1441 Health Check

US 1441 NRA Regulations apply to all recipients and payors of US-sourced FDAP (Fixed Determinable Annual or Periodic) income.

The regulations, all 800+ pages of them, came into force on January 1^st 2001 and require non-US intermediaries to add end of year tax information reporting (“TIR”) and submission to audits twice every six years, to their existing withholding tax operations structures and strategies.


The regulations also require different processing rules to apply to those who contract directly with the IRS (QIs) as opposed to those who do not (NQIs).

QIs, in return for contracting with the IRS, are able to protect the identity of their non-US customers and optimise their compliance efforts through pooled end of year reporting.

NQIs on the other hand must document and disclose all their customers, US and and non-US, to both their upstream QI or US withholding agent and to the IRS in addition to being far more liable to a regulatory requirement to file information returns electronically.

Failure to comply with disclosure to an upstream QI can lead to a 30% tax rate on client income (even though the client may be entitled to a treaty rate) and subsequent legal exposure to client law suits.

Failure to report to the IRS can lead to significant penalties from the IRS up to and including “intentional disregard” which carries a penalty of $100 per form with no limit on the penalty that can be imposed.

These regulations are enforced through a system of audits performed on QIs twice in every six year cycle. Since a QI’s or US withholding agent’s customers may well include downstream NQIs, NQI compliance (or lack thereof) is visible to the IRS even without a contract, due to the reporting obligations of upstream institutions which will highlight any lack of reporting at the lower levels.

Current Status

	In 2005-2007 the number of Forms 1042-S rejected was reported to be between 70% and 90%;
	US Treasury Blue Book (2009) requests Congress to approve increases to penalties for failure to file (up to $1.5 million failure to file 1042-S) which if passed, would have effect for the reporting year 2009;
	IRS Notice 2008-98 proposes two auditors per audit for QIs and major changes to acceptable QI control procedures.

What is a health check?

A health check is a consultancy assignment undertaken on either a fixed fee or time and materials basis which reviews the key aspects of compliance depending on the status of the institution as a QI or NQI. The Health Check includes, but is not limited to:

General

	Assessment of general knowledge, training and internal regulatory documentation;
	Assessment of QI related human and technology resource being deployed;
	Assessment of Controls to Prevent, Detect, Deter and Correct Material Failures;
	Assessment of Level of Preparedness for a full audit;
	Assessment of supporting policies (EFTPS, FIRE);
	Assessment of compliance to disclosure rules;

Documentation

	Quality of documentation under KYC and S. 1441 NRA (W-8 & W9);
	Quality of document management (e.g. reliability and validity tracking);
	Quality of account designation;
	Use of presumption rules;

Withholding

	Use of Rate Pools (QIs) and Withholding Rate Statements (NQIs);
	Accuracy of withholding calculations;
	Assessment of policies;

Deposits

	Assessment of Withholding Agent contract terms and compliance to deposit formula (NWQIs);
	Assessment of understanding and application of deposit formula (WQIs);
	Assessment of any adjustments made;

Tax Information Reporting

	Assessment of understanding of requirements and consequences;
	Existence and accuracy of 1042 reporting (1042, 104-T, 1042-S) and delivery methods;
	Existence and accuracy of 1099 reporting (1099-X, 945).

Who does the Health Check?

The team we deploy (which can vary from 1 to 4) will depend on whether the firm is a QI or an NQI and the scale and scope of their operations. However, all team members have extensive experience with the practical impact of the regulations.

The Team Principal, Ross McGill, has been working with firms on practical compliance issues since 1996 and subsequently with QIs and NQIs since 2001. Mr McGill runs regular training course and updates for QIs and NQIs in Europe and Asia and has, and continues to be, closely involved with the main industry bodies that are efforting projects to improve compliance.

Why have a health check?

There are several reasons a firm may wish to have a Health Check:

Qualified Intermediaries:

	To review compliance to the letter and intent of the regulations;
	To assess the firm’s general compliance prior to a Phase I audit;
	To assist a QI make practical changes and formulate a compliance strategy after failing a Phase I audit and prior to a Phase II audit.

Non-Qualified Intermediaries:

	To review whether the firm is compliant and, if not, identify key areas of risk and need for change;
	To perform a risk assessment of any areas of non compliance and identify costs associated with bringing these into compliance as well as the penalties that may be applicable if compliance is not achieved.

Disclaimer

We are not auditors, nor will a health check necessarily be admissible to an auditor in mitigation of any audit requirements. Nothing in the promotion, explanation or delivery of a Health Check is intended to be or should be considered to be the provision of tax advice.

Price

Our 1441 Health Check is POA.  Please contact us to discuss your needs and obtain a quote.