Understanding IRS Form W-9 and W-8 Compliance

The Internal Revenue Service (IRS) utilizes various forms to ensure compliance with the United States tax laws, especially regarding information reporting and withholding requirements. Navigating the complexities of IRS forms and compliance is crucial for both individuals and businesses engaged in financial activities involving U.S. entities. 

Two critical forms in this regard are Form W-9, "Request for Taxpayer Identification Number and Certification," and the series of Form W-8 documents, each serving a distinct purpose in tax compliance for non-U.S. persons. This article provides a comprehensive overview of IRS Form W-9 and each type of Form W-8, detailing their purposes, requirements, and compliance considerations.

IRS Form W-9: Request for Taxpayer Identification Number and Certification 

Purpose: Form W-9 is used primarily by financial institutions and other entities to obtain information from U.S. persons (including individual residents and entities) who receive income subject to IRS information reporting. The information collected includes the taxpayer identification number (TIN), which is necessary for reporting income paid to the IRS and for withholding taxes as appropriate.

Who Uses It: U.S. persons, including U.S. citizens, U.S. resident aliens, and domestic entities, are typically required to fill out Form W-9 when they work as independent contractors, receive interest or dividends, or engage in other financial transactions that necessitate reporting income to the IRS.

Key Components: 

Taxpayer Identification Number (TIN): Could be a Social Security Number (SSN), Employer Identification Number (EIN), or Individual Taxpayer Identification Number (ITIN).

Certification: By signing the form, the submitter certifies that the TIN provided is correct and that they are not subject to backup withholding taxes unless they indicate otherwise on the form.

Compliance: Entities must ensure that they obtain a completed Form W-9 from U.S. persons before making payments that are reportable to the IRS. Failure to obtain a Form W-9 may require the payer to withhold a portion of the payment (generally 24%) as backup withholding.

The IRS revised Form W-9 in March 2024. The description of Line 1 was updated to “Name of entity/individual”, clarifying that for a sole proprietor or disregarded entity, the owner’s name should be entered on line 1, and the business/disregarded entity’s name on line 2 removing any confusion that existed on the old Form W-9 revised on October 2018.

Line 3a was modified to clarify how a disregarded entity completes this line. An LLC that is a disregarded entity should check the appropriate box for the tax classification of its owner. Otherwise, it should check the “LLC” box and enter its appropriate tax classification. 

New line 3b was added to Form W-9. A flow-through entity is required to complete this line to indicate that it has direct or indirect foreign partners, owners, or beneficiaries when it provides the Form W-9 to another flow-through entity in which it has an ownership interest. This change is intended to provide a flow-through entity with information regarding the status of its indirect foreign partners, owners, or beneficiaries, so that it can satisfy any applicable reporting requirements. For example, a partnership that has any indirect foreign partners may be required to complete Schedules K-2 and K-3. 

IRS Form W-8 Series: Compliance for Non-U.S. Persons, Certificates of Foreign Status 

The Form W-8 series is used primarily by foreign persons (non-U.S. persons) to assert their status and claim benefits under the U.S. tax treaty (if applicable), thereby reducing or exempting them from U.S. withholding tax on various types of income or, to certify their non-participation in substantial U.S. activities. There are several versions of Form W-8, each tailored to specific circumstances:

Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)" 

Purpose: Used by foreign individuals to claim foreign status or a reduced rate of, or exemption from, withholding as a resident of a foreign country with which the U.S. has an income tax treaty.

Key Details: The form requires identification of the individual, the claim of treaty benefits, Individual's TIN in their country of residence, if applicable, and a certification of the beneficial owner's status.

Form W-8BEN-E, "Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)" 

Purpose: Similar to the W-8BEN but used by entities to certify their status as non-U.S. entities and claim any treaty benefits.

Key Details: Entities must provide their EIN and the nature of their foreign status, detailing the applicable tax treaty provisions. They must also provide the entity’s classification under U.S. tax law and the country of incorporation.

