Arrangements that change withholding
US payers are often required to withhold tax on certain payments to foreign persons, and a tax treaty may reduce the rate when the recipient qualifies and provides the right documentation. Nonresident entertainers and athletes may be able to enter into a withholding agreement with the IRS that ties withholding to expected net income rather than gross receipts. When a foreign person sells US real property, the buyer generally must withhold, and a withholding certificate from the IRS can reduce that amount if it is applied for in time. Financial institutions can enter into intermediary agreements with the IRS that govern how they document customers and withhold. Each arrangement requires its own application or documentation.
Documentation behind a claim
Treaty claims usually rest on a properly completed beneficial ownership form, and a payer may ask for more if anything looks inconsistent. For a performer's withholding agreement, the IRS typically expects contracts, an itinerary, and a budget of expenses. For a property sale, it expects details of the purchase, the improvements, and the expected gain. Payers who withhold too little can become liable for the shortfall, so they often take a conservative approach unless the paperwork is complete. Keep copies of every form provided to payers and every application filed.
Deciding the approach
We start by identifying who is paying whom, for what, and when the money is expected to move. We then look at whether a treaty, an agreement, or a certificate may apply, and how long the process tends to take compared with the payment date. If tax has already been over-withheld, we discuss filing a return or claim to recover it. We also check state rules, since New York has its own requirements for certain payments and for property sales by nonresidents.
