The best tax reports are the ones that not only tell you about current tax developments but also give you a glimpse of what may be in the offing.
In November, the IRS released its Priority Guidance Plan for 2020-2021, giving us a glimpse of planned guidance projects for this fiscal year; the Internal Revenue Service Advisory Council (IRSAC) issued its annual report providing its recommendations for tax issues requiring IRS input; and, more globally, the OECD has released a report on the status of crypto taxation in various jurisdictions around the world.
In other tax reporting developments for November, the IRS provided an update in its QI FAQs relating to reliance on section 871(m) good faith effort standards and extended guidance on Form 1099-R reporting for escheated pension accounts.
- We look at the IRS guidance on tax withholding and reporting topics that may be addressed in the coming year.
- The OECD report provides a glimpse into the status of crypto taxation in countries around the world.
- The IRS clarifies how qualified intermediaries can utilize the good faith efforts standard for derivative transactions subject to section 871(m), and extends guidance relating to Form 1099-R reporting on pension money distributed to state unclaimed property funds.
1. IRS releases its Priority Guidance Plan for 2020-2021
On 17 November, 2020, the IRS released its Priority Guidance Plan for fiscal year 2020-2021. The plan covers the period from 1 July, 2020 to 30 June, 2021 and contains the guidance projects that it plans to issue during the fiscal year.
In this latest report, the IRS notes that the task that has consumed a great deal of its time over the last three years appears to be coming to an end. It expects that by 30 December, 2020, it will largely have finished providing guidance relating to implementation of the Tax Cuts and Jobs Act of 2017, the largest of recent tax law behemoths.
From the pages of the guidance plan, we gain a view into tax withholding and information guidance projects that we can anticipate for the coming year.
Among these projects are the finalization of the proposed tax withholding and reporting burden reduction regulations issued in 2018. While several provisions in the proposed regulations were finalized earlier this year in T.D. 9890, the remainder of the 2018 proposed regulations relating to such topics as FATCA gross proceeds withholding exemption, changes to the lag method and expansion of over withholding reimbursement and offset procedures remain outstanding.
Moreover, under the burden reduction rubric, the IRS plans to issue additional guidance relating to the application of section 871(m) tax to dividend equivalent payments arising with respect to derivative transactions. In particular, the new regulations may address rules relating to non-delta one transactions.
There is also additional Chapter 3 and Chapter 4 guidance expected, including updates to the Qualified Intermediary Agreement. This, in part, will be to account for changes stemming from recently issued withholding regulations under section 1446(a) and section 1446(f) relating to partnership dispositions and distributions, including broker withholding on dispositions of publicly traded partnerships.
Finally, the IRS regulatory project under section 6045 relating to tax information reporting on virtual currency transactions remains on the priority guidance plan for the year.
2. IRSAC Annual Report recommends IRS address outstanding tax reporting issues
IRPAC, or the Information Reporting Program Advisory Committee no longer exists, and its work has been folded into the larger Internal Revenue Service Advisory Council (IRSAC). So for tax information reporting and withholding topics of interest being discussed between industry, advisors and the IRS, we look to the IRSAC Annual Report.
The latest IRSAC Annual Report (Pub. 5316), issued in November 2020, outlines several recommendations to the IRS with respect to tax reporting and withholding issues raised by industry and tax advisors.
First, the report recommends that the IRS incorporate into the Form W-8IMY itself the certification that non-qualified intermediaries are required to provide for alternative ‘streamlined’ withholding statements.
To use the streamlined withholding statements, the intermediary under existing rules must state on the withholding statement that the information on the Form W-8IMY is not inconsistent with account information the intermediary has for the beneficial owners for determining withholding tax rates. But the statement is commonly left out of such statements, impinging on their validity.
Second, in anticipation that the qualified intermediary agreement would be updated in the near future to accommodate section 1446(f) regulations, IRSAC recommends that other guidance currently provided in FAQs be incorporated in any updated QI Agreement or agreement for withholding foreign partnerships or withholding foreign trusts.
Third, the IRSAC report argues for additional leniency in the terms of when a partnership may obtain an extended due date for its Form 1042-S filings in connection with changes to the ‘lag method.’
This relates to income earned by a partnership in one year that is undistributed during that year. Under new rules that generally eliminate lag method utilization for calendar-year partnerships, the undistributed income earned in Year 1 is reportable in the Form 1042-S for Year 1 even though withholding may occur in the subsequent year.
In certain cases, the new rules allow for the extension of the Form 1042-S filing due date from March to September. Where a partnership invests in another partnership, allocation information with respect to undistributed income attributable to an underlying partnership can often be delayed. IRSAC argues that the new September extended due date for Form 1042-S filings be available for a wider set of circumstances than under current rules due to information lag.
And finally, the IRSAC report recommends that the IRS provides further guidance on several issues that continue to impact domestic tax reporting, in particular with respect to cost basis: (1) application of market discount rules to complex debt instruments; (2) tax reporting for final liquidating distributions; (3) how lending of MLP interests should be characterized and reported; and (4) taxation and disclosure relating to bond premium in event a bond is called prior to maturity.
3. OECD report summaries on global tax developments relating to crypto
While we wait for additional IRS guidance on the taxation of virtual currencies in the U.S., crypto tax mavens may be interested in a report issued by the OECD in October 2020. The report, Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, provides one of the most comprehensive cross-country surveys of crypto tax rules across some 50 jurisdictions.
The OECD report compares tax treatment of crypto assets across different countries through various stages of the crypto life cycle, from creation to disposal. It also discusses tax policy considerations relating to virtual currencies.
As backdrop to the report, the OECD notes that as of October 2020, the market capitalization of crypto assets had reached US$390 billion, with more than 10 million transactions taking place each market day.
The report indicates that the growth of this asset class combined with their exchangeability with fiat currencies or other financial assets has the potential to facilitate tax evasion and impact monetary policy.
Moreover, investment in virtual currencies “generate value”, and could therefore be a potential tax base on which to generate tax revenue.
4. QI FAQ on Section 871(m) Good Faith Reliance
In November, the IRS updated its QI FAQs (Question 13 under Certifications and Periodic Reviews) relating to reliance on the good faith efforts standard under section 871(m).
Under transition relief, most recently extended in Notice 2020-2, the IRS states that it will take into account good faith efforts by withholding agents to comply with section 871(m) rules in enforcing these provisions through 2022 (for delta-one transactions) and 2023 (for non-delta one transactions).
The FAQs clarify that a qualified intermediary, like other withholding agents, can rely on this good faith standard.
The FAQ notes that a QI that is not a qualified derivatives dealer but is acting as intermediary on a section 871(m) transaction, however, does not exclude such transactions from its periodic review. Where it is relying on the good faith efforts standard, it should disclose this in an attachment to its periodic review certification.
5. Is reporting required for escheated pension funds?
In 2018, the IRS ruled that IRA distributions to state unclaimed property funds were subject to tax withholding and reporting. In recently issued Rev. Rul. 2020-24, the IRS has extended this guidance to employer pension plans.
Therefore, distributions of escheated funds from employer pension plans to state unclaimed property funds will also be subject to tax withholding and reporting on Form 1099-R.
Transition relief, however, is provided in the ruling.
The ruling states that a “person will not be treated as failing to comply with the withholding and reporting requirements described in this revenue ruling with respect to payments made before the earlier of 1 January, 2022, or the date it becomes reasonably practicable for the person to comply with those requirements.”
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