Form W-8ECI, "Certificate of Foreign Person's Claim That Income Is Effectively Connected with the Conduct of a Trade or Business in the United States" 

Purpose: Used by foreign persons to declare that certain income is effectively connected with the conduct of a trade or business within the U.S., therefore subject to different tax treatment.

Key Details: This form asserts that the income reported is, and should be, subject to ordinary U.S. income tax.

Form W-8EXP, "Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting" 

Purpose: Utilized by foreign governments, international organizations, foreign central banks of issue, foreign tax-exempt organizations, foreign private foundations, or governments of U.S. possessions to certify their status.

Key Details: Entities must certify their qualifications for exemption from U.S. withholding on income.

Form W-8IMY, "Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting" 

Purpose: Used by intermediaries (such as brokers and agents) or entities that are acting as intermediaries (entities that act between the payer and the beneficial owner) or flow-through entities in a transaction, facilitating claims for benefits or exemptions by owners or beneficiaries who are the actual recipients of the income.

Key Details: This form involves declarations regarding the intermediary status and responsibility for withholding duties on payments.

Compliance Tips 

For both forms W-9 and W-8, accuracy and timeliness are crucial. Incorrect or outdated information can lead to several of the below consequences:

1. Tax Compliance Issues: If forms W-9 and W-8 are incorrect or outdated, it can lead to non-compliance with tax regulations, potentially resulting in penalties, additional taxes for both investors and funds, backup withholding and/or ineligibility of reduced tax rates from tax treaties.
2. Reporting Errors: Funds are required to report certain information to tax authorities, such as the Internal Revenue Service (IRS) in the United States. Incorrect or outdated forms can lead to errors in reporting, which may trigger audits or inquiries from tax authorities.
3. Withholding Tax Issues: In the case of non-U.S. investors, providing an incorrect or outdated Form W-8 can result in improper withholding tax treatment. This can lead to over-withholding or under-withholding of taxes on income generated by the investment, causing financial losses or complications for investors.
4. Legal and Regulatory Risks: Funds have legal obligations to ensure compliance with tax laws and regulations. Failure to collect accurate and up-to-date tax-related information from investors can expose funds to legal and regulatory risks, including fines, sanctions, or even legal action.
5. Operational Challenges: Dealing with incorrect or outdated forms can create operational challenges for funds, including the need for additional resources to rectify the situation, potential delays in processing transactions, and increased administrative burdens.
6. Reputational Damage: Investors may lose trust in a fund that demonstrates a lack of attention to detail or compliance with tax requirements. Reputational damage can have long-term consequences, leading to loss of clients, difficulty attracting new investors, and damage to the fund's brand image.

To mitigate these consequences, funds should have robust procedures in place to verify the accuracy of investor tax-related documentation, regularly update information as necessary, and ensure compliance with relevant tax laws and regulations. Additionally, investors should be proactive in providing accurate and updated information to funds to avoid potential complications.

Entities and individuals are advised to:

1. Regularly update information with the IRS and payers whenever there are significant changes.
2. Understand the specific requirements and conditions of each form, especially when claiming benefits under a tax treaty.
3. Timeliness: Forms W-9 and W-8 must be kept up-to-date and generally renewed every three years, or when a revised form is available or any information on a current form becomes outdated. 
4. Accuracy: It is crucial to ensure that the information provided is accurate and substantiates the claims made.
5. Withholding: Entities must withhold at the appropriate rate if a valid form is not provided or if the form received is invalid or expired.

Compliance with the requirements for Forms W-9 and W-8 is essential for both U.S. and foreign persons engaged in financial transactions implicating U.S. taxation. Understanding the specific requirements of each form helps prevent costly penalties and ensures proper reporting to the IRS.

Consult with a tax advisor or attorney to ensure proper completion and submission of forms, particularly in complex situations or large transactions.  

Evolved is a tax compliance and advisory firm with offices in New York City, Philadelphia and Stamford, serving clients nationally throughout the US.  We provide tax provision, private equity and venture capital services alongside advisory for high net-worth tax and family office tax.