In August of 2010, the IRS announced “executing our international strategy is a top priority, and our work continues to intensify in this area.” Included in this strategy is a requirement for examiners to review withholding and reporting on payments to foreign individuals and entities during corporate audits. Other organizations should anticipate that the IRS will apply what they learn in corporate audits of Accounts Payable to audits in other organizations as well.
Under long-standing rules and regulations, payers making payments of U.S.-source income to foreign persons are required to collect a 30 percent withholding tax on the gross income unless an exception applies. For an exception to be valid, the payer must follow prescribed procedures, including collecting appropriate and valid withholding certificates from the recipient prior to payment. Withheld taxes must be deposited timely. The gross income and taxes withheld (if any) must be reported on a Form 1042-S information return filed with the IRS and sent to the recipient by March 15 of the calendar year following the payment.
The IRS enforces compliance with these rules by requiring the payer (called a withholding agent because of the obligation to withhold taxes) to make periodic payments of withheld taxes (the due date varies with the amount of the liability) and imposing penalties for the failure to comply with withholding and reporting rules. The Small Business Jobs Act included increased penalties for failure to report income timely (described in future posts) for payments required to be reported on or after January 1, 2011. Payers making payments of U.S.-source income to foreign persons should expect the IRS to be diligent in collecting the penalties.