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Four best practices to address Forms W-8 changes

Financial institutions face a flurry of operational challenges as they adjust their document collection and verification processes to accommodate new IRS Forms W-8 and other legislative tax changes. But withholding agents can take a few key steps to get ahead of the revisions.

The IRS rolled out final versions of Forms W-8ECI and W-8BEN earlier in October. New versions of W-8BEN-E and W-8IMY are still in draft but are expected to be finalized by month's end. The majority of the changes reflect new rules under IRC Section 1446(f) related to withholdings tied to Publicly Traded Partnership (PTP) distributions specifically, setting them apart from Fixed, Determinable, Annual, and Periodical (FDAP) income.

The modifications carry potentially far-reaching implications. During a recent webinar hosted by IHS Markit, industry experts discussed the details of these form changes and the many operational challenges they present to withholding agents. Here are some of the key takeaways from the event on how to prepare effectively.

Use the full sunset period
The IRS is providing a six-month sunset period following the release of these forms, meaning that withholding agents won't have to start using the new forms until May 2022. Experts agreed that withholding agents should take full advantage of this period.

"Any time we get a new set of forms, there are always some operational hiccups," said Cyrus Daftary, a Tax Principal at KPMG US. "So I would encourage everyone to continue using the current forms through the coming tax season and use that time in between to prepare for the changes."

Another reason to wait: Some of the forms and their related instructions are still in the draft stage, so they could change before being finalized. The IRS also has yet to release requestor instructions that provide withholding agents with additional information on how to handle the forms.

Take stock of your 1446(f) impact
IRC Section 1446(f) introduces several hurdles that withholding agents will have to clear to manage the new forms, particularly around validation. For instance, some forms may be valid for FDAP generally, but they may not be for 1446 specifically. This could present issues for firms that use universal forms across business lines.

Additionally, the treatment between FDAP and 1446(f) differs markedly under the new rules, particularly in regard to qualified intermediaries (QI) and nonqualified intermediaries (NQI).

For instance, while NQIs have look-through treatment for FDAP, they do not for section 1446(f). QIs, meanwhile, have the potential to provide beneficiary-specific documentation instead of pools for 1446(f).

As a first step to address these issues, webinar participants urged withholding agents to evaluate their portfolios to determine whether they have instruments on their books or in their custody that are impacted by 1446(f).

Make a plan for sourcing Qualified Notices
Key exceptions under Section 1446 present additional layers of complexity. For instance, the so-called 10% ECI exception is based on security status rather than income type or the account holder's tax profile. But questions remain on how to capture that data point and integrate it into a withholding engine.

Garnering the information to determine whether those exceptions apply may be time-consuming. Qualified Notices are to be posted to PTP websites, but that may become cumbersome if firms have several PTPs to manage through. What's more, PTPs don't use a standardized format for Qualified Notices, making data collection more difficult.

Unsurprisingly, an audience poll during the webinar showed that nearly 70% of attendees did not have a solution in place to assist in sourcing Qualified Notices.

To help alleviate this burden, participants advocated for moving to a standardized format across the industry. In addition, IHS Markit is expanding its Tax Utility, which currently is a repository for Forms W-8 and W-9, to include PTP tax information. This will provide a centralized location for Qualified Notices and will allow for this data set to be integrated with its withholding module.

Get ready for a new solicitation effort
In addition to the recent Form W-8 changes, the proposed tax changes under the Biden Green Book would lower the thresholds that require certain form obligations, such as Form 1099-K, and makes the collection of Forms W-9 and certified TINs far more pertinent.

"If it becomes law, the Biden Green Book proposal is really going to magnify the number of 1099-Ks that you're going to have to generate — and more importantly, you may soon need to collect W-9s from clients who didn't meet prior thresholds," Daftary said. "I would encourage folks to do a solicitation of your U.S. clients where there isn't a W-9 in hand and ensure you've got a W-9 so that you don't wind up having a problem down the road."

Experts on the webinar also advocated that firms begin TIN matching if they do not already. The IRS has introduced a new API to connect directly to the IRS TIN matching program, and IHS Markit is integrating the API as part of the validation process in Tax Solutions.

Preparation is key
Across the board, webinar participants underscored the importance of bringing the necessary time and attention to these changes to ensure that systems are in place to handle the changes correctly. Without the proper response, firms leave themselves open to noncompliance, possibly including interest and penalty charges.

IHS Markit is working to help its Tax Solution clients address these challenges by updating our due diligence suite of products with the new Form W-8 changes by the end of 2021. In addition, we are enhancing our due diligence API performance, enriching Account Linking for IPS, as well as new capabilities in 2022 to support client outreach, and automated queue clearing.

Learn more about how Tax Solutions can help you achieve timely and accurate regulatory compliance.

Posted 02 November 2021 by William Sheridan, Managing Director, Tax Solutions, IHS Markit and

Yvonne Kunihira-Davidson, Executive Director, Tax Solutions, IHS Markit

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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