IRS Information Reporting and Withholding Requirements for US Banks
Information Reporting and Withholding Requirements for US Banks
US banks, including regional and small financial institutions (FIs), must comply with IRS regulations regarding information reporting and withholding. These requirements ensure proper tax classifications, tax withholding identification and collection, and year end reporting for various types of payments made to both US and non-US persons. This article outlines the key aspects of these requirements, focusing on the forms and procedures necessary for compliance.
Types of Payments and Required Forms
US banks handle a variety of financial products resulting in payment types with specific reporting and withholding requirements. The main payment types include interest, fees, dividends, and credit card transactions. The IRS has required through regulations and instructions that the following forms are required to be collected to determine withholding and reporting obligations:
- Form W-9: Used to collect taxpayer identification numbers (TINs) from US persons.
- Some reportable payment types do not require a certified US tin and rely on TIN match with IRS records as a form of account validation.
- Form W-8: Primarily used to certify foreign status and;
- W-8BEN - claim treaty benefits for individuals.
- W-8BEN-E - claim treaty benefits for entities
- W-8ECI - effectively connected with trade or business
- W-8EXP - exemption due to foreign government or other foreign organization
- W-8IMY - intermidiary or flow-through entity
- CRS Self-Certification: Used for Common Reporting Standard (CRS) compliance, particularly for multinational FIs with branches or management of financial account in a participating jurisdiction. There are seperate requirements for tax data between individuals, entities, and controlling persons.
Navigating IRS Information Reporting and Withholding Challenges
US banks must collect the appropriate forms to identify withholding and reporting obligations based on the tax certifications made on the forms as well as the specific types of payments being made.
Withholding
Once a payment is identified, a form must be collected and validated. Then a bank must determine if withholding is required. Withholding of taxes in the U.S. is required at source, to ensure the IRS is made whole on U.S. taxable income paid by banks. The bank should look at factors such as tax elections made on form, sourcing of payment, is form valid for the purposes requested. Once these factors are determined, tax withholding may be applied:
- BACKUP: this type of withholding is performed on all types of payments when there is not a certified TIN on file for an account receiving most types of income. Absent a W-9, or a W-8 proving foreign status, a bank should perform backup withholding which is currently set to 24%. When a W-9 is provided, there is no tax withholding required except under a few exceptions.
- NRA: Non-Resident Alien withholding is regulated under IRC 1441, and is commonly referred to as Chapter 3 withholding. This is applied to accounts which have provided a valid W-8 form and applies to payments that fall under FDAP (fixed, determinable, annual, periodic) payment types like interest and dividends.
- FATCA: not to be confused with FATCA reporting for non-US FI, FATCA withholding is also commonly referred to as Chapter 4 withholding. This is applied to accounts that have no U.S. indicia and have not provided a valid W-8 form. FATCA also only applies to FDAP income and does not apply to individuals.
It is also important to note that there is no withholding as part of the CRS reporting regime.
Reporting
After identifying which payments are being made and validating the tax certifications made on forms and tax withholding obligations, a bank must now identify which type of reporting is required. The key obligations result in the following reporting obligations:
- Interest Payments:
- Forms: W-9, W-8, CRS self-certification
- Withholding: Backup, NRA, FATCA
- Reporting: Form 1099-INT, Form 1042-S, CRS XML
- Fees:
- Forms: W-9, W-8
- Withholding: Backup withholding, NRA withholding, FATCA
- Reporting: Form 1099-MISC, Form 1042-S
- Dividends:
- Forms: W-9, W-8, CRS self-certification
- Withholding: Backup withholding, NRA withholding, FATCA
- Reporting: Form 1099-DIV, Form 1042-S, CRS XML
- Credit Card Transactions:
- Forms: TIN match, W-8
- Withholding: Not applicable (not FDAP)
- Reporting: Form 1099-K
- Principal Repayment:
- Forms: W-9, W-8, CRS self-certification
- Withholding: Backup withholding (not FDAP)
- Reporting: Form 1099-B (tracking of cost basis), CRS XML
Recommendations for Compliance
To ensure compliance with IRS information reporting and withholding (IRW) requirements, US banks should:
- Collect and verify tax forms:
- Ensure all necessary forms (W-9, W-8, CRS self-certification) are collected and validated for accuracy.
- When a form is not required, perform IRS TIN match for proactive compliance
- Implement robust systems:
- Create a process to ensure proper payment identification to know when and what type of tax form is required.
- Use vendor platforms (like TAINA) to streamline the collection and validation of tax forms.
- Use combination of payment identification and form validations to determine if there is a tax withholding requirement.
- Leverage vendor to identify changes in circumstances that may require a new form and ensure strong data integrity.
- Once transaction activity has been verified for the year, establish data flows for tax reporting processes.
- Stay updated:
- Regularly review IRS regulations, publications, and instructions forupdates to maintain compliance with evolving regulations.
- Test systems and processes to ensure there are no gaps or quality issues.
How can TAINA help US Banks?
US banks, including regional and small FIs, must navigate complex IRS infrormation reporting and withholding requirements to ensure proper tax compliance. By understanding the types of payments, required forms, and reporting obligations, banks can effectively manage their tax responsibilities and support a sustainable financial ecosystem.
TAINA offers a robust solution that automates and streamlines due diligence processes, ensuring compliance, accuracy, and efficiency. By adopting TAINA’s innovative solutions, U.S. based financial institutions can enhance their compliance procedures and mitigate risks.
We would love to talk to you more about your current documentation validation process and how our award-winning FATCA and CRS Validation platform may add value to your organisation.
For more information on how our fully automated FATCA and CRS Validation platform can add value to your business, get in touch or request a demo to see it in action.
