Voluntary Compliance Program for Withholding Agents

Voluntary Compliance Program for Withholding Agents

In a memo dated February 25, 2005, the IRS Large & Mid-size Business Division, announced that based on recently received Chief Counsel Advice, withholding agents participating in the Section 1441 Voluntary Compliance Program (VCP) would not be subject to interest charges under certain circumstances.

Section 1441 requires withholding agents to withhold tax on income subject to withholding paid to foreign persons. 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 code section only if the withholding agent obtains documentation from the foreign person. Under the regulations, the withholding tax can be eliminated if documentation is received after the payment, however penalties and interest on the tax which should have been withheld would still be assessed.

The February 25th memo provides that withholding agents participating in the VCP, who have failed to withhold the proper amount of tax by the due date for filing Forms 1042 but subsequently receive documentation providing evidence that tax was properly withheld, will not be subject to interest charges under the program. The IRS said that it has received a number of questions regarding the applicability of interest described under section 5.02(2) of Rev. Proc. 2004-59. In the memo, the IRS explained that interest charges will only apply to actual underpayments of tax.

In September 2004, the IRS issued Rev. Proc. 2004-59 to announce the VCP, which is available to eligible withholding agents that make payments of U.S.-source dividends, interest, rents, royalties and other fixed or determinable, annual or periodical income to foreign persons. The program allows withholding agents to voluntarily disclose failures to
(1) withhold or pay the correct tax on income reported on Form 1042,
(2) withhold or pay the correct amount of backup withholding tax and
(3) correctly report information under sections 1461 and 6041-6050N.

The VCP applies only to tax and reporting obligations related to Forms 1042 and 1042-S, and not Forms 945 and 1099, except to the extent that (1) correcting a failure to document U.S. persons or (2) a misclassification of U.S. and foreign persons, requires the filing or correction of those forms.

In general, the VCP requires withholding agents to provide information regarding current withholding procedures, failures in those procedures and the number of persons affected, the total amount of taxes the withholding agent failed to withhold, and a description of corrective actions to be implemented. Rev. Proc. 2004-59 provides that the IRS will not assert any penalties on the withholding agent’s liability if the withholding agent’s failure is due to reasonable cause. Participation in the VCP will be deemed to be reasonable cause.