According to KPMG, the US government has been hiring and training over 3,000 IRS examiners with process verification and tax audit efforts. Why? Most organizations know about the need to report 1099 income, but the Foreign Account Tax Compliance Act (FATCA) is requiring greater compliance to report payments made to foreign entities. Form 1042-S filings will be a part of the standard tax return examination.
Tax compliance as a part of accounts payable is also important due diligence to limit fraud as part of a “know your supplier” program, similar to a KYC (know your customer) program. By validating tax information, particularly for global partners, it can reduce the likelihood of payments made to fraudsters or other known bad entities.
Risks to Non-Compliance
The IRS has put into place policies that put more of the responsibility on the payor, not the supplier, for reporting.
- Reporting fines – For 1042-S and 1099, fines range from $50 to $500 per incident for not reporting payments.
- 30% penalty on payment amounts – For Fixed, Determinable, Annual, or Periodical (FDAP) income payments made cross border, if the payor doesn’t withhold the proper amount, they’re liable for a major fine.
- Risk exposure – Tax audits in one area can open up scrutiny and exposure to other areas of the business.
- Form complexity – The W-9 form for US based suppliers is fairly straight forward, mostly focused on the tax identification number (TIN) of the payee – either their Social Security Number or Employer Identification Number. However, for overseas suppliers and partners is more complex with forms including W-8BEN, W-8BEN-E, W-8EXP, W-8IMY, W-8ECI, W-4 and Form 8233. Navigating and completing these forms, especially for a foreign entity, can be confusing and frustrating.
Automating the Tax Compliance Process
While tax compliance is falling more on the shoulders of accounts payable, there are few solutions that make it easier for both the AP practitioner and the supplier. In fact, tools continue to be an afterthought or they’re bolted on as a separate process.
Adding tax form collection to the standard supplier onboarding process is ideal. By collecting the information prior to invoices and payments being submitted, the risk is lower.
- Collect tax forms for every supplier – Rather than picking and choosing which suppliers need to provide a tax form, the best policy approach is to require forms from everyone. This meets the basic documentation requirement that the IRS will not dispute.
- Guide the supplier – From within the supplier portal or through supplier communications, guide the supplier to provide their tax identification and forms during the onboarding process.
- Validate – Verify TINs that are submitted as part of onboarding. While this is primarily to minimize errors when it’s time to report to the IRS, it also makes good sense to reduce typos and even false identities.
- Think globally – If many suppliers are from specific regions, consider localizing the supplier portal in their native language to include tax form collection and validation. Depending on the country of operation, it may be necessary to consider European and LatAM VAT tax IDs as part of the process.
- Be flexible – The tax code is always changing and the IRS requirements may also change. Ensure that the portal can easily adapt to new requirements.
- Link payments – To streamline reporting and withholding, connect tax ID information to payments. This can reduce the need to cross-reference supplier accounts and streamline required withholding at the point of payment.