Guidance on Refunds and Credits Under Chapter 3, Chapter 4, and Related Withholding Provisions

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Part III – Administrative, Procedural and Miscellaneous

Guidance on Refunds and Credits Under Chapter 3, Chapter 4, and Related

Withholding Provisions

Notice 2015-10

I.

PURPOSE

The Department of the Treasury (Treasury Department) and the Internal

Revenue Service (IRS) are concerned about cases in which persons subject to

withholding under sections 1441 through 1443 (herein referred to as chapter 3)

or sections 1471 and 1472 (herein referred to as chapter 4) are making or will

make claims for refunds or credits in circumstances where a withholding agent

failed to deposit the amounts withheld as required under section 6302 (or

otherwise pay such amounts to the Treasury Department). The Treasury

Department and the IRS are aware that withholding agents may not always be

compliant with the requirement to deposit amounts withheld under chapter 3 or 4

or reported as withheld on Form 1042-S. If a refund or credit is issued for an

amount that has not been deposited, the IRS may not be able to recover that

amount because the claimant and, in some cases the relevant withholding agent,

may be outside the United States. The allowance of refunds or credits based on

the amount reported as withheld on Form 1042-S subjects the Treasury

Department to the risk that refunds or credits may be improperly granted for

fictitious withholding or amounts that have not been deposited, for which

collectability issues may arise. In light of these concerns, the Treasury

Department and the IRS intend to issue regulations applicable to claims for

refund or credit for amounts withheld under chapter 3 or 4. In general, these

regulations will provide that an otherwise allowable claim for refund or credit

made by a claimant that is the beneficial owner of a withheld payment is only

available to the extent that the relevant withholding agent deposited the amount

withheld

ent and the IRS intend to issue regulations applicable to claims for

refund or credit for amounts withheld under chapter 3 or 4. In general, these

regulations will provide that an otherwise allowable claim for refund or credit

made by a claimant that is the beneficial owner of a withheld payment is only

available to the extent that the relevant withholding agent deposited the amount

withheld.

Section II of this notice provides background on the statutory and regulatory rules

governing refund and credit claims for amounts withheld under chapter 3 or 4.

Section III of this notice describes, in general, the regulations that the Treasury

Department and the IRS intend to issue with respect to the treatment of refund

and credit claims made by persons subject to withholding under chapter 3 or 4

when the amount withheld is not deposited with the Treasury Department by a

withholding agent as required under section 6302 (or otherwise paid to the

Treasury Department). The regulations will also provide for a pro rata allocation

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of the amount available to the claimant for refund or credit when a withholding

agent has partially satisfied its deposit requirements. These regulations will

apply to claims for refund or credit for amounts withheld with respect to the 2015

calendar year and thereafter. No inference is intended with regard to existing

law, and for all years, the IRS will continue to deny claims for refund or credit

when appropriate, including for fictitious withholding and other fraudulent claims.

Section IV of this notice requests public comments regarding the administration

of the pro rata allocation and procedural rules described in section III.B of this

notice and on potential exceptions to the rules described in this notice.

II.

BACKGROUND

A

S will continue to deny claims for refund or credit

when appropriate, including for fictitious withholding and other fraudulent claims.

Section IV of this notice requests public comments regarding the administration

of the pro rata allocation and procedural rules described in section III.B of this

notice and on potential exceptions to the rules described in this notice.

II.

BACKGROUND

A.

General Requirement to Withhold, Deposit, and Report under

Chapters 3 and 4

Chapter 3 generally requires withholding agents to collect the substantive tax

liability of foreign persons that is imposed under sections 871(a), 881(a), and

4948 on certain payments of U.S. source fixed or determinable annual or

periodical income through withholding requirements. Chapter 4 generally

requires withholding agents to withhold tax on certain payments to foreign

financial institutions (FFIs) that are nonparticipating FFIs and certain nonfinancial

foreign entities (NFFEs) that do not provide information regarding their

substantial U.S. owners. Chapter 4 also generally requires participating FFIs to

withhold tax on certain payments to accounts held by recalcitrant account holders

and payees that are nonparticipating FFIs. The withholding required under

chapters 3 and 4 is collected primarily by domestic withholding agents but is also

collected by foreign withholding agents.

