What You Need to Know About the IRS’s Campaign to Identify Foreign Non-Filers Through a W-8ECI Matching Program

On May 23, 2017, IRS Officials announced in an industry webcast that the IRS began a campaign to identify foreign companies that should be filing Form 1120-F, but have not.  The officials also warned that the IRS intends to follow up on every potential non-compliant company it identifies and refer some for further audit.  Apparently initial letters have just been sent to companies or will be coming “very, very soon.”  

The IRS is identifying potential non-filers by comparing Forms W-8ECI to filed forms 1120-F.  U.S. companies are required to withhold (and remit to the IRS) 30% of payments to foreign companies unless the foreign company provides them a Form W-8ECI, certifying that the income they are receiving is connected to the United States and that the foreign company will be filing a U.S. income tax return reporting that income.  If a W-8ECI is provided, no withholding is necessary and the foreign company will receive its full payment.  The IRS suspects that many foreign companies have provided certifications on Form W-8ECI to avoid withholding, but then have not filed a U.S. tax return reporting the income, thereby avoiding US tax on that income.

Foreign corporations that have provided a Form W-8ECI (but who have not yet filed tax returns) should seek a competent accountant to prepare and file a Form 1120-F, income tax return for a foreign corporation and ensure that all income related to the W-8ECI is reported.  If companies receive a letter from the IRS regarding the lack of a filed Form 1120-F, they should not delay in responding and would be advised to seek counsel to advise on the response, to evaluate other areas of potential non-compliance, and to represent them in an eventual IRS audit.     

This post is co-authored by Sam North CPA and Shareholder, Sweeney Conrad and Cory L. Johnson Attorney and Shareholder at Colvin + Hallett. The advice and information is general, and all specific questions should be directed to: snorth@sweeneyconrad.com or cjohnson@colvinhallettlaw.com.