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Free efile taxes 2. Free efile taxes   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Free efile taxes You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Free efile taxes This chapter discusses accounting methods. Free efile taxes For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free efile taxes Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Free efile taxes Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Free efile taxes Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Free efile taxes A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Free efile taxes An item considered material for financial statement purposes is generally also considered material for income tax purposes. Free efile taxes See Publication 538 for more information. Free efile taxes You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Free efile taxes If you later want to change your accounting method, you generally must get IRS approval. Free efile taxes How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Free efile taxes Types of accounting methods. Free efile taxes   Generally, you can use any of the following accounting methods. Free efile taxes Each method is discussed in detail below. Free efile taxes Cash method. Free efile taxes Accrual method. Free efile taxes Special methods of accounting for certain items of income and expenses. Free efile taxes Combination (hybrid) method using elements of two or more of the above. Free efile taxes Business and other items. Free efile taxes   You can account for business and personal items using different accounting methods. Free efile taxes For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free efile taxes Two or more businesses. Free efile taxes   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Free efile taxes Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Free efile taxes Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Free efile taxes However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Free efile taxes See Accrual Method Required , later. Free efile taxes Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Free efile taxes Items of income include money received as well as property or services received. Free efile taxes If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Free efile taxes See chapter 3 for information on how to report farm income on your income tax return. Free efile taxes Constructive receipt. Free efile taxes   Income is constructively received when an amount is credited to your account or made available to you without restriction. Free efile taxes You do not need to have possession of the income for it to be treated as income for the tax year. Free efile taxes If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Free efile taxes Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Free efile taxes Direct payments and counter-cyclical payments. Free efile taxes   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Free efile taxes Delaying receipt of income. Free efile taxes   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free efile taxes You must report the income in the year the money or property is received or made available to you without restriction. Free efile taxes Example. Free efile taxes Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Free efile taxes She was told in December that her payment was available. Free efile taxes She requested not to be paid until January 2014. Free efile taxes However, she must still include this payment in her 2013 income because it was made available to her in 2013. Free efile taxes Debts paid by another person or canceled. Free efile taxes   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Free efile taxes If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free efile taxes See Cancellation of Debt in chapter 3. Free efile taxes Deferred payment contract. Free efile taxes   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Free efile taxes However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Free efile taxes Example. Free efile taxes You are a farmer who uses the cash method and a calendar tax year. Free efile taxes You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Free efile taxes You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Free efile taxes However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Free efile taxes Repayment of income. Free efile taxes   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Free efile taxes If the repayment is more than $3,000, a special rule applies. Free efile taxes For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Free efile taxes Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Free efile taxes This includes business expenses for which you contest liability. Free efile taxes However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Free efile taxes See chapter 4 for information on how to deduct farm business expenses on your income tax return. Free efile taxes Prepayment. Free efile taxes   Generally, you cannot deduct expenses paid in advance. Free efile taxes This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free efile taxes Example. Free efile taxes On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Free efile taxes In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Free efile taxes In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Free efile taxes An exception applies if the expense qualifies for the 12-month rule. Free efile taxes See Publication 538 for more information and examples. Free efile taxes See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Free efile taxes Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Free efile taxes The purpose of an accrual method of accounting is to correctly match income and expenses. Free efile taxes Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Free efile taxes See Accrual Method Required and Farm Inventory , later. Free efile taxes Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Free efile taxes Under this rule, include an amount in income on the earliest of the following dates. Free efile taxes When you receive payment. Free efile taxes When the income amount is due to you. Free efile taxes When you earn the income. Free efile taxes When title passes. Free efile taxes If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Free efile taxes Inventory. Free efile taxes   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Free efile taxes An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Free efile taxes See Publication 538 for more information. Free efile taxes Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Free efile taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Free efile taxes The all-events test has been met. Free efile taxes This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Free efile taxes Economic performance has occurred. Free efile taxes Economic performance. Free efile taxes   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Free efile taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Free efile taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free efile taxes Example. Free efile taxes Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Free