IRS Plans Crackdown on Withholding Taxes

In a recent article by WebCPA, the IRS Commissioner Douglas Shulman said the agency would begin ramping up enforcement against tax abuses such as the avoidance of withholding taxes, especially on dividends.

In a speech at a Washington, D.C., tax conference, Shulman said that withholding taxes is one of the areas in which the IRS plans to concentrate its enforcement efforts.

"Today, the IRS will add withholding taxes to the Tier I list of issues," he said. "The tier issue process will provide the needed organizational priority and coordination to ensure taxpayer compliance with the U.S. withholding tax provisions. Our compliance efforts will span efforts to ensure individual, business and corporate taxpayers understand and fulfill their withholding tax filing obligations, to addressing transactions that attempt to circumvent withholding taxes or claiming improper tax treaty withholding rates."

The Senate Permanent Subcommittee on Investigations held a hearing in September on how investment banks were helping clients, mainly hedge funds, avoid dividend withholding taxes. Shulman said the IRS was carefully examining transactions whose primary purpose is to avoid dividend withholding tax.

Other areas in which the IRS has recently ramped up scrutiny include transfer pricing, contract manufacturing arrangements designed to avoid Subpart F income in foreign locations that do not have sufficient manufacturing activity, and hybrid structures, such as hybrid entities and hybrid instruments that either exclude income from taxation or obtain double deductions and credits in various jurisdictions.

Among these are foreign tax credit generators. "In my opinion, FTC generator transactions are examples of situations where certain taxpayers may be trending toward the 'bad actor' end of the spectrum," said Shulman.

On the individual tax side, the IRS commissioner also emphasized the agency's efforts to crack down on tax shelters with the help of whistleblowers, informants and John Doe summonses.
"Using informants is another part of our toolkit," said Shulman. "Since the inception of the Whistleblower Office in 2007, the IRS has received hundreds of tips on financial institutions and individuals with foreign accounts and international compliance issues. Some of these have become big money cases."