The Electronic Form W-8:
A Potential Cure for Your Compliance Headaches?


Each year, Withholding Agents ("WAs") spend countless hours collecting and validating paper Forms W-8. Worse yet, getting a valid Form can take a number of tries, frustrating both the customer and the WA. Now, there is an easier, more accurate, and less expensive way to comply.

An Electronic Form W-8 ("E-W8") software tool allows you to collect Forms W-8 over the internet. The E-W8 automates the solicitation and validation of Forms W-8, reducing delays, costs, and errors. WAs and customers also obtain a more efficient, structured renewal process.

Implementing an E-W8 tool, however, requires proper planning. We would like to point out some key issues for you to consider.


MEMORANDUM OF UNDERSTANDING ("MOU"): The IRS offers a formal MOU process for WAs to have their proposed (or existing) E-W8 system approved. However, the IRS FAQs at http://www.irs.gov/faqs/index.html, do not give much practical detail on the MOU process. In our experience, WAs should expect to have between three to six working meetings with the IRS at which they will address the following issues:


DIGITAL SIGNATURE: The Federal E-Sign Act (15 USC § 7001) ("Act") only provides general guidelines regarding digital signature systems, and proscribes no specific technology, form or method for producing valid signatures. WAs accordingly must carefully tailor their E-W8 tool to satisfy the Act in order to obtain valid Forms W-8. We particularly advise WAs to focus on §7001(c) regarding consumer disclosures; §7001(d) regarding retention of contracts and records; §7001(e) regarding the accuracy of such records; and §7001(g) on notorization and acknowledgements.


JOINT ACCOUNTS: Many current joint account holders with on-line accounts share the same username, password, and PIN, making it difficult to ensure that each account holder has individually signed his or her own Form W-8BEN. WAs must develop a unique data element that can be associated with each individual - and then verified. While a WA could use such standard approaches as using a mother's maiden name, or the name of a first pet, we advise using a data element from the account opening process, such as a passport, cédula, or visa number, because these elements are more readily verifiable. Each account holder will then input his or her unique data element during the E-W8 submission process to verify that he or she has signed and submitted his or her individual Form W-8BEN.


VALIDATION LOGIC: WAs should incorporate as much validation logic as possible into their E-W8 system. For example, on a Form W-8BEN, the E-W8 validation logic should be designed to check the following information:

1. One (and only one) box is checked on line 3;

2. If a treaty claim is made, the country on line 9a matches the country on Line 4; and

3. If the entity is a non-individual, the capacity has been provided (and so on).


ADDITIONAL DOCUMENTATION/ DUE DILIGENCE: It may not be cost effective to entirely automate the Form W-8 process. For example, the due diligence standards require extra documentation if a customer uses a U.S. mailing address, a power of attorney (or certain other capacities), or provides an address outside of a treaty jurisdiction. Some WAs have decided to send all such additional documentation to a centralized location for validation. You should be aware, however, that the IRS is considering our request to substitute a series of questions relevant to U.S. tax status in place of the paper "reasonable statement" of U.S. address and additional documentation (such as passports or other IDs). We will keep you posted of developments on this issue.


LOGIN, PASSWORD AND PIN: It is an unfortunate fact that multiple mailings to some NRA customers do not work well. The customer may think that the follow up letters are just duplicates; and in many jurisdictions, the mail system is unreliable. While it is common U.S. practice to send a Login, Password, and PIN through separate mailings, a better solution may be to include the Login and Password in the primary mailing, and then have the customer log onto the E-W8 site to have a unique PIN systemically generated. This enables the WA to have only one written communication with the customer - easier by far on both parties.


CONCLUSION: WAs should fully think through systemic, tax technical, and operational design considerations before approaching the IRS for an MOU. Such planning will make the MOU process run far more smoothly and hopefully, will reduce the time until you have a fully functional E-W8 system up and running.


If you have any additional questions, please feel free to contact us by phone at (202) 783-1553, by email at: cticompliance@cticompliance.com, or visit us on the web at http://www.cticompliance.com/.

 

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