Withholdings on aliens by educational institutions.

• Author: Elly, Mark H.

In an effort to get colleges and universities to better comply with employment tax requirements, on Jan. 29, 2001, the IRS issued Rev. Proc. 2001-20, which is an offer to waive penalties on underpayments or deficiencies due to reasonable causes. This limited-time experimental offer, called Voluntary Compliance on Alien Withholding Program, is for public and other nonprofit educational institutions that want to resolve tax, withholding and reporting compliance issues for income and FICA tax on aliens. Exempt Sec. 501(a) colleges and universities and their affiliates are eligible. Rev. Proc. 2001-20 is an effort to improve voluntary compliance among the targeted institutions in withholding and reporting on wages, grants, scholarships and other income to alien individuals.

"Targeted defects" are failures to pay and to withhold and pay the correct taxes under Secs. 3111 (Social Security), 3101 (Medicare excise), 3402 (income taxes on employers and employees) and 1441-1464 (income tax on scholarships, fellowships and grants, independent personal services and royalties).

The general tax rate applied to nonresident aliens is 30% (Sec. 871), but there are many exceptions for reduced rates. The Service and Treasury have concluded that it is desirable to allow the benefit of reduced withholding at the source rate, rather than a refund procedure. Doing so, however, depends on whether withholding agents perform important compliance functions (i.e., properly withholding). Regs. Sec. 1.1441-7(b)(1) (the withholding's due diligence standard) imposes the responsibility on the withholding agent to ascertain whether withholding is applicable, as well as the appropriate withholding rate.

Offer's Advantages

If, after review, the IRS agrees with an institution's proposed procedures, it:

* Sends an acknowledgment letter assuring the institution that its procedures are acceptable.

* In general, will not impose penalties for identified underpayments or deficiencies, if a liability is due to a reasonable cause.

* Will not anticipate opening examinations as a result of information that institutions submit, but it does reserve the right to do so. If an institution complies after receiving the acknowledgment letter, the IRS will not use the submitted information as the basis to initiate an examination.

Caveats. While an offer is attractive, the Service does not guarantee that it will not impose penalties or initiate an examination. Further, the Service does not offer...