In brief

What happened?

Information reporting and withholding requirements continued to be a key tax issue both in and outside the United States during 2023, and additional changes should be expected in 2024. The IRS and tax authorities outside the United States have updated various forms used for information reporting, made a number of administrative changes, and issued proposed guidance for digital asset reporting.

Why is it relevant?

The penalties applicable to payors and withholding agents for the failure to properly document their account holders and payees, withhold tax where required, and comply with a variety of reporting requirements continue to increase while the rules become more complex. Thus, it is important for payors and withholding agents to keep abreast of, and react appropriately to, changes in the rules so they can maintain compliance, and to be aware of potential changes in the future.

Actions to consider:

In 2024 and beyond, parties affected by these developments should focus on having the appropriate controls around compliance with information reporting and withholding processes and procedures, given the increased volume and the need to demonstrate compliance to tax regulators.

Domestic developments

Final de minimis error safe harbor regulations

Treasury on December 18, 2023 issued final regulations implementing statutory safe harbor rules that protect filers from penalties for failure to file correct information returns or furnish correct payee statements. The safe harbor rules treat information returns and payee statements with erroneous dollar amounts as correct returns or statements for certain penalty purposes if the errors are de minimis in dollar amount.

The final regulations also detail the time and manner in which a payee may elect to not have the safe harbor rules apply. In addition, the final regulations update dollar amounts, definitions, and references in existing regulations relating to information return and payee statement penalties. Finally, the final regulations provide rules relating to the reporting of basis of securities by brokers as this reporting relates to the de minimis error safe harbor rules.

The final regulations apply to information returns required to be filed and payee statements required to be furnished on or after January 1, 2024.

See our Insight, Treasury finalizes de minimis error safe harbor rules for information returns and payee statements, for more information.

Delay in Form 1099-K reporting threshold

The IRS on November 21, 2023 issued Notice 2023-74 announcing that the $600 Form 1099-K (Payment Card and Third Party Network Transactions) reporting threshold for third-party settlement organizations (TPSOs) will be delayed for calendar year 2023 for purposes of IRS enforcement and administration with respect to the lower Section 6050W reporting threshold as amended by the American Rescue Plan Act of 2021.

For calendar year 2023, TPSOs are not required to report payments in settlement of third-party network transactions with respect to a participating payee unless (1) the gross amount of aggregate payments to be reported exceeds $20,000 and (2) the number of such transactions with that participating payee exceeds 200.

The IRS is planning for a threshold of $5,000 for calendar year 2024 transactions as part of a phased-in approach to implementing the $600 reporting threshold.

See our Insight, IRS announces delay in Form 1099-K reporting threshold for 2023, for more information.

Chapter 3 updates

Section 1446(f) and qualified intermediaries

The IRS in December 2022 issued Rev. Proc. 2022-43 setting forth the final qualified intermediary agreement (QI agreement) that applies beginning January 1, 2023 when the final Section 1446(f) regulations issued in 2020 became effective and the 2017 version of the QI agreement expired. The 2023 QI agreement generally adopts changes proposed in Notice 2022-23, which expanded the scope of the QI agreement to apply to QIs (1) effecting transfers of interests in publicly traded partnerships (PTPs) or (2) receiving distributions made by PTPs on behalf of QI account holders. QIs are permitted to assume withholding and reporting responsibilities for purposes of Sections 1446(a) and (f). See our Insight, IRS issues final qualified intermediary agreement, for more information.

Draft Form W-8EXP

The IRS October 30, 2023 released on a new version (October 2023 revision date) of Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, and on November 7, 2023 new Instructions for Form W-8EXP. Receivers of certain types of income must provide Form W-8EXP to (1) establish that they are not a US person; (2) claim that they are the beneficial owner of the income for which Form W-8EXP is given; and (3) claim a reduced rate of, or exemption from, withholding based on their status as a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or a government of a US territory.

Notably, Form W-8EXP and the instructions were updated to reflect final regulations published in December 2022 permitting qualified foreign person funds (QFPFs) to claim an exemption to withholding under Section 1445 based on their QFPF status. In addition, the instructions to Form W-8EXP have been updated to reflect revisions to the supporting information required for an entity qualifying under Section 501(c)(3) to represent that it is not a private foundation.

Observation: Withholding agents may continue to accept the 2017 version of Form W-8EXP through April 2024, and may rely on a 2017 version of Form W-8EXP signed prior to May 1, 2024 until its normal validity period expires.

Draft Form W-9

The IRS released on July 26, 2023 a new draft of Form W-9, Request for Taxpayer Identification Number and Certification, and on December 21, 2023 draft Instructions for the Requester of Form W-9. A flow-through entity is required to complete new line 3b to indicate that it has direct or indirect foreign partners, owners, or beneficiaries when it provides the Form W-9 to another flow-through entity. This change is intended to provide a flow-through entity with information regarding the status of its indirect foreign partners, owners, or beneficiaries, so that it can satisfy any applicable reporting requirements associated with Schedules K-1, K-2, and K-3.

Observation: Although the draft W-9 has an October 2023 revision date, at the time of this writing the draft Form W-9 had not yet been issued in final form by the IRS.

