New Developments in Tax Withholding and Information Reporting

1. New Developments in Tax Withholding and Information Reporting What’s All The Fuss About? By Roger Cardinal Ernst & Young LLP

2. What’s All The Fuss About? • Enforcement • Enforcement • Enforcement • Enforcement • Enforcement • Enforcement

3. Enforcement Issues • Audits ARE taking place • No longer “some day” • Guidance today • 11/03 Industry Directive • Guidance “tomorrow” • New Section of Internal Revenue Manual • Planning and Preparing NOW are critical

4. Audits • NOT “QI style” – Digging deep, asking hard questions, assessing taxes and penalties • Field Agents in NY will be trained by enforcement team at 290 Broadway • Field Agents outside of NY will be trained??? • Issues all over the place

5. Guidance Today • November ’03 Industry Directive • 10 Fundamental Steps

6. 10 Steps of Industry Directive • Analyze the Withholding Tax System • Review Forms • Review Processing Mechanics • Be prepared to explain • Flowchart of systems and interrelationships • Internal controls • Procedures manuals • Strata for sampling purposes

7. 10 Steps (cont.) • Review Procedures for account opening and identification of payees • Sufficient controls and separation of duties for credible information? • Reconcile to confirm that all reportable income has been captured. • 1042-S verification

8. 10 Steps (cont.) • Determine appropriate strata for sampling purposes • By amount? • By withholding rate? • By type of account? • By documentation type? • By business unit or cost center?

9. 10 Steps (cont.) • Determine Sample Size • Request Documentation for accounts in sample • Verify classification and identification of payee • Review documentation requirements for various types of income

10. 10 Steps (cont.) • Review 1042-S for proper “codes” • Income code • Recipient code • Exemption code • Calculate underwitheld taxes, extrapolate, and determine interest, and penalties

11. Audit Guidance “tomorrow” – IRM unit • Non-Financial Institution Audits (Accounts Payable/Treasury Function/Other) • Financial Institution Audits • Includes Accounts Payable

12. A/P Audit guidelines • Will provide examples of when Withholding/Reporting may be needed • Will identify target industries • Will recommend “3 step audit process” • 5471/5472 info will be used • (YES it is inaccurate for this purpose) • Model IDRs will be provided

13. Financial Institution Audit Guidelines • Functional Review of Operational Procedures • New Account Opening Procedures • Due Diligence- Standard of Knowledge • Examination of forms W-8 • Transactions Requiring Special Treatment by the Withholding Agent (Based largely on what IRS learned in VCP and other voluntar submissions)

14. What does all this mean? • You are forewarned as to what they’ll be looking for – in the BEST of situations • Those of you who availed yourselves of the VCP – do not get complacent – your audits could be MORE harsh, if you’ve not met your promises

15. Prepare NOW • You know what will be asked • Identify all areas of your organization, including a/p, treasury, and all units that make payments of possible US-sourced income to non-US payees • Find your contacts • Determine and document procedures

16. Prepare (cont) • Review tax documentation for validity • Cure what’s curable (this will take time! • Confirm your withholding and reporting accuracy • Be prepared for every question the IRS may ask

17. Prepare (cont) • Don’t forget accounts payable • Payments for Services • Payments for Software • Payments for Rent of Real or other Tangible property • Don’t forget inter-company payments • May have special documentation requirements • Don’t forget the Treasury Function, wire payments, etc.

18. Questions?