Effects of Revisions to IRS Form W-9
Author: Michael Hill
In December 2013 and again in December 2014, the IRS revised and updated Form W-9, Request for Taxpayer Identification Number and Certification. While each revision may have little effect on most entities, the IRS encourages taxpayers to obtain updated forms from investors in partnerships, LLCs and S corporations.
The revisions included the addition of Box 4 related to Foreign Account Tax Compliance Act (FATCA) withholding and exemptions. The instructions also were updated to provide additional information on FATCA reporting. In addition, the LLC section of Box 3 was revised to offer additional information for LLCs to clarify their respective tax classification.
One reason to consider obtaining updated Forms W-9 is the implementation of the FATCA regulations beginning July 1, 2014. While it may seem reasonable to believe most entities are aware of any member’s foreign status, this may not be the case. Form W-9 was revised to provide for certification of FATCA withholding status. The instructions to the form provide that if Form W-9 has not been provided, a partnership is to presume a partner is a foreign person and, therefore, subject to withholding tax. IRS regulations do not require a partnership or S corp to obtain an updated Form W-9 from its members/shareholders. However, any such entity may require such from its U.S. partners in an effort to certify nonforeign status, overcome the presumption of foreign status and avoid withholding on the partner’s share of income. Foreign persons should use the appropriate Form W-8 or Form 8233 to resolve their U.S. tax status. Failure to obtain proper certification, or a faulty reliance on alternative information, could leave the U.S. entity at risk for a substantial withholding liability.
There is another reason to consider updating Form W-9. A multistate partnership or S corp could be subject to withholding requirements or composite tax requirements by various state tax authorities. Such an entity could eliminate exposure for these tax liabilities with properly completed and updated Forms W-9. Approximately 38 states have withholding or composite requirements for partnerships, while approximately 39 states have withholding or composite requirements for S corps. However, rules vary by state as to what type of entity is subject to withholding or is permitted/required to file composite. Clarification of tax status for partners or S shareholders can reduce exposure to penalties for failing to withhold or potentially withholding inappropriately.
Finally, partners or shareholders should provide an updated Form W-9 for a change in structure, name or exemption status. The form’s instructions state an update is required in cases such as a C corporation filing an S election, an entity name change, a taxpayer identification number change or other events, such as when the grantor of a grantor trust dies. The management of a flow-through entity may have no knowledge of these types of transactions absent an updated W-9.
While there is no requirement to update Form W-9 for the recent revisions, any entity with possible exposure in these areas should consider requesting the updated form to mitigate its risk.
To learn more about the impact and changes to Form W-9, as well as related issues, contact your BKD advisor.