Enforcement of the tax withholding and reporting obligations imposed upon US entities, with respect to payments to non-US citizens, has without doubt become one of the hottest topics at the Internal Revenue Service (IRS). As evidence of the importance the IRS is placing on this issue, withholding tax has now been designated as a Tier l issue. At issue is Section 1441 of the tax code, which stipulates that payments made to a non-U.S. citizen for services performed in the United States are subject to a withholding tax.
In this article, Marianna Dyson and Mike Lloyd describe how this area has been virtually ignored and therefore companies are unfamiliar with the applicable rules and are also unaware of the significant risks of non compliance. The article focuses on how the IRS is now in the process of increasing its enforcement activity surrounding payments to non-U.S. citizens. Given the IRS’s current focus to ensure compliance with the section 1441 rules, every US entity making payments to non-U.S. citizens has reason to be concerned about this increased enforcement activity. At this time there have been over 6000 random employment/AP audits of companies that are being targeted by the IRS surrounding cross-border withholding and information reporting issues.