Tax Compliance: Qualified Intermediary Program Provides Some Assurance That Taxes on Foreign Investors Are Withheld and Reported, but Can Be Improved

IRS attempted to measure the accuracy of the self-certified documentation, including sampling Forms W-8BEN during an examination of Forms 1042 and 1042-S. IRS found this approach very difficult as there was very little information to measure against. We had hoped that IRS would compute the percentage of cases in which U.S. financial intermediaries were relying on self certified documentation from foreign investors without direct interaction with the person. IRS then could have and then focused its compliance efforts on those institutions where a high percentage of cases involved such self certified documents or involved significant dollars. Rather IRS chose to look generally at the accuracy of self-certifications. Thus IRS's approach has not been the systemic identification of non-compliance. IRS told us that they have not looked for patterns involving institutions reliance on self certified documentation, but instead they have looked to make sure the institutions had checked the boxes on the forms.

IRS reviewed a sample of paper Forms 1042-S to understand the problem relating to blank entries in the "Recipient Country of Residence for Tax Purposes" box and "Unknown" in the "Recipient's Name" field. IRS determined that a significant part of the problem with paper documents was that taxpayers were putting the address and country in same box and leaving the country box blank. IRS has met with bankers and withholding agents to discuss its concerns with a high format error rate involving the electronic transmission of data. IRS officials stated that they have not taken any action to recover amounts identified as having not been paid in the sample of returns they reviewed. Instead, they have used the information gathered from their review to identify examples of under withholding to help guide future audit selection.

IRS issued Announcement 2008-98 on November 3, 2008 which required external auditors to report to Qualified Intermediary Program (QIP) staff any material failure of internal controls uncovered during an audit of a QI. Additionally the announcement requires QIs to associate with a U.S. accounting firm. However, in an e-mail on June 27, 2012, Thomas Chillemi of IRS said that Announcement 2008-98 was not implemented. He said that next year will be the sunset of the QI program because of FATCA and there there will be no QI external audits.

IRS chose not to make use of the contractual nature of Qualified Intermediary (QI) program. Instead they implemented a procedure to include Form 4419, Application for Filing Information Returns Electronically, in all QI applications and renewals. By not contractually requiring electronic filing and continuing to permit paper filing of the forms, IRS runs the risk that some Form 1042-S data may not be transcribed and included in the CTW database in years were funding is not allocated for transcribing and perfecting these data.