efile taxes She entered into a contract with ABC Farm Consulting in 2012. Free efile taxes The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Free efile taxes It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Free efile taxes Jane paid ABC Farm Consulting $2,000 in December 2012. Free efile taxes Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Free efile taxes Economic performance for Jane's liability in the contract occurs as the services are provided. Free efile taxes Jane incurs the $2,000 cost in 2013. Free efile taxes An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free efile taxes For more information, see Economic Performance in Publication 538. Free efile taxes Special rule for related persons. Free efile taxes   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Free efile taxes Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Free efile taxes For more information, see Internal Revenue Code section 267. Free efile taxes Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Free efile taxes A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Free efile taxes A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Free efile taxes A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Free efile taxes A tax shelter. Free efile taxes Note. Free efile taxes Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Free efile taxes Family corporation. Free efile taxes   A family corporation is generally a corporation that meets one of the following ownership requirements. Free efile taxes Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Free efile taxes Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Free efile taxes Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Free efile taxes For more information on family corporations, see Internal Revenue Code section 447. Free efile taxes Tax shelter. Free efile taxes   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Free efile taxes Its principal purpose is the avoidance or evasion of federal income tax. Free efile taxes It is a farming syndicate. Free efile taxes A farming syndicate is an entity that meets either of the following tests. Free efile taxes Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Free efile taxes More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Free efile taxes   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Free efile taxes   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Free efile taxes Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Free efile taxes This record should show the actual count or measurement of the inventory. Free efile taxes It should also show all factors that enter into its valuation, including quality and weight, if applicable. Free efile taxes Hatchery business. Free efile taxes   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Free efile taxes Products held for sale. Free efile taxes   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Free efile taxes , must be included in inventory. Free efile taxes Supplies. Free efile taxes   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Free efile taxes Deduct the cost of supplies in the year used or consumed in operations. Free efile taxes Do not include incidental supplies in inventory as these are deductible in the year of purchase. Free efile taxes Livestock. Free efile taxes   Livestock held primarily for sale must be included in inventory. Free efile taxes Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Free efile taxes See also Unit-livestock-price method , later. Free efile taxes If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Free efile taxes Growing crops. Free efile taxes   Generally, growing crops are not required to be included in inventory. Free efile taxes However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Free efile taxes See Uniform capitalization rules below. Free efile taxes Also see Uniform Capitalization Rules in  chapter 6. Free efile taxes Items to include in inventory. Free efile taxes   Your inventory should include all items held for sale, or for use as feed, seed, etc. Free efile taxes , whether raised or purchased, that are unsold at the end of the year. Free efile taxes Uniform capitalization rules. Free efile taxes   The following applies if you are required to use an accrual method of accounting. Free efile taxes The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Free efile taxes The costs of animals are subject to the uniform capitalization rules. Free efile taxes Inventory valuation methods. Free efile taxes   The following methods, described below, are those generally available for valuing inventory. Free efile taxes The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free efile taxes Cost. Free efile taxes Lower of cost or market. Free efile taxes Farm-price method. Free efile taxes Unit-livestock-price method. Free efile taxes Cost and lower of cost or market methods. Free efile taxes   See Publication 538 for information on these valuation methods. Free efile taxes If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Free efile taxes However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Free efile taxes Farm-price method. Free efile taxes   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Free efile taxes Market price is the current price at the nearest market in the quantities you usually sell. Free efile taxes Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Free efile taxes If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Free efile taxes Unit-livestock-price method. Free efile taxes   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Free efile taxes You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Free efile taxes The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Free efile taxes Unit prices and classifications are subject to approval by the IRS on examination of your return. Free efile taxes You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Free efile taxes IRS approval is not required for these adjustments. Free efile taxes Any other changes in unit prices or classifications do require IRS approval. Free efile taxes   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Free efile taxes This method accounts only for the increase in cost of raising an animal to maturity. Free efile taxes It does not provide for any decrease in the animal's market value after it reaches maturity. Free efile taxes Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Free efile taxes   Do not include sold or lost animals in the year-end inventory. Free efile taxes If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Free efile taxes The animals on hand at the end of the year are considered those most recently acquired. Free efile taxes   You must include in inventory all livestock purchased primarily for sale. Free efile taxes You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Free efile taxes However, you must be consistent from year to year, regardless of the method you have chosen. Free efile taxes You cannot change your method without obtaining approval from the IRS. Free efile taxes   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Free efile taxes If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Free efile taxes