Intelligent Reporting Summit: EY Expert Explains Why New Regulations are Causing Trouble

This blog was last updated on March 11, 2019

Deborah Pflieger is a principal and leader of Ernst & Young’s information reporting and withholding practice. She tracks changes and trends in 1099 tax information reporting and will present on the topic at the 2018 Sovos Intelligent Reporting Summit in Denver in October. Pflieger recently spoke with Sovos about reporting trends that have caused concern in some segments of the industry.  

Sovos: What are some of the trends in tax information reporting that might have flown under the radar a bit?

Deborah Pflieger: With the new tax law that went into effect in January, we have a lot of ancillary impacts people haven’t been thinking about. For instance, there is a new reporting obligation and now new forms related to life insurance policies and the people who invest in them.  Say you took out a life insurance policy when your kids were small. The kids grow up, and you don’t need the policy anymore. The policy has a cash surrender value, but it’s not much. There is a cottage industry that buys up life insurance contracts like that. The investors take over the policy. They pay you an amount that is more than cash surrender value and less than face value. They also pay all future premiums. When you pass away, they get the insurance proceeds. As I said, this has been a cottage industry for years, but there was never any reporting on it. Now, there is.

For transactions in 2018 and going forward, the investors who buy a policy have to file a 1099-LS to report the purchase of the policy from the original policy holder. Also, upon receiving a 1099-LS, the insurance company must issue a 1099-SB to report the seller’s investment in the policy.  The IRS just released these draft forms in mid-August.

Sovos: How is that causing issues for insurance companies?

Pflieger: It’s complex. The acquirer, the investor that bought the policy, must report the amount paid, who acquired the policy and who sold it. That information goes to the IRS and to the insurance company. The insurance company then has to issue the 1099-SB to the insured. These are all new forms and new processes. Insurance companies are trying to figure out how to comply. Insurance processes and procedures aren’t as mature as those in banking and capital markets. Insurance companies have a lot of things they weren’t necessarily doing right, and now they have these new things to address.

Sovos: There is also news on the W-8BEN front, isn’t there? Isn’t that one of the forms used to document foreign nationals?

Pflieger: There are new rules for the W-8BEN. Forms W-8BEN collected by US financial institutions must now generally have the individual’s date of birth and foreign TIN or a reasonable explanation of why they do not have one. This is so that when the IRS shares a 1042-S, which reports payments to foreign nationals, with the individual’s country of residence, the foreign country is able to identify the person who received the payment.  Just think if you sent a 1042-S to the UK for John Smith, without any identifying information, the UK would have no clue as to which John Smith received the income.  Absence of a date of birth and TIN means the W-8BEN is most likely invalid

Sovos: What happens then?

Pflieger: We have to use the presumption rules, and for individuals that means we have to presume them to be US persons.  Imagine, without a valid W-8BEN Kate Middleton becomes a US person and since we don’t have a W-9 from Kate, the invalid form triggers backup withholding, which creates a really bad customer experience. What payers need to do is collect valid documentation as early in the process as they can so they don’t have to worry about providing a negative customer experience.

Sovos: In other news, there are developments on the FATCA front.

Pflieger: There are. As a result of the new tax law, we’re seeing a lot of large financial groups restructuring their foreign operations because of the treatment of foreign-sourced income. For example, they might liquidate a subsidiary and start running the subsidiary as a branch. That changes its FATCA status. Instead of being, say, a Dutch corporation, you now have a branch of a US entity.

Sovos: What kind of activity does that trigger?

Pflieger: That branch is now a US person. It has additional information reporting obligations under FATCA and CRS. And chances are it has more reporting to the US government than before, with 1099s and so forth that weren’t relevant when the branch was a foreign entity. Everyone is so focused on restructuring that they’re not thinking about the downstream ramifications. You have to go back and look at your structure and see what has been changed. You also have to give everyone you’re doing business with new tax forms. For example, you have to go out and give W-9 forms to people you gave W-8 forms to previously.