On October 7, 2020, the IRS released final regulations related to withholding on transfers by non-U.S. persons of interests in partnerships. These regulations include the much-awaited provisions requiring brokers to withhold at the rate of 10 percent on amounts realized from the sale or exchange of publicly traded partnership (PTP) interests where payment is made to a non-U.S. customer or to a broker that is treated as a non-U.S. person under the regulations. The PTP withholding (and associated reporting) regulations are to be effective beginning January 1, 2022. We will discuss these new regulations in a separate blog and in our November newsletter. Below, we look at the highlights of tax regulation for September.
- Tax developments in September include a disparate mix of announcements and regulatory guidance, including IRS announcements that lenders should not report qualifying forgiveness on PPP loans under the CARES Act on Form 1099-C and, separately, that a draft 2021 redesigned Form W-4P will in fact not be used for 2021.
- What steps is the IRS taking relating to taxpayers’ obligation to report and pay taxes on cryptocurrency sales?
- In other news, several information reporting publications have been updated, including Publication 1220, which contains, among other items, specifications for electronic filing of Forms 1099.
1. No Form 1099-C reporting on qualifying forgiveness on PPP loans
In Announcement 2020-12, the IRS has responded to industry questions about whether forgiveness of Paycheck Protection Program (PPP) loans allowed under the CARES Act is required to be reported.
While cancellation of indebtedness is ordinarily reported on Form 1099-C, the IRS has notified lenders that not only do Forms 1099-C not have to be filed for qualifying forgiveness under a PPP loan but that they should not. Doing so would only cause confusion.
Under the CARES Act, enacted as part of legislative relief targeting the economic challenges posed by COVID-19, loans to businesses under the PPP could be forgiven based on certain criteria specified in the statute.
Lenders that ordinarily file Form 1099-C to report debt forgiveness had asked whether this was appropriate for PPP loans since debt forgiveness for such loans would not be includible in income, unlike other cancellation of debt events.
2. Form W-4P and regulations on default withholding rate on retirement and annuity payments
In Treasury Decision 9920, the IRS finalized proposed regulations issued earlier this year that provided that the default withholding rate on periodic retirement and annuity payments would be provided in IRS forms and instructions (instead of the regulations).
Previously, the regulations provided that if no Form W-4P is provided to the payor, the payor is to withhold on such periodic payments at the rate applicable to a married individual claiming 3 withholding exemptions.
In a re-designed draft 2021 Form W-4P issued in July 2020, the IRS noted in the instructions that the default withholding rate on such periodic payments would instead be the rate for a single individual with no adjustments.
However, the IRS announced in a note released with TD 9920 that the draft 2021 Form W-4P will not be utilized for 2021; instead, the IRS intends to update the 2021 Form W-4P to resemble the 2020 version.
The default withholding rate for periodic retirement and annuity payments would remain the same as for 2020 — that of a married individual claiming 3 withholding exemptions.
3. Regulations issued on partnership interest dispositions under section 864(c)(8)
The IRS has issued final regulations relating to how taxable gain resulting from a non-U.S. partner’s sale of an interest in a partnership that is engaged in a U.S. trade or business should be determined.
Generally, section 864(c )(8) of the Internal Revenue Code would treat such gain as taxable to the extent that a deemed sale by the partnership of its assets at such time would result in what is called effectively connected gain. These final regulations tweak the rules for determining effectively connected gain on a deemed partnership asset sale.
The rules, however, do not cover withholding on such partnership interest dispositions. Those rules for withholding under section 1446(f) were released on 17 October 2020 in T.D. 9926.
We will be covering the section 1446(f) regulations in a separate blog.
4. Crypto taxation continues to interest the IRS
There have been several news reports of the IRS again sending out information letters to taxpayers relating to their obligation to report and pay taxes on cryptocurrency sales. These appear to be the same informational letters that were sent out by the IRS in the summer of 2019.
In addition to the letters, tax practitioners have been discussing the crypto tax question that is now expected to appear on the front page of the IRS Form 1040. It reads: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Practitioners find some of the undefined terms vague and subject to interpretation. Moreover, it seems that a taxpayer may have to answer “Yes” to the question even in cases (e.g. purchase but no sale or transfer) even when there may be no tax due and nothing to report.
The IRS also released an internal Chief Counsel memo in late August 2020 stating that payments in virtual currency to a taxpayer for completing microtasks on a digital platform were includible in income and taxable.
Microtasks, according to the memo, might include processing data, reviewing images, downloading an app and leaving a review, downloading games and reaching certain milestones, completing online quizzes or surveys, or registering accounts with various online services.
It also acknowledged that the value of crypto received in exchange for a single microtask may be less than $1. The IRS seems interested in taxing crypto transactions in all areas they may arise.
5. Pub. 1220 and several other publications and forms have been updated
The IRS has updated the following publications:
- Publication 1220 — Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G (For Tax Year 2020)
- Publication 1187 — Specifications for Electronic Filing of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding (For Tax Year 2020)
- Publication 5118 — FATCA Online Registration User Guide (September 2020)
- Publication 5189 — FATCA Reports ICMM Notifications User Guide (August 2020)
- Publication 5262 — Qualified Intermediary, Withholding Foreign Partnership, and Withholding Foreign Trust Applications & Account Management User Guide (September 2020)
In addition, the 2021 instructions for Form 1099-INT and Form 1099-OID have been released.
As is evident in the list of updated publications, electronic filing and digital registration and management platforms have really come to play a central role in IRS information reporting processing.
Refinitiv is not a tax advisor and the information presented above should not be construed as, and is not intended to be, tax advice. The information contained here is of a general nature, and it may not apply to your particular circumstance. Also, while we make reasonable efforts to provide up-to-date materials, tax and other regulatory guidance are often subject to change and interpretation, and there is no guarantee that the information is accurate at the time you view these materials or that they will remain accurate for the future. You should consult with your own tax advisor on the application of any tax rule or other regulation or law to you based on your own circumstances. Any information set forth here, including any links or attachments, was not written or intended to be used, and cannot be used, for the purpose of either avoiding any tax-related penalty or promoting, marketing, or recommending to any person, any partnership, or other entity, investment plan, or arrangement.