IRS Begins Focus on Foreign Athletes and Entertainers
The IRS recently launched an Issue Management Team focused
on improving U.S. income reporting and tax payment compliance by foreign athletes and entertainers who work in the United States. The initial focus is on those engaged in tennis, golf and music. These individuals and those associated with arranging their appearances in the U.S. and managing their financial affairs are typically high income individuals. Because of this, it is important to ensure proper tax reporting and payment.
IRS is using a three pronged approach for this initiative:
- improving the availability of information and guidance needed to help this group comply with income reporting and tax payment requirements
- providing IRS enforcement personnel with information they need to identify and work compliance issues frequently encountered with this population and
- conducting direct compliance and enforcement activity.
Artists and Athletes (Income Code 20)
Because many tax treaties contain a provision for pay to artists and athletes, a separate category is assigned these payments for withholding purposes. This category may include payments made for performances by public entertainers (such as theater, motion picture, radio, or television artists, or musicians), athletes, or other persons as defined by the applicable treaty article.
- Note: As a general rule the tax treaty article dealing with artists and athletes must be applied before the articles on independent personal services and dependent personal services are applied to the income of the artists and the athletes.
As a general rule Form W-8ECI may not be used to exempt withholding on a payment for personal services provided by a foreign individual. In addition, special rules apply to artists and athletes who have formed partnerships or corporations as the beneficial owners of the income accruing to them. Refer to Withholding Exemption on Effectively Connected Income for more information.
You must withhold tax at a 30% rate on payments to artists and athletes for services performed as independent contractors. Refer to pay for independent Personal Services for more information. You must withhold tax at graduated rates on payments to artists and athletes for services performed as employees. Refer to pay for dependent Personal Services for more information. However, in any situation where the nature of the relationship between the payor of the income and the artist or athlete is not ascertainable, you should withhold at a rate of 30%.
Caution should be taken when payments are made to a U.S. agent of a foreign person. Withholding agents who have knowledge that the payee is an agent of a foreign person must treat the payment as made to a foreign person. An exception is made for a payee who is a “financial institution”.
Treasury Regulation 1.1441-1(b)(2)(ii) effective for payments made after December 31, 2000 Follows:
Â§1.1441-1. Requirement for the deduction and withholding of tax on payments to foreign persons.
(b)(2)(ii) Payments to a U.S. agent of a foreign person. A withholding agent making a payment to a U.S. person (other than to a U.S. branch that is treated as a U.S. person pursuant to paragraph (b)(2)(iv) of this section) and who has actual knowledge that the U.S. person receives the payment as an agent of a foreign person must treat the payment as made to the foreign person. However, the withholding agent may treat the payment as made to the U.S. person if the U.S. person is a financial institution and the withholding agent has no reason to believe that the financial institution will not comply with its obligation to withhold . . .
Central Withholding Agreements
Nonresident alien entertainers or athletes performing or participating in athletic events in the United States may be able to enter into a withholding agreement with the IRS for reduced withholding provided certain requirements are met. Under no circumstances will a withholding agreement reduce taxes withheld to less than the alien’s anticipated income tax liability.
Nonresident alien entertainers or athletes requesting a central withholding agreement must provide the following information.
- A list of the names and addresses of the nonresident aliens to be covered by the agreement.
- Copies of all contracts that the aliens or their agents and representatives have entered into regarding the time period and performances or events to be covered by the agreement including, but not limited to, contracts with:
- Employers, agents, and promoters,
- Exhibition halls,
- Persons providing lodging, transportation, and advertising, and
- Accompanying personnel, such as band members or trainers.
The name, address, and employer identification number of the agent or agents who will be the central withholding agents for the aliens and who will enter into a contract with the IRS. A central withholding agent ordinarily receives contract payments, keeps books of account for the aliens covered by the agreement, and pays expenses (including tax liabilities) for the aliens during the period covered by the agreement.
When the IRS approves the request, the Associate Chief Counsel (International) will prepare a withholding agreement. The agreement must be signed by each withholding agent, each nonresident alien covered by the agreement, and the Commissioner or his delegate.
Generally, each withholding agent must agree to withhold income tax from payments made to the nonresident alien; to pay over the withheld tax to the U.S. Treasury on the dates and in the amounts specified in the agreement; and to have the IRS apply the payments of withheld tax to the withholding agent’s Form 1042 account. Each withholding agent will have to file Form 1042 and Form 1042-S for each tax year in which income is paid to a nonresident alien covered by the withholding agreement. The IRS will credit the withheld tax payments, posted to the withholding agent’s Form 1042 account, in accordance with the Form 1042-S. Each nonresident alien covered by the withholding agreement must agree to file Form 1040NR or, if he or she qualifies, Form 1040NR-EZ.
A request for a central withholding agreement should be sent to the address shown in the discussion found at Central Withholding Agreements at least 90 days before the agreement is to take effect.
Refer to Revenue Procedure 89-47, C.B. 1989-2, 598 for more information.
Under many tax treaties, compensation paid to artists, entertainers, or athletes for services performed in the United States is exempt from U.S. income tax only when the services are performed during a limited period of temporary presence in the United States and the pay is within limits provided in the tax treaty that applies (Refer to Table 2 of Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (PDF)).
Employees and independent contractors may claim an exemption from withholding under a tax treaty by filing Form 8233 (PDF). Often, however, you will have to withhold at the statutory rates on the total payments to the artist, entertainer or athlete. This is because the exemption may be based upon factors that cannot be determined until after the end of the year.
- Withholding on Specific Income
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.