Tax Compliance: Front-end and Back-end Compliance
Compliance with tax obligations is a crucial component for any well-functioning business. Specific compliance requirements vary based on the type of business. The attorneys at Fuerst Ittleman David & Joseph have assisted clients with tax compliance in a wide variety of contexts. In each circumstance, the focus has always been on being proactive and taking steps to mitigate risk before issues have the chance to arise.
- Banks and financial institutions are generally required to implement procedures to identify their customers and account holders, usually by acquiring IRS W-9 forms from account holders, so that the bank or financial institution can withhold on payments made to the account holder (especially for foreign account holders), or issue 1099 forms to notify the account holder of its receipt of income. Failure to properly identify and document account holder relationships can lead to the imposition of liability on the bank or financial institution.
- Banks and financial institutions, particularly in areas with a lot of international commerce like South Florida, need to be aware of their compliance obligations with respect to international transactions. Before a bank or financial institution is relieved of an obligation to withhold on a payment (such as of interest) to a foreign recipient claiming an exemption from withholding, it must receive a W-8 form from the payment recipient. There are several variations of the W-8, depending on the claimed exemption (i.e. exemption under a treaty requires a form W-8BEN).
- Banks and financial institutions making payments to foreign financial institutions, or holding accounts for non-U.S. persons, must be aware of the requirements of the recently enacted Foreign Account Tax Compliance Act (FATCA); specifically, unless a foreign financial institution has agreed to provide information regarding its U.S. account holders to the IRS, payments made to that foreign financial institution are often subject to withholding at a 30 percent rate regardless of any claimed exemption. Further, in order to satisfy the reciprocal nature of FATCA, U.S. banks will likely soon be required to disclose the identities of their foreign account holders so the IRS can transmit the same to the relevant foreign tax authorities. It is also imperative for banks and financial institutions to implement and follow strict anti-money laundering procedures. Large cash transactions, transactions evidencing a pattern of activity intended to avoid reporting requirements (for example, deposits of just under $10,000 made close in time to one another), and transactions generally suspicious in nature, all impose reporting requirements on banks and financial institutions.
- Whether a business’s workers are classified as employees or independent contractors significantly impacts the company’s tax compliance obligations. Businesses with employees have withholding obligations and are required to make quarterly deposits of the withheld funds. Conversely, businesses operating through independent contractors generally have no withholding requirement, but must still issue 1099 forms to their contractors to allow them to properly report their income. The distinction between an employee and an independent contractor can be a fine one; businesses often intend to operate through independent contractors but are, in the IRS’s eyes, operating with employees. This can come as a nasty shock to the business’s owners, especially when notice comes in the form of an IRS demand for unpaid payroll withholdings.
- Sophisticated individual taxpayers also have extensive compliance requirements of which they are often unaware. Offshore bank accounts, interests in foreign business entities, and other foreign assets are subject to strict reporting requirements which, if not complied with, give rise to significant penalties. Further, domestic compliance issues often arise for sophisticated taxpayers. For instance, the IRS recently implemented detailed valuation and documentation requirements for deductible charitable gifts.
These are just a few examples of tax compliance that should be implemented to prevent issues from ever arising. This front-end tax compliance is an important investment for businesses to make. As the saying goes, an ounce of prevention is worth a pound of cure.
The attorneys at Fuerst Ittleman David & Joseph have extensive experience in analyzing the federal tax compliance needs of a variety of businesses, and implementing procedures to ensure that those compliance obligations are met.
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