An amount withheld by a withholding agent is required to be deposited with the

Treasury Department in accordance with section 6302. See Treas. Reg. §§

1.1461-1(a) and 1.1474-1(b). The regulations also generally require a

withholding agent to deposit withheld amounts within certain time periods that

vary depending on the amount of deposits. See Treas. Reg. § 1.6302-2. A

withholding agent is required to report its federal income tax liability for the

amounts of tax it is required to withhold under chapters 3 and 4 on Form 1042,

Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for

the calendar year

agent to deposit withheld amounts within certain time periods that

vary depending on the amount of deposits. See Treas. Reg. § 1.6302-2. A

withholding agent is required to report its federal income tax liability for the

amounts of tax it is required to withhold under chapters 3 and 4 on Form 1042,

Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for

the calendar year. If, at the end of a calendar year, the total amount of deposited

tax is less than the amount of tax required to be reported as due on Form 1042,

the withholding agent must pay the balance due when filing its Form 1042. See

Treas. Reg. § 1.1461-1(a). If the total amount of deposits received by the

Treasury Department is less than the withholding tax liability of the withholding

agent, and the withholding agent has not paid the tax due with the filing of its

Form 1042, the withholding agent remains liable for the taxes due under section

1461 (for amounts withheld under chapter 3) or section 1474(a) (for amounts

withheld under chapter 4) and associated interest and penalties. See sections

6601, 6651(a)(2), and 6656.

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A withholding agent is also required to file with the IRS and furnish to the

recipient of the payment a Form 1042-S, Foreign Person’s U.S. Source Income

Subject to Withholding, reporting any amount withheld with respect to amounts

paid to the recipient. The aggregate amount reported as withheld or otherwise

paid by the withholding agent on all Forms 1042-S should equal the federal

income tax liability reported by the withholding agent on Form 1042.

B.

Claims for Refunds and Credits

Section 33 allows as a credit against the tax imposed by Subtitle A (income tax)

the amount of tax withheld at the source under subchapter A of chapter 3.

Section 1462 and Treas. Reg. § 1.1462-1(a) provide that the beneficial owner of

the income may claim a credit of the amount of tax actually withheld under

chapter 3 against the total income tax computed on the beneficial owner’s return

s

Section 33 allows as a credit against the tax imposed by Subtitle A (income tax)

the amount of tax withheld at the source under subchapter A of chapter 3.

Section 1462 and Treas. Reg. § 1.1462-1(a) provide that the beneficial owner of

the income may claim a credit of the amount of tax actually withheld under

chapter 3 against the total income tax computed on the beneficial owner’s return.

For purposes of chapter 4, section 1474(b)(1) and the regulations thereunder

allow a credit for the amount of tax deducted and withheld under chapter 4 as if

such tax had been deducted and withheld under subchapter A of chapter 3.

Treas. Reg. § 1.1474-3(a) provides that the amount of tax actually withheld shall

be allowed as a credit against the total income tax computed in the beneficial

owner’s return.

Treas. Reg. § 1.1464-1(a) provides for a refund or credit under chapter 65

(section 6401 through section 6432) of an overpayment of tax that has actually

been withheld at source under chapter 3 to be made to the taxpayer from whose

income the amount of such tax was in fact withheld. For chapter 4 purposes,

Treas. Reg. § 1.1474-5(a)(1) provides that a refund or credit of an amount of tax

that has actually been withheld at source at the time of payment will be made to

the beneficial owner of the payment to which the amount of withheld tax is

attributable if such beneficial owner meets the requirements of chapter 65.

Generally, there is an overpayment when (i) there is a payment in excess of the

tax due, (ii) pursuant to section 6401(a), there is a payment assessed or

collected after the expiration of the statute of limitations, or (iii) pursuant to

section 6401(b), there is an excess refundable credit because the amount

allowable as a credit exceeds the tax imposed. Under a special rule in section

6401(b)(2), the credit under section 33 is treated as a refundable credit only in

the case of a beneficial owner who is a nonresident alien and who has made an

election to be treated as a U.S

f the statute of limitations, or (iii) pursuant to

section 6401(b), there is an excess refundable credit because the amount

allowable as a credit exceeds the tax imposed. Under a special rule in section

6401(b)(2), the credit under section 33 is treated as a refundable credit only in

the case of a beneficial owner who is a nonresident alien and who has made an

election to be treated as a U.S. resident under section 6013(g) or (h). In the case

of an overpayment, section 6402(a) authorizes the IRS to credit the amount of

such overpayment against any liability in respect of an internal revenue tax on

the part of the person who made such overpayment and provides that the IRS

shall, subject to certain offsets, refund any balance.

Treas. Reg. § 301.6402-3T(e) provides the procedural requirements applicable to

a claim for refund or credit made by a nonresident alien individual or foreign

corporation for amounts withheld under chapter 3 or 4. These regulations

provide that, for an overpayment of tax that resulted from withholding under

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chapter 3 or 4, the claimant must attach a copy of the relevant Form 1042-S to

the income tax return on which the claim for refund or credit is made.

III.

GUIDANCE TO ADDRESS REFUND AND CREDIT CLAIMS WHERE

THE DEPOSIT REQUIREMENT HAS NOT BEEN SATSIFIED

A.

