Is your firm ready for a government effort to crackdown on cross-border withholding non-compliance? Probably not, according to experts, and that could mean major compliance headaches, not to mention stiff penalties.

Observers say a number of recent developments signal that the government is ramping up enforcement related to the Section 1441 withholding regulations, an area in which compliance is likely lagging at many organizations.

Most notably, the IRS in December designated cross-border withholding as a Tier I audit issue, which signals it’s a “huge enforcement priority for the IRS,” says Michael Lloyd, an attorney in the law firm Miller & Chevalier.

Certain payments, such as interest, dividends, and royalties, made to any non-U.S. person for services performed in the U.S. may be subject to cross-border withholding under Section 1441. Experts say the regulations have extremely broad reach.

“This impacts any financial institution that pays interest and dividends and any multinational corporations that makes qualifying payments to non-U.S. persons,” says Jim Stubbs, a director and practice leader for the regulatory compliance group at BDO Consulting.

For instance, experts say multinational companies, particularly those in the entertainment, technology, oil and gas, biomedical, and pharmaceutical industries, as well as law and accounting firms, state governments, universities, and non-profits could be impacted.

The party that’s on the hook for any non-compliant payments is the withholding agent—the taxpayer making the payment. And in some cases, the tax executives responsible for the withholding can be held personally liable, says Lloyd.

Observers say the IRS has been ramping up for increased enforcement in the cross-border withholding area in recent years, following a Voluntary Compliance Program that highlighted compliance problems. The IRS also published new audit procedures last year on cross-border withholding issues, and a Senate sub-committee issued reports on systemic problems and compliance concerns involving cross-border withholding practices.

As a result, experts say taxpayers should take a careful look at their cross-border withholding procedures and quickly fix any gaps before the IRS comes knocking.

Since compliance failures are easily identified by an audit, Lloyd says this area is “an easy target” for IRS examiners. And the penalties withholding compliance failures are steep—in some cases almost as much as the amount of the tax that wasn’t withheld.

Experts say the biggest problem organizations face in complying with the regulations is that “many often don’t even recognize that they have a withholding obligation.”

While the ultimate compliance obligation often falls on the accounts payable department, observers say those employees typically aren’t trained to spot the withholding issues, resulting in compliance failures.

Experts say companies need to take a hard look at their cross-border withholding procedures and act quickly to correct any deficiencies.

That means conducting internal “health checks” to figure out whether they’re making payments to non-U.S. persons, and if so, what types, says Cyrus Daftary, a partner in the law firm Burt, Staples & Maner.

Companies that haven’t already should look at the IRM to get an idea of what IRS examiners will be looking for, says Daftary.

Lloyd says companies should also review their procedures and training materials in this area, put new ones in place if they don’t have any, and train employees in the accounts payable and Treasury functions on the regulations.

Compliance Week will provide readers full coverage in our March 31 edition.

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