Furnishing Payee Statements Electronically

Last year, the IRS issued temporary and proposed regulations setting forth procedures under which filers of certain information returns can furnish payee statements electronically, rather than on paper. The regulations anticipate use of a Website-based technology for delivery. While the information returns that may be provided electronically under these regulations are limited to Form W-2, Wage and Tax Statement, Form 1098-E, Student Loan Interest Statement, and Form 1098-T, Tuition Payment Statement, the regulations likely will be extended to other information in the near future.

Under the regulations, information return recipients must consent affirmatively to receiving their statements in an electronic format. The consent must be made electronically, in a manner that reasonably demonstrates that the recipient will be able to access the statement in the electronic format in which it will be furnished. Alternatively, the consent may be made in a different manner if it is confirmed electronically. As a practical matter, therefore, an employer cannot obtain a "consent" from an employee to furnish Form W-2 electronically if the employee has no access to a computer or to the employer's intranet on which employee Forms W-2 are to be posted.

To obtain valid consents from recipients, the furnisher must provide them with a clear and conspicuous disclosure that the payee statement will be furnished on paper if they do not consent to receive it electronically. Recipients must also be informed of the scope and duration of the consent (e.g., whether the consent will continue to apply to future years unless it is withdrawn). Finally, the furnisher must inform recipients that they may withdraw consent at any time by furnishing the withdrawal in writing (either electronically or on paper) to the filer.

On or before January 31 of the year following the calendar year to which the statement relates, the furnisher must notify the recipient that the payee statement is posted on the applicable Website. This notice may be delivered by mail, e-mail or in person. The notice must provide instructions on how to access and print the statement, and include the words "IMPORTANT TAX RETURN DOCUMENT AVAILABLE" in capital letters. The good news for information return providers is that under the regulations they need not confirm that recipients actually have entered their Website and accessed information return data.

Given the annual cost of processing, printing and mailing information returns, many filers will want to furnish payee statements electronically. Thus, the ability of individual income tax return preparers to access those information returns will become critical. However, this ability will be limited by a furnisher's reasonable efforts to ensure the confidentiality of any taxpayer information posted on its Website.

Payments to Nonresident Aliens

New regulations under Sec. 1441, applicable to withholding and reporting on amounts paid to nonresident aliens, generally became effective on Jan. 1, 2001. The new regulations make dramatic changes to the documentation requirements imposed on persons making payments to nonresident aliens. Under the regulations, traditional Form W-8, Instructions for the Requesters of Forms W-8BEN, W-8ECI, W8EXP, and W-8IMY, and Form 1001, Ownership, Exemption, or Reduced Rate Certificate, used to claim NRA nonresident alien status and treaty benefits, were replaced. New Forms W-8BEN, Certificate of Foreign Status of Beneficial Ownership for United States Tax Withholding, W-8ECI, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With Conduct of a Trade or Business in the United States, W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding, and W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding, now generally are required to claim foreign status and treaty rate reductions in withholding.

Notice 2001-4. In Notice 2001-4, the Service announced additional transitional relief for U.S. withholding agents under the new regulations. While the regulations still became effective Jan. 1, 2001, the notice simplified many of the new documentation requirements imposed by the regulations. As a result:

• Forms W-8, 1001, etc., including those that already had expired, generally are valid for 2001 (provided the withholding agent can demonstrate good faith in making an effort to obtain new withholding certificates);
• Foreign partnerships are not required to provide documentation to payers for their non-U.S. partners, or U.S.-exempt partners, until the end of 2001; and
• Withholding agents may accept the October 1998 version of Form W-8 until the end of 2001. Reliance on such forms, however, is not permissible for payments to a foreign financial institution, if the withholding agent has reason to know the institution is acting as an intermediary on behalf of others. New versions of Form W-8 were released last December.

Address rule. Despite other changes, Notice 2001-4 clearly provided that the "address rule" in the old regulations no longer applies to dividend payments, effective for payments made in 2001. Under the former rule, a payer could apply a reduced rate of withholding under an income tax treaty, based solely on the address of the person to whom the dividends were paid. Without the address rule, a payer generally must have Form W-8BEN on file to apply a reduced treaty rate to dividends paid to nonresident aliens.

Services rendered abroad. Under the presumption rules of the new regulations, a U.S. payer generally must report foreign-source income paid for services performed outside the U.S., unless the U.S. payer has a Form W-8 (or documentary evidence) from the payee stating that the payee is not a U.S. person. It is important to note that, under the regulations, a controlled foreign corporation is deemed to be a U.S. payer. However, Notice 2001-4 provides that until further notice, the IRS will not require a U.S. payer to report income paid for services rendered if:

• The payee of the income is an individual;
• The U.S. payer does not know that the payee is a U.S. citizen or resident;
• The payer does not know, and has no reason to know, that the income is (or may be) effectively connected with the conduct of a trade or business; and
• All the services for which the payment is made were performed outside the U.S.

Conclusion

While the new, fairly burdensome, documentation requirement for services rendered abroad has been alleviated for payments made to individuals, it is still in effect for payments made for services rendered abroad by partnerships, such as architectural, law and public accounting firms.

From George Fox, LL.B., CPA, and Debbie Pflieger, LL.B., Washington, DC