M E M O R A N D U M
February 20, 2009
TO: Distribution
FROM: Burt, Staples & Maner LLP
RE: UBS Settlement with the IRS: New Perils for Withholding Agents
UBS agreed to pay $780 million to the United States on February 18 to
avoid criminal prosecution associated with its U.S. withholding tax
compliance. While BSM’s representation of UBS in this case limits what
we can say about the settlement, U.S. withholding agents (including
non-financial institutions) and Qualified Intermediaries (“QIs”) should
take heed of what is apparent from the publicly available court filings:
the settlement constitutes a sea change in the IRS’ attitudes towards
withholding tax compliance. It is an alert to assess your withholding
and reporting compliance and take appropriate actions to address any
failures before the IRS identifies them for you.
New Compliance
Environment: Some withholding agents may dismiss the import of the UBS
settlement because it related to a criminal investigation of a financial
institution. However, $400 million of the total settlement related only
to tax, penalties and interest assessed by the IRS. That number stands
in stark contrast to the relatively modest amounts that we know many
U.S. withholding agents paid to resolve their withholding tax failures
in the Voluntary Compliance Program (“VCP”) or that QIs have paid as
part of their external audits.
In short, the IRS is determined to
compel withholding tax compliance despite the current financial crisis.
The IRS signaled its determination when it elevated withholding taxes to
a “Tier 1” audit issue several months ago; withholding tax compliance
now will get the same intense scrutiny that the IRS gives tax shelter
structures. This is fundamentally different from the early days of the
new withholding tax rules in 2001 when the IRS pledged to work with
withholding agents to resolve withholding and reporting problems.
Instead, the IRS has publicly stated that it intends to make Form
1042 compliance a standard audit item. We have heard informally that the
IRS plans to send a first batch of audit letters to non-financial
institutions, and the IRS has said that it will search its Form 5471 and
5472 databases for potential non-filers. The IRS also plans to conduct
follow-up audits of former VCP participants.
Recommendation 1:
Withholding agents should assess their systems, procedures and overall
withholding tax compliance to be ready for a potential IRS audit. If you
would like our assistance, BSM can work with you to perform a
confidential “health check” of your withholding and reporting
compliance, as it has for many clients, both financial institutions and
multi-nationals.
If withholding tax or reporting failures are
identified, you have two basic choices. Either voluntarily disclose them
to the IRS, or accept the risk of audit challenge and controversy.
Neither choice is inherently correct in all situations. We can help you
evaluate your particular facts to determine the best course. We have
handled many of the largest, if not the largest, voluntary submissions
to the IRS since the end of the VCP, and there are many pros and cons to
consider from both courses.
Recommendation 2: We urge
withholding agents to read carefully the publicly filed documents to
gain insight into the IRS’ views on a number of tax technical issues of
import to both U.S. withholding agents and QIs. We particularly draw
your attention to the government’s views as to when a Form W-8BEN may be
considered unreliable if provided by a tax haven corporation owned by a
U.S. person, or when a QI may face backup withholding exposure from
non-U.S. source payments made to both disclosed and undisclosed U.S.
persons. Such positions are controversial and far-reaching, and you
should assess them carefully.