Digital assets

Proposed digital assets information reporting regulations

Treasury on August 25, 2023 issued proposed regulations regarding information reporting, determination of the amount realized and basis, and backup withholding for certain digital asset sales and exchanges. The regulations would impose obligations to file information returns and furnish payee statements on dispositions of digital assets based on companies engaging in a broad array of services or activities related to digital assets. These reporting requirements generally are proposed to become effective for sales and exchanges of digital assets effected on or after January 1, 2025, with later effective dates for basis reporting and transfer statements. See our Insight, Treasury issues extensive proposed regulations with broad scope around digital asset information reporting, for more information.

Crypto Asset Reporting Framework (CARF)

On November 8, 2023 the United States joined 47 other countries to agree to implement by 2027 the Organisation for Economic Cooperation and Development’s (OECD’s) CARF to standardize how tax authorities regulate and share information on crypto assets. This follows the OECD’s October 2022 release of the final CARF, which provides a framework for the reporting and automatic exchange of tax information on crypto-asset transactions. See our Insight, OECD issues new Crypto-Asset Reporting Framework, for more information.

Crypto staking rewards

The IRS on July 31, 2023 issued Rev. Rul. 2023-14 providing that staking rewards are taxable to the recipient. If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is to be included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the validation rewards. As a result, payors and potentially withholding agents of validation rewards could have US information reporting and withholding obligations associated with making these payments.

Nonfungible tokens (NFTs)

The IRS on March 21, 2023 issued Notice 2023-27 clarifying that future guidance may treat certain NFTs as collectibles under Section 408(m). The notice also describes how the IRS intends to determine whether an NFT constitutes a collectible pending issuance of that guidance. If NFTs were taxed as collectibles, any gain on the sale of an NFT would be taxed at the maximum long-term capital rate of 28% versus the maximum long-term capital gains rate for assets that are not collectibles.

Automatic exchange of information

British Virgin Islands (BVI) Financial Account Reporting System (Fars)

The BVI International Tax Authority (ITA) announced on December 6, 2023 that its BVIFars payment portal will go live in January 2024. All relevant entities with reporting BVI obligations are required to enroll in the BVIFars portal to satisfy their respective obligations in relation to Foreign Account Tax Compliance Act (FATCA), Common Reporting Standard (CRS), and Country-by-Country Reporting (CbCR). Each entity registered in BVIFars must pay an annual fee of $185.

Administrative

Electronic filing of Forms 1042 and 1042-S

Treasury and the IRS on February 21, 2023 released final regulations amending the rules for electronically filing (e-filing) to require certain filers to e-file certain returns and documents beginning in 2024. The final regulations provide that a withholding agent required to file an income tax return on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, must e-file its return if the withholding agent is required to file at least 10 returns during the calendar year in which the Form 1042 is required to be filed. A withholding agent that is an individual, estate, or trust is not required to e-file its return. Partnerships with more than 100 partners also must e-file Form 1042 even if they do not have 10 or more information returns to file.

Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, e-filing changes made by the final regulations include (1) a reduction from 250 to 10 of the number of returns a person may file before being required to e-file; (2) a requirement that all specified returns (e.g., Forms 1099s, W-2, and 1042-S) be counted in the aggregate when determining whether the electronic-filing threshold is met; and (3) a requirement that partnerships with more than 100 partners electronically file information returns.

Observation: Withholding agents that are required to file Form 1042 electronically will want to give themselves plenty of time to familiarize themselves with the IRS Modernized e-File (MeF) system through which the Form 1042 would be filed electronically, to ensure that they are able to submit their electronic Forms 1042 in a timely manner.

Information Return Intake System (IRIS) and Transmitter Control Code (TCC)

The IRS on January 25, 2023 announced in IR-2023-14 the launch of IRIS — a new, free online portal to help businesses e-file Form 1099 series information returns for tax year 2022 and later. Filers can use the platform to create, upload, edit and view information and download completed copies of 1099-series forms for distribution and verification. Businesses can e-file both small and large volumes of 1099-series forms by either keying in the information or uploading a file with the use of a downloadable template. 

Businesses use the IRIS TCC to create and file forms. It requires a separate application that differs from the TCC for e-filing information returns through FIRE. Users completing the application must be a responsible officer acting on behalf of the business and have an IRS account and an e-services personal identification number. It may take up to 45 days to receive the TCC code once the IRIS TCC application is submitted.

Annual inflation adjustments

The IRS on November 9, 2023 issued Rev. Proc. 2023-34 providing the annual inflation adjustments for more than 60 tax provisions to be used by taxpayers in their 2024 returns (that is, the returns that generally are filed in 2025). For forms filed in 2025, penalties increased to $330 for incorrect information returns, $660 as the minimum penalty for failures due to intentional disregard, and $3,978,000 for maximum penalties unrelated to intentional disregard.

US treaties

The termination of the US-Hungary treaty will impact payments subject to US federal income tax and withholding that are paid or credited on or after January 1, 2024.

The US-Chile income tax treaty and accompanying protocol entered into force on December 19, 2023. The treaty is effective for taxes withheld at source beginning February 1, 2024, and for other taxes, for taxable periods beginning on or after January 1, 2024. See our Insight, US-Chile treaty enters into force, for more information.

Observation: Withholding agents will need to modify their treaty withholding tables to incorporate the new treaty withholding rates for eligible Chilean residents effective February 1, 2024. In addition, the February 1, 2024 effective date for the treaty withholding rates may require the withholding agent to issue multiple Forms 1042-S for the same type of income paid to a beneficial owner, in order to reflect the difference in withholding rates before and after the effective date.