a single submission, withholding agents may only avail themselves of the program one time.
The procedures require eligible withholding agents to submit the delinquent Forms 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons), Forms 8804 (Annual Return for Partnership Withholding Tax (Section 1446)), or Forms 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests), and any related information returns, along with full payment of the tax due. The submission must also include a statement that identifies the areas or lines of business for which there was noncompliance, an explanation of the noncompliance, a description of the corrective procedures implemented to ensure prospective compliance, a copy of any such procedures furnished to employees or others responsible for the withholding agent’s compliance, and an affirmative statement that the withholding agent has not previously filed delinquent returns under the same procedures.
In addition to a providing a single point of contact for the submission of delinquent returns, a key benefit for the program relates to consideration of requests for penalty relief. Absent extreme reasons for filing and payment failures such as serious illness or natural disasters, withholding agents that file delinquent returns directly with an IRS Service Center should expect to be assessed failure-to-file penalties under section 6651(a)(1), failure-to-pay penalties under section 6651(a)(2), and late deposit penalties under section 6656 if the taxes were actually withheld. Based upon the very limited discretion afforded to first-level IRS reviewers of abatement requests within the Service Centers, a withholding agent’s first request for abatement is generally denied unless the failure arose directly from the types of extreme circumstances identified above, and the withholding agent would need to ultimately file a protest IRS Appeals to make its case for penalty relief to someone empowered to consider the circumstances prompting the delinquency as well as the government’s hazards of litigation.
However, this program builds in more robust consideration for penalty relief by FPP early in the process than what would occur simply by filing with an IRS Service Center. Although there are never guarantees, similar IRS programs have more thoughtfully considerd taxpayer reasons for compliance failures when the taxpayer voluntarily discloses nonwillful failures based upon factors such as a misunderstanding of the rules coupled with strong indications of the taxpayer’s intent to remain in compliance prospectively. To request penalty relief under the procedures detailed in the memorandum, the withholding agent’s request must contains, at a minimum, the following items:
- A description of the withholding agent’s current compliance procedures applicable to payments to foreign persons;
- A description and explanation of the failures in the withholding agent’s tax, withholding, and reporting procedures for payments to foreign persons and the years affected by such failures;
- The number of persons affected by such failures and how the number was determined;
- A calculation of the total amount of taxes the withholding agent failed to withhold, pay, or report, not including interest and penalties, for tax periods open for assessment or collection under the provisions of section 6501, including any adjustments under section 1463 for tax already paid with supporting documentation;
- A list of the documents being provided with the submission; and
- A penalty of perjury statement.