Sovos Intelligent Reporting Summit: Look for W-8 Red Flags and Avoid 1042-S Penalties

Clark Sells
July 23, 2018

Mary Kallewaard is co-founder of Cokala, an advisory services firm offering experienced and practical help for tax regulatory compliance for a wide variety of IRS forms. She will present on how to spot potential problems with W-8 and 1042-S forms at the 2018 Sovos Intelligent Reporting Summit in Denver in October. Sovos recently spoke with Kallewaard about her presentation.

Sovos: You’ll be primarily discussing W-8 and 1042-S forms at the Intelligent Reporting Summit. Please give us a quick reminder of the information on those forms.

Mary Kallewaard: A W-8 form identifies the beneficial owner of income and how to classify the beneficial owner: Is it an individual, a corporation, a partnership, a trust? Also, is it US or foreign? Form W-8 lets a person certify foreign status. Then, organizations use form 1042-S to report certain types of payments made to entities or individuals that have identified themselves as foreign on form W-8.

Sovos: The 1042-S has become a reporting hassle for a lot of institutions recently. How does the W-8 play into managing reporting of the 1042-S?

Kallewaard: Having a complete W-8 form for the foreign payee is the anchor for everything that comes afterward. You won’t know what to put on a 1042-S form without reliable information on the W-8. If certain required information is missing on the W-8, it’s not a valid form. If other information is in conflict or makes it unreliable, it’s as if you never received a W-8 at all.

Sovos: What is the responsibility a reporting institution has regarding the W-8 and the 1042-S?

Kallewaard: The withholding agent, the institution doing the reporting, has to have knowledge and systems to review W-8 forms to ensure that they include all the information the regulations require, notably whether or not to withhold tax and whether or not the W-8 requires a 1042-S.

Sovos: What are some of the potential consequences for organizations that mishandle W-8 forms?

Kallewaard: There are IRS penalties for late, incorrect or missing 1042-S forms, but the consequences can go beyond that. For instance, say a payee reports a zero tax rate through tax treaty instead of a required 30 percent rate. If that W-8 form was not reliable to support reduced withholding, your company can end up with liability for that 30 percent in addition to interest on the amount you didn’t deposit because you failed to withhold it. An IRS audit may find examples of unreliable, invalid W-8 forms. If you don’t have a valid W-8 in the first place, you could wind up liable for having made incorrect tax decisions. That can be very expensive.

Sovos: So, what are some of the red flags to look for with W-8 forms?

Kallewaard: There are a lot of them, but briefly, the payee could give you the wrong kind of form. There are five types of forms, the W-8 BEN, BEN-E, IMY, EXP and ECI, so there is a lot of room for confusion. The payee could also give you the wrong version of the form. After IRS comes out with new version, there are deadline dates beyond which you can no longer accept a previous one. Of course, incorrect or missing information is probably the most common type of error. There could also be information that makes the form unreliable under a specific regulation.

Sovos: What can organizations do to solve problems with W-8 forms?

Kallewaard: There are very specific possible ways to cure problems with forms. If you’re not able to get them cured, there are very specific presumptions in regulations. You default to deploying a presumed status. But I’ll get into more of that in Denver. That will be the bulk of the presentation.

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