Sec. 1441 voluntary compliance program.

• Author: Sylvia, Sharlene M.

The IRS has launched a voluntary compliance program (VCP) under Sec. 1441 for withholding agents (such as financial institutions) that make payments of U.S.-source dividends, interest, rents, royalties and other fixed or determinable, annual or periodical (FDAP) income to foreign persons; see Rev. Proc. 2004-59.

The VCP responds to comments from financial institutions that wanted to disclose and resolve compliance issues associated with implementing final regulations under Secs. 1441-1464 and 6041-6050S. When these financial institutions started to implement the final regulations, they began identifying tax deficiencies and failures in their systems. These entities told the IRS that complying with the final regulations required ongoing documentation of account holders and major changes to existing systems and procedures.

The Sec. 1441 VCP is available for submissions made from Sept. 29, 2004-Dec. 31, 2005. It applies to tax withholding and reporting obligations under Secs. 1441-1443 and 1461, and to related tax withholding and reporting obligations under Secs. 3406 and 6041-6050N.

Background

Sec. 1441 requires any person who pays income subject to tax under Sec. 871(a) or 881(a), which includes FDAP income, to withhold tax on the gross amount paid. Generally, the tax is imposed on the gross amount at a 30% rate. However, the withholding rate may be reduced or eliminated pursuant to a tax treaty or a Code section, if the withholding agent obtains documentation from the foreign person. A withholding agent is required to determine the status of the persons to whom it makes payments by obtaining documentation from them and may withhold at a reduced rate on payments to foreign persons only if the foreign person has furnished the required documentation.

Eligibility

To be eligible for the VCP, a withholding agent must meet the definition in Regs. Sec. 1.1441-7(a)(1): any person, whether U.S. or foreign, that has the control, receipt, custody, disposal or payment of an item of income of a foreign person subject to withholding, and is not a "qualified intermediary," a "withholding foreign partnership," a "withholding foreign trust" or an "eligible organization" as defined in Section 2.01 of Rev. Proc. 2001-20. An "eligible organization" includes (1) a college or university described in Sec. 170(b)(1)(A)(ii), which is exempt from tax under Sec. 501(a) as an organization described in Sec. 501(c)(3); or (2) an organization described in Sec. 501(c)(3)...