General Rule

The Treasury Department and the IRS intend to amend the regulations under

Treas. Reg. §§ 1.1464-1(a) and 1.1474-5(a)(1) to provide that a refund or credit

will be allowed to a claimant with respect to an overpayment only to the extent

the relevant withholding agent has deposited (or otherwise paid to the Treasury

Department) the amount withheld and such amount is in excess of the claimant’s

tax liability, except as otherwise provided by section 6401(b)(2). Similarly, the

Treasury Department and the IRS also intend to issue regulations under section

33 and amend the regulations under Treas. Reg

erpayment only to the extent

the relevant withholding agent has deposited (or otherwise paid to the Treasury

Department) the amount withheld and such amount is in excess of the claimant’s

tax liability, except as otherwise provided by section 6401(b)(2). Similarly, the

Treasury Department and the IRS also intend to issue regulations under section

33 and amend the regulations under Treas. Reg. §§ 1.1462-1(a) and 1.1474-3(a)

to provide that a credit for an amount withheld is only available to a claimant to

the extent that the withholding agent has deposited (or otherwise paid to the

Treasury Department) the amount withheld. Therefore, subject to certain

exceptions, including, potentially, the exceptions referenced in section III.C of this

notice, no refund or credit will be allowed under the regulations for an amount

withheld under chapter 3 or 4 when there is a shortfall in the deposits required to

be made by the withholding agent. While this notice focuses on regulations to be

issued under sections 33, 1462, 1464, and 1474, the Treasury Department and

the IRS may amend or issue other related regulations to carry out the objectives

described in this notice.

B.

Allocation of Partial Deposits to Refund or Credit Claims

The Treasury Department and the IRS recognize that a withholding agent may

deposit a portion of the amount of tax that it has withheld under chapter 3 or 4.

The Treasury Department and the IRS intend to issue regulations providing that,

in such cases, the claimant is entitled to an amount of refund or credit, to the

extent otherwise allowable, that takes into account that the withholding agent has

deposited a portion of the required amount of tax. The regulations will adopt a

pro rata method to allocate the amount available for refund or credit with respect

to each claimant

he IRS intend to issue regulations providing that,

in such cases, the claimant is entitled to an amount of refund or credit, to the

extent otherwise allowable, that takes into account that the withholding agent has

deposited a portion of the required amount of tax. The regulations will adopt a

pro rata method to allocate the amount available for refund or credit with respect

to each claimant. Under this method, a withholding agent’s deposits made to its

Form 1042 account will be divided by the amount reported as withheld on all

Forms 1042-S filed by the withholding agent to arrive at a “deposit percentage.”

Solely for purposes of refund and credit claims related to chapter 3 or 4, each

claimant will be treated as though the withholding agent made a deposit equal to

• the amount reported as withheld on the Form 1042-S with respect to the

claimant, multiplied by

• the withholding agent’s deposit percentage.

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The claimant will be entitled to a refund or credit of the amount withheld to

the extent that the deposit amount allocated to the claimant exceeds the

claimant’s tax liability.

As an example, consider a case in which a withholding agent pays a $100

dividend to each of ten nonresident aliens and withholds tax at 30 percent from

each dividend under chapter 3. The withholding agent is required to deposit

$300 of tax, but instead deposits only $225 of tax that it withheld. The

withholding agent reports on a Form 1042-S issued to each nonresident alien

and filed with the IRS that it paid to that nonresident alien a $100 dividend and

withheld $30 of tax. In this case, the withholding agent’s deposit percentage is

75 percent ($225, the amount of deposits reflected in the withholding agent’s

Form 1042 account, divided by $300, the amount reported as withheld on all

Forms 1042-S filed by the withholding agent)

issued to each nonresident alien

and filed with the IRS that it paid to that nonresident alien a $100 dividend and

withheld $30 of tax. In this case, the withholding agent’s deposit percentage is

75 percent ($225, the amount of deposits reflected in the withholding agent’s

Form 1042 account, divided by $300, the amount reported as withheld on all

Forms 1042-S filed by the withholding agent). If one nonresident alien properly

claims that, under an income tax treaty with the United States, he is entitled to a

15 percent withholding tax rate and claims a $15 refund, he is allocated $22.50 of

the deposit (the $30 reported as withheld on the claimant’s Form 1042-S,

multiplied by the withholding agent’s deposit percentage of 75 percent). Since

the nonresident alien withholding tax rate is 15 percent, he has a $15 tax liability.

Therefore, there is an overpayment of $7.50, and the nonresident alien will be

entitled to a refund or credit for that amount.

Permitting a partial refund or credit under this methodology ensures that a

claimant’s refund or credit claim will not be denied in its entirety due to the failure

of the relevant withholding agent to fully deposit or otherwise pay the required

amount of tax and serves to allocate amounts available for refund or credit

proportionately to claimants.