However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Free efile taxes This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Free efile taxes It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Free efile taxes Uniform capitalization rules. Free efile taxes   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Free efile taxes This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Free efile taxes Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Free efile taxes Example 1. Free efile taxes You are a farmer who uses an accrual method of accounting. Free efile taxes You keep your books on the calendar year basis. Free efile taxes You sell grain in December 2013 but you are not paid until January 2014. Free efile taxes Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Free efile taxes Example 2. Free efile taxes Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Free efile taxes Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Free efile taxes Deduct the costs of producing the grain in the year you pay for them. Free efile taxes Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Free efile taxes Crop method. Free efile taxes   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Free efile taxes You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Free efile taxes Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Free efile taxes    See chapter 4 for details on deducting the costs of operating a farm. Free efile taxes Also see Regulations section 1. Free efile taxes 162-12. Free efile taxes Other special methods. Free efile taxes   Other special methods of accounting apply to the following items. Free efile taxes Amortization, see chapter 7. Free efile taxes Casualties, see chapter 11. Free efile taxes Condemnations, see chapter 11. Free efile taxes Depletion, see chapter 7. Free efile taxes Depreciation, see chapter 7. Free efile taxes Farm business expenses, see chapter 4. Free efile taxes Farm income, see chapter 3. Free efile taxes Installment sales, see chapter 10. Free efile taxes Soil and water conservation expenses, see chapter 5. Free efile taxes Thefts, see chapter 11. Free efile taxes Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Free efile taxes However, the following restrictions apply. Free efile taxes If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free efile taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free efile taxes Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Free efile taxes Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Free efile taxes You may also have to pay a fee. Free efile taxes To obtain approval, you must generally file Form 3115. Free efile taxes There are instances when you can obtain automatic consent to change certain methods of accounting. Free efile taxes See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Free efile taxes For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Free efile taxes Also see Publication 538. Free efile taxes Prev  Up  Next   Home   More Online Publications
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Free efile taxes Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Free efile taxes S. Free efile taxes Taxpayer Identification NumbersUnexpected payment. Free efile taxes Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Free efile taxes Electronic reporting. Free efile taxes Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Free efile taxes S. Free efile taxes Real Property InterestForeign corporations. Free efile taxes Domestic corporations. Free efile taxes U. Free efile taxes S. Free efile taxes real property holding corporations. Free efile taxes Partnerships. Free efile taxes Trusts and estates. Free efile taxes Domestically controlled QIE. Free efile taxes Late filing of certifications or notices. Free efile taxes Certifications. Free efile taxes Liability of agent or qualified substitute. Free efile taxes Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Free efile taxes Withholding of Tax In most cases, a foreign person is subject to U. Free efile taxes S. Free efile taxes tax on its U. Free efile taxes S. Free efile taxes source income. Free efile taxes Most types of U. Free efile taxes S. Free efile taxes source income received by a foreign person are subject to U. Free efile taxes S. Free efile taxes tax of 30%. Free efile taxes A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Free efile taxes The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Free efile taxes The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Free efile taxes In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Free efile taxes S. Free efile taxes source income. Free efile taxes Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Free efile taxes NRA withholding does not include withholding under section 1445 of the Code (see U. Free efile taxes S. Free efile taxes Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Free efile taxes A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Free efile taxes However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Free efile taxes S. Free efile taxes person is not required to withhold. Free efile taxes In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Free efile taxes Withholding Agent You are a withholding agent if you are a U. Free efile taxes S. Free efile taxes or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Free efile taxes A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Free efile taxes S. Free efile taxes branch of certain foreign banks and insurance companies. Free efile taxes You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Free efile taxes Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Free efile taxes In most cases, the U. Free efile taxes S. Free efile taxes person who pays an amount subject to NRA withholding is the person responsible for withholding. Free efile taxes However, other persons may be required to withhold. Free efile taxes For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Free efile taxes In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Free efile taxes Liability for tax. Free efile taxes   As a withholding agent, you are personally liable for any tax required to be withheld. Free efile taxes This liability is independent of the tax liability of the foreign person to whom the payment is made. Free efile taxes If you fail to withhold and the foreign payee fails to satisfy its U. Free efile taxes S. Free efile taxes tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Free efile taxes   The applicable tax will be collected only once. Free efile taxes If the foreign person satisfies its U. Free efile taxes S. Free efile taxes tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Free efile taxes Determination of amount to withhold. Free efile taxes   You must withhold on the gross amount subject to NRA withholding. Free efile taxes You cannot reduce the gross amount by any deductions. Free efile taxes However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Free efile taxes   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Free efile taxes In no case, however, should you withhold more than 30% of the total amount paid. Free efile taxes Or, you may make a reasonable estimate of the amount from U. Free efile