New Developments in New Developments in Tax Withholding and Tax Withholding and Information ReportingInformation Reporting

What’s All The Fuss About?What’s All The Fuss About?

By By

Roger CardinalRoger Cardinal

Ernst & Young LLPErnst & Young LLP

What’s All The Fuss What’s All The Fuss About?About?

EnforcementEnforcement EnforcementEnforcement EnforcementEnforcement EnforcementEnforcement EnforcementEnforcement EnforcementEnforcement

Enforcement IssuesEnforcement Issues Audits ARE taking placeAudits ARE taking place

– No longer “some day”No longer “some day” Guidance todayGuidance today

– 11/03 Industry Directive11/03 Industry Directive Guidance “tomorrow”Guidance “tomorrow”

– New Section of Internal Revenue New Section of Internal Revenue ManualManual

Planning and Preparing NOW are Planning and Preparing NOW are criticalcritical

AuditsAudits

NOT “QI style” – Digging deep, NOT “QI style” – Digging deep, asking hard questions, assessing asking hard questions, assessing taxes and penaltiestaxes and penalties

Field Agents in NY will be trained Field Agents in NY will be trained by enforcement team at 290 by enforcement team at 290 BroadwayBroadway

Field Agents outside of NY will be Field Agents outside of NY will be trained???trained???

Issues all over the placeIssues all over the place

Guidance TodayGuidance Today

November ’03 Industry DirectiveNovember ’03 Industry Directive– 10 Fundamental Steps10 Fundamental Steps

10 Steps of 10 Steps of Industry DirectiveIndustry Directive

Analyze the Withholding Tax Analyze the Withholding Tax SystemSystem– Review FormsReview Forms– Review Processing MechanicsReview Processing Mechanics– Be prepared to explainBe prepared to explain

Flowchart of systems and Flowchart of systems and interrelationshipsinterrelationships

Internal controlsInternal controls Procedures manualsProcedures manuals Strata for sampling purposesStrata for sampling purposes

10 Steps (cont.)10 Steps (cont.)

Review Procedures for account Review Procedures for account opening and identification of opening and identification of payeespayees– Sufficient controls and separation of Sufficient controls and separation of

duties for credible information?duties for credible information? Reconcile to confirm that all Reconcile to confirm that all

reportable income has been reportable income has been captured.captured.– 1042-S verification1042-S verification

10 Steps (cont.)10 Steps (cont.)

Determine appropriate strata for Determine appropriate strata for sampling purposessampling purposes– By amount?By amount?– By withholding rate?By withholding rate?– By type of account?By type of account?– By documentation type?By documentation type?– By business unit or cost center?By business unit or cost center?

10 Steps (cont.)10 Steps (cont.)

Determine Sample SizeDetermine Sample Size Request Documentation for Request Documentation for

accounts in sampleaccounts in sample Verify classification and Verify classification and

identification of payeeidentification of payee Review documentation Review documentation

requirements for various types of requirements for various types of incomeincome

10 Steps (cont.)10 Steps (cont.)

Review 1042-S for proper “codes”Review 1042-S for proper “codes”– Income codeIncome code– Recipient codeRecipient code– Exemption codeExemption code

Calculate underwitheld taxes, Calculate underwitheld taxes, extrapolate, and determine extrapolate, and determine interest, and penaltiesinterest, and penalties

Audit Guidance Audit Guidance “tomorrow” – IRM unit“tomorrow” – IRM unit Non-Financial Institution Audits Non-Financial Institution Audits

(Accounts Payable/Treasury (Accounts Payable/Treasury Function/Other)Function/Other)

Financial Institution AuditsFinancial Institution Audits– Includes Accounts Payable Includes Accounts Payable

A/P Audit guidelinesA/P Audit guidelines

Will provide examples of when Will provide examples of when Withholding/Reporting may be Withholding/Reporting may be neededneeded

Will identify target industriesWill identify target industries Will recommend “3 step audit Will recommend “3 step audit

process”process” 5471/5472 info will be used5471/5472 info will be used

– (YES it is inaccurate for this purpose)(YES it is inaccurate for this purpose) Model IDRs will be providedModel IDRs will be provided

Financial Institution Financial Institution Audit GuidelinesAudit Guidelines

Functional Review of Operational Functional Review of Operational ProceduresProcedures

New Account Opening ProceduresNew Account Opening Procedures Due Diligence- Standard of Due Diligence- Standard of

KnowledgeKnowledge Examination of forms W-8Examination of forms W-8 Transactions Requiring Special Transactions Requiring Special

Treatment by the Withholding Agent Treatment by the Withholding Agent (Based largely on what IRS learned in (Based largely on what IRS learned in VCP and other voluntar submissions)VCP and other voluntar submissions)

What does all this What does all this mean?mean? You are forewarned as to what You are forewarned as to what

they’ll be looking for – in the BEST they’ll be looking for – in the BEST of situationsof situations

Those of you who availed Those of you who availed yourselves of the VCP – do not get yourselves of the VCP – do not get complacent – your audits could be complacent – your audits could be MORE harsh, if you’ve not met MORE harsh, if you’ve not met your promisesyour promises

Prepare NOWPrepare NOW

You know what will be askedYou know what will be asked– Identify all areas of your Identify all areas of your

organization, including a/p, treasury, organization, including a/p, treasury, and all units that make payments of and all units that make payments of possible US-sourced income to non-possible US-sourced income to non-US payeesUS payees

– Find your contactsFind your contacts– Determine and document Determine and document

proceduresprocedures

Prepare (cont)Prepare (cont)

Review tax documentation for Review tax documentation for validityvalidity– Cure what’s curable (this will take Cure what’s curable (this will take

time!time! Confirm your withholding and Confirm your withholding and

reporting accuracyreporting accuracy Be prepared for every question Be prepared for every question

the IRS may ask the IRS may ask

Prepare (cont)Prepare (cont)

Don’t forget accounts payableDon’t forget accounts payable– Payments for ServicesPayments for Services– Payments for SoftwarePayments for Software– Payments for Rent of Real or other Tangible Payments for Rent of Real or other Tangible

propertyproperty Don’t forget inter-company payments Don’t forget inter-company payments

– May have special documentation May have special documentation requirementsrequirements

Don’t forget the Treasury Function, wire Don’t forget the Treasury Function, wire payments, etc.payments, etc.

Questions?Questions?