Withholding Taxes Made a Tier I Issue

On December 8, the IRS announced that it was adding withholding taxes to its list of Tier I issues. IRS commissioner Douglas Shulman made the announcement in remarks to the 21st Annual George Washington University International Tax Conference (IRS News Release IR-2008-137). He stated that IRS compliance efforts in this area will cover individual, business, and corporate taxpayers and will address transactions that “attempt to circumvent withholding taxes or claim improper tax treaty withholding rates.”

The commissioner singled out investment banks that have been trying to help hedge funds avoid withholding on dividends. In the individual area, he said the Service would focus on unreported offshore accounts.

As a Tier I issue, withholding will get greater scrutiny from IRS examiners. The Large and Mid-Size Business Division (LMSB) considers Tier I issues to be of high strategic importance. They include areas that involve large numbers of taxpayers, large amounts of money, or high risk of noncompliance.

Tier I issues are designated as such by the IRS’s Compliance Strategy Council. Each Tier I issue is assigned to an IRS “issue owner executive,” and an industry directive is sent to all examiners providing guidance on identifying and developing the issue. (See Internal Revenue Manual Section 4.51.5.)

Not long after withholding was made a Tier I issue, the IRS LMSB Division commissioner, Frank Ng, explained that use of the tier system for addressing compliance issues will become the Service’s standard operating procedure (Elliott, “Tiered-Issue Process Will Be Standard in the Future, Says IRS Official,” 2008 TNT 239-5 (December 11, 2008)).