February 9, 2006 -- In September 2004, the Treasury and IRS announced a temporary Voluntary Compliance Program ( VCP ) for tax, withholding and reporting obligations that apply to withholding agents in connection with payments of income to foreign persons.  New withholding tax regulations became effective on January 1, 2001 and many financial institutions have spent significant resources to comply with the new regulations.  As a part of this effort, these institutions have been identifying deficiencies and failures in their systems and have come forward to the IRS to resolve these issues.  In order to provide a consistent treatment to all withholding agents, the IRS developed the VCP to enhance U.S. withholding tax compliance across the board.  The program applies to payments of U.S. sourced dividends, interest, rents, royalties, and other fixed or determinable, annual or periodical (FDAP) income to foreign persons.  A 30% withholding tax generally applies to payments of FDAP income to foreign persons; however, this tax can often be reduced or eliminated under U.S. tax treaties with other countries.  The withholding agent is required to determine the status of a person to whom payments are being made by obtaining documentation from them.  A reduced rate will apply if the proper documentation has been provided.

The program will allow a withholding agent to come forward and voluntarily disclose withholding and reporting deficiencies.  The IRS will not impose penalties for identified underpayments or deficiencies that are due to reasonable cause.

Originally, this program was to be effective from September 30, 2004 through December 31, 2005; however, the IRS has agreed to extend this program through March 31, 2006.

If you are interested in learning more about this program, please contact Bill Burns at 215-564-1900.

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