Withholding Agent Penalties
When it comes to foreign entities -- both individuals and corporations -- paying taxes in the United States, a withholding agent plays a vital role in ensuring compliance.
A U.S. withholding agent must be able to identify all non-U.S. citizens and nonresident payees in order to meet its withholding responsibilities. But who is a withholding agent?
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A withholding agent is a person or entity that has control, receipt, custody, or payment of any item of income belonging to a foreign person that is subject to withholding.,
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A withholding agent is often described as the last person in the United States who has control over the money before it is paid to the foreign person.,
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The term “withholding agent” includes, but is not limited to individuals, U.S. corporations, foreign intermediaries, and U.S. branches of a foreign entity.,
A withholding agent is personally liable for any taxes that were required to be withheld. What is the potential cost of not complying with these withholding regulations? Read on.
Civil Penalties for Failure to Withhold
Aside from owing the amount of tax that should have been withheld and interest, a withholding agent who fails to comply with these withholding requirements can face such civil penalties as:
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The 100% penalty equal to the total amount of tax evaded.
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The 20% accuracy-related penalty of the amount of the underpayment of withheld tax in the case of negligence.
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A 75% penalty for the underpayment of withheld taxes in the case of civil fraud.
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Additional taxes of 5% to a maximum of 25% for the negligent failure to file a return; and
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Additional taxes of 15% to a maximum of 75% for the fraudulent failure to file a return.
Invalid TINS
Normally the IRS will not impose a penalty on a withholding agent for any invalid TINs reported on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, unless the withholding agent knew or should have known that the TIN was incorrect. When penalties are appropriate, they should be assessed under Code Sec. 6721, Failure to File Correct Information Returns. (Chief Counsel Advice 201615012)
ID Problem & ITINS
To file a return a taxpayer must have a taxpayer ID number. Since nonresident aliens do not have and cannot obtain a legal SSN, they must use an ITIN.IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. Overall, some 11-million individuals have ITINs. ITINs can only be used for federal tax reporting purposes.
E-Filing Tip
Undocumented aliens may (illegally) use someone else’s SSN to obtain employment. However, they cannot file using that SSN and must obtain an ITIN for filing. This creates a mismatch for e-filing. Practitioners familiar with these type returns indicate using SSN on the W-2 screen but the ITIN on the return will avoid e-filing problems. Of course, the individual gets no SS credits for the W-2 wages, but they can at least satisfy the filing requirements. According to the instructions to IRS Form W-7, e-filing cannot be done for a return on which an ITIN is used in the calendar year the ITIN is issued. For example, if an ITIN is applied for and received in 2022, no return using that ITIN (including prior year returns) can be e-filed until 2023.
The following individuals qualify for an ITIN:
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U.S. resident alien (based on days present in the United States) filing a U.S. tax return and not eligible for an SSN.
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Dependent or spouse of a U.S. citizen/resident alien.
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Dependent or spouse of a non-resident alien visa holder.
Applying for an ITIN - The IRS provides the following instruction for obtaining an ITIN for the first time.
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Complete Form W-7.,
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Attach an original, valid federal income tax return behind the Form W-7., If filing multi-year returns, they can all be attached to the Form W-7.,
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Include supporting documents to establish identity and connection to a foreign country (see W-7 instructions) - The IRS will only accept original identification documents or certified copies of these documents from the issuing agency along with a completed Form W-7 and Federal tax return when an individual applies for an ITIN directly to IRS.
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The package can be filed in one of the following ways :
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By submitting it in person, by appointment, at certain IRS Taxpayer Assistance Centers (TACS)., Appointments can be scheduled by calling 1-844-545-5640; see https://www.irs.gov/help/taclocations-where-in-person-document-verification-is-provided for a list of designated TACs that offer ITIN document authentication service;,
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By mailing the W-7, tax return and required documentation to Internal Revenue Service, ITIN Operation Centre, P.O. Box 149342, Austin TX 78714-9342; or
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By submitting the W-7 through and signed by an Acceptance Agent or Certified Acceptance agent who verifies the information and signs the W-7 prior to submission and forwards the application to the IRS at the address noted in “b” above.
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All ITINs begin with the digit 9 and are otherwise formatted like an SSN, 9XX-XX-XXXX. The fourth- and fifth-digit ranges are from 50-65, 70-88, 90-92, and 94-99.
An ITIN that hasn’t been included on a U.S. federal tax return at least once in the last 3 consecutive tax years will expire. Thus, ITINs that have not been used on a federal tax return at least once in 2018, 2019, or 2020 expire Dec. 31, 2021. Taxpayers whose ITIN expired and who need to file a tax return in 2022, and haven’t already renewed their ITIN, must submit a renewal application on Form W-7, along with required documentation (originals or certified copies from the issuing agency). The processing of Federal returns that are submitted in 2022 with an expired ITIN will be delayed.
For tax years after December 31, 2017, spouses and dependents are not eligible for a new ITIN or to renew an ITIN unless they qualify the tax filer for an allowable tax benefit, or they file their own tax return.
To reduce the paperwork burden on households where several people will need to renew their ITIN, the IRS has created the family option. An individual can choose to file for or renew the ITINs of all of their family members at the same time. Family members include the tax filer, spouse and any dependents claimed on the tax return. However, spouses and dependents residing outside the U.S. do not need to renew their ITINs unless they anticipate being claimed for a tax benefit (for example, after they move to the U.S.) or if they file their own tax return. That’s because the deduction for personal exemptions is suspended for tax years 2018 through 2025 by the TCJA. Consequently, spouses or dependents outside the U.S. who would have been claimed for this personal exemption benefit and no other benefit do not need to renew their ITINs.
Acceptance Agents or Certifying Acceptance Agents
A practitioner can become an acceptance agent as part of the IRS program by completing Form 13551, Application to Participate in the IRS Acceptance Agent Program, submitting a fingerprint card or proof of professional status and certifying they have completed the on-line training provided on IRS.gov. Forms 13551 are accepted year-round, but the form’s instructions caution that it can take up to 4 months for the application to be processed and that renewal requests should be submitted 6 months before an Acceptance Agent’s agreement expires. (Form 13551, June 2019) The role of the Acceptance Agent is to verify the documentation being submitted meets the submission requirements.
A Certifying Acceptance Agent (CAA) is an individual who is allowed to submit a W-7 on behalf of an individual without furnishing supporting documentary evidence and who accepts some record keeping responsibilities. CAA applicants must complete forensic training to aid in identifying fraudulent identification documents. This training is at the CAA’s own expense.
For more information refer to the instructions for Form 13551, IR-2018-137, and search on “How to become an Acceptance Agent” on the IRS web site. See also on the IRS web site: https://www.irs.gov/individuals/new-itinacceptance-agent-program-changes which includes a 2020 change to the types of documents CAAs are allowed to authenticate.