The Treasury Department and the IRS considered whether to permit a claimant

that is the beneficial owner to prove that the deposit of tax made by a withholding

agent was specifically made with respect to an amount withheld from the

claimant (i.e., under a tracing or specific identification methodology). Under the

existing information reporting, withholding, and deposit procedures, a withholding

agent does not indicate to which beneficial owner the deposit of tax relates, and

such information is not reported on Form 1042 or 1042-S

e by a withholding

agent was specifically made with respect to an amount withheld from the

claimant (i.e., under a tracing or specific identification methodology). Under the

existing information reporting, withholding, and deposit procedures, a withholding

agent does not indicate to which beneficial owner the deposit of tax relates, and

such information is not reported on Form 1042 or 1042-S. Under the existing

procedures, therefore, an amount deducted by the withholding agent with respect

to a payment to the beneficial owner cannot be matched with an amount of tax

deposited in the withholding agent’s Form 1042 account. Moreover,

implementing a tracing or specific identification methodology that would permit

this matching could present a significant administrative burden for withholding

agents who process substantial volumes of payments and for the IRS. Because

Treasury and the IRS believe that the obstacles to developing and implementing

a specific tracing methodology are unlikely to be overcome in the foreseeable

future, they intend to adopt the pro rata allocation method described earlier in this

notice. Treasury and the IRS request comments, however, on the feasibility of

developing and implementing a more precise methodology at some future date.

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The IRS recognizes the need for written procedures with respect to the deposit

allocation rules described in this section III.B to ensure that claimants are

reasonably apprised of the status of their claims and to ensure that each claimant

receives the proper amount of refund or credit under these rules. For example,

the IRS is considering both when to compute the initial deposit percentage for a

withholding agent and how frequently to re-compute the deposit percentage to

reflect additional deposits made by the withholding agent after Form 1042 has

been filed, and after the amount available for a claim is first determined

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receives the proper amount of refund or credit under these rules. For example,

the IRS is considering both when to compute the initial deposit percentage for a

withholding agent and how frequently to re-compute the deposit percentage to

reflect additional deposits made by the withholding agent after Form 1042 has

been filed, and after the amount available for a claim is first determined. The IRS

is also considering the manner in which withholding agents and affected

claimants will be informed of a deposit percentage (whether initial or recomputed)

that is less than 100 percent, and the process under which additional refund or

credit amounts will be paid or allowed to a claimant when a withholding agent

takes steps to increase its deposit percentage. For these purposes, the IRS

intends to establish procedures (in, for example, the Internal Revenue Manual) in

connection with these allocation rules.

C.

Exceptions

The Treasury Department and the IRS are considering exceptions to the general

rules described in sections III.A and III.B of this notice that are administrable by

the IRS and minimize the potential for fraud or the intentional under-deposit of

withholding taxes. For example, the Treasury Department and the IRS are

considering whether to provide an exception if the amount of the under-deposit of

tax is de minimis or if the relevant withholding agent has a demonstrated history

of compliance with its deposit requirements. The exceptions would treat a

claimant that is the beneficial owner of the withheld payment as if a full deposit

had been made, but only for purposes of a claim for refund or credit of an amount

withheld under chapter 3 or 4. To the extent that any exceptions are adopted,

they would not deem a withholding agent that fails to satisfy its deposit

requirements as satisfying those requirements. Therefore, the withholding agent

would remain liable for the amount of tax required to be deposited and

associated interest and penalties.

IV

ses of a claim for refund or credit of an amount

withheld under chapter 3 or 4. To the extent that any exceptions are adopted,

they would not deem a withholding agent that fails to satisfy its deposit

requirements as satisfying those requirements. Therefore, the withholding agent

would remain liable for the amount of tax required to be deposited and

associated interest and penalties.

IV.

REQUEST FOR COMMENTS

This notice requests public comments regarding the allocation of partial deposits

and procedural rules described in section III.B of this notice, the potential

exceptions described in section III.C of this notice, and other potential exceptions

consistent with the purposes of the guidance described in this notice. This notice

solicits written comments from affected persons by June 29, 2015. Written

comments should be sent to: CC:PA:LPD:PR (NOT-2015-10), room 5203,

Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC

20044. Submissions may be hand-delivered Monday through Friday between

the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (NOT-2015-10), Courier’s

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington,

DC 20224 or sent electronically via the Federal eRulemaking Portal at

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Notice.Comments@irscounsel.treas.gov (NOT-2015-10). Please insert “Notice

2015-10” in the subject line of any electronic communications. All comments will

be available for public inspection and copying.

V.

DRAFTING INFORMATION

The principal author of this notice is Michael Kaercher of the Office of Associate

Chief Counsel (International). However, other personnel from Treasury and the

IRS participated in its development. For further information regarding this notice,

contact John Sweeney or Michael Kaercher at (202) 317-6942 (not a toll-free

call).