taxes S. Free efile taxes sources and put a corresponding part of the amount due in escrow until the amount from U. Free efile taxes S. Free efile taxes sources can be determined, at which time withholding becomes due. Free efile taxes When to withhold. Free efile taxes   Withholding is required at the time you make a payment of an amount subject to withholding. Free efile taxes A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Free efile taxes A payment is considered made to a person if it is paid for that person's benefit. Free efile taxes For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Free efile taxes A payment also is considered made to a person if it is made to that person's agent. Free efile taxes   A U. Free efile taxes S. Free efile taxes partnership should withhold when any distributions that include amounts subject to withholding are made. Free efile taxes However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Free efile taxes S. Free efile taxes partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Free efile taxes If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Free efile taxes A U. Free efile taxes S. Free efile taxes trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Free efile taxes To the extent a U. Free efile taxes S. Free efile taxes trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Free efile taxes Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Free efile taxes (See Returns Required , later. Free efile taxes ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Free efile taxes Form 1099 reporting and backup withholding. Free efile taxes    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Free efile taxes S. Free efile taxes person. Free efile taxes You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Free efile taxes S. Free efile taxes person that is subject to Form 1099 reporting if any of the following apply. Free efile taxes The U. Free efile taxes S. Free efile taxes person has not provided its taxpayer identification number (TIN) in the manner required. Free efile taxes The IRS notifies you that the TIN furnished by the payee is incorrect. Free efile taxes There has been a notified payee underreporting. Free efile taxes There has been a payee certification failure. Free efile taxes In most cases, a TIN must be provided by a U. Free efile taxes S. Free efile taxes non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Free efile taxes A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Free efile taxes You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Free efile taxes S. Free efile taxes person. Free efile taxes For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Free efile taxes S. Free efile taxes person subject to Form 1099 reporting. Free efile taxes See Identifying the Payee , later, for more information. Free efile taxes Also see Section S. Free efile taxes Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Free efile taxes Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Free efile taxes Wages paid to employees. Free efile taxes   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Free efile taxes See Pay for Personal Services Performed , later. Free efile taxes Effectively connected income by partnerships. Free efile taxes   A withholding agent that is a partnership (whether U. Free efile taxes S. Free efile taxes or foreign) is also responsible for withholding on its income effectively connected with a U. Free efile taxes S. Free efile taxes trade or business that is allocable to foreign partners. Free efile taxes See Partnership Withholding on Effectively Connected Income , later, for more information. Free efile taxes U. Free efile taxes S. Free efile taxes real property interest. Free efile taxes   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Free efile taxes S. Free efile taxes real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Free efile taxes S. Free efile taxes real property interest to a shareholder, partner, or beneficiary that is a foreign person. Free efile taxes See U. Free efile taxes S. Free efile taxes Real Property Interest , later. Free efile taxes Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Free efile taxes It does not apply to payments made to U. Free efile taxes S. Free efile taxes persons. Free efile taxes Usually, you determine the payee's status as a U. Free efile taxes S. Free efile taxes or foreign person based on the documentation that person provides. Free efile taxes See Documentation , later. Free efile taxes However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Free efile taxes Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Free efile taxes However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Free efile taxes U. Free efile taxes S. Free efile taxes agent of foreign person. Free efile taxes   If you make a payment to a U. Free efile taxes S. Free efile taxes person and you have actual knowledge that the U. Free efile taxes S. Free efile taxes person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Free efile taxes However, if the U. Free efile taxes S. Free efile taxes person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Free efile taxes   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Free efile taxes S. Free efile taxes person and not as a payment to a foreign person. Free efile taxes You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Free efile taxes Disregarded entities. Free efile taxes   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Free efile taxes The payee of a payment made to a disregarded entity is the owner of the entity. Free efile taxes   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Free efile taxes   If the owner is a U. Free efile taxes S. Free efile taxes person, you do not apply NRA withholding. Free efile taxes However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Free efile taxes You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Free efile taxes Flow-Through Entities The payees of payments (other than income effectively connected with a U. Free efile taxes S. Free efile taxes trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Free efile taxes This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Free efile taxes Income that is, or is deemed to be, effectively connected with the conduct of a U. Free efile taxes S. Free efile taxes trade or business of a flow-through entity is treated as paid to the entity. Free efile taxes All of the following are flow-through entities. Free efile taxes A foreign partnership (other than a withholding foreign partnership). Free efile taxes A foreign simple or foreign grantor trust (other than a withholding foreign trust). Free efile taxes A fiscally transparent entity receiving income for which treaty benefits are claimed. Free efile taxes See Fiscally transparent entity , later. Free efile taxes In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Free efile taxes You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Free efile taxes You must determine whether the owners or beneficiaries of a flow-through entity are U. Free efile taxes S. Free efile taxes or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Free efile taxes You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Free efile taxes If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Free efile taxes See Documentation and Presumption Rules , later. Free efile taxes Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Free efile taxes Foreign partnerships. Free efile taxes    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Free efile taxes If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Free efile taxes However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Free efile taxes If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Free efile taxes Example 1. Free efile taxes A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Free efile taxes S. Free efile taxes citizen. Free efile taxes You make a payment of U. Free efile taxes S. Free efile taxes source interest to the partnership. Free efile taxes It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Free efile taxes S. Free efile taxes citizen. Free efile taxes The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Free efile taxes You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Free efile taxes Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Free efile taxes Report the payment to the U. Free efile taxes S. Free efile taxes citizen on Form 1099-INT. Free efile taxes Example 2. Free efile taxes A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Free efile taxes The second partnership has two partners, both nonresident alien individuals. Free efile taxes You make a payment of U. Free efile taxes S. Free efile taxes source interest to the first partnership. Free efile taxes It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Free efile taxes In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Free efile taxes The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Free efile taxes Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Free efile taxes Example 3. Free efile taxes You make a payment of U. Free efile taxes S. Free efile taxes source dividends to a withholding foreign partnership. Free efile taxes The partnership has two partners, both foreign corporations. Free efile taxes You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Free efile taxes You must treat the partnership as the payee of the dividends. Free efile taxes Foreign simple and grantor trust. Free efile taxes   A trust is foreign unless it meets both of the following tests. Free efile taxes A court within the United States is able to exercise primary supervision over the administration of the trust. Free efile taxes One or more U. Free efile taxes S. Free efile taxes persons have the authority to control all substantial decisions of the trust. Free efile taxes   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Free efile taxes A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Free efile taxes   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Free efile taxes The payees of a payment made to a foreign grantor trust are the owners of the trust. Free efile taxes However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Free efile taxes If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Free efile taxes Example. Free efile taxes A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Free efile taxes S. Free efile taxes citizen. Free efile taxes You make a payment of interest to the foreign trust. Free efile taxes It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Free efile taxes S. Free efile taxes citizen. Free efile taxes The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Free efile taxes You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Free efile taxes Report the payment to the nonresident aliens on Forms 1042-S. Free efile taxes Report the payment to the U. Free efile taxes S. Free efile taxes citizen on Form 1099-INT. Free efile taxes Fiscally transparent entity. Free efile taxes   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Free efile taxes The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Free efile taxes ). Free efile taxes The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Free efile taxes An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Free efile taxes Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Free efile taxes   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Free efile taxes Example. Free efile taxes Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Free efile taxes A has two interest holders, B and C. Free efile taxes B is a corporation organized under the laws of country Y. Free efile taxes C is a corporation organized under the laws of country Z. Free efile taxes Both countries Y and Z have an income tax treaty in force with the United States. Free efile taxes A receives royalty income from U. Free efile taxes S. Free efile taxes sources that is not effectively connected with the conduct of a trade or business in the United States. Free efile taxes For U. Free efile taxes S. Free efile taxes income tax purposes, A is treated as a partnership. Free efile taxes Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Free efile taxes The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Free efile taxes Accordingly, A is fiscally transparent in its jurisdiction, country X. Free efile taxes B and C are not fiscally transparent under the laws of their respective countries of incorporation. Free efile taxes Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Free efile taxes Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Free efile taxes S. Free efile taxes source royalty income for purposes of the U. Free efile taxes S. Free efile taxes -Y income tax treaty. Free efile taxes Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Free efile taxes Therefore, A is not treated as fiscally transparent under the laws of country Z. Free efile taxes Accordingly, C is not treated as deriving its share of the U. Free efile taxes S. Free efile taxes source royalty income for purposes of the U. Free efile taxes S. Free efile taxes -Z income tax treaty. Free efile taxes Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Free efile taxes This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Free efile taxes You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Free efile taxes An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Free efile taxes A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Free efile taxes In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Free efile taxes You must determine whether the customers or account holders of a foreign intermediary are U. Free efile taxes S. Free efile taxes or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Free efile taxes You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Free efile taxes If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Free efile taxes See Documentation and Presumption Rules , later. Free efile taxes Nonqualified intermediary. Free efile taxes   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Free efile taxes The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Free efile taxes Example. Free efile taxes You make a payment of interest to a foreign bank that is a nonqualified intermediary. Free efile taxes The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Free efile taxes S. Free efile taxes person for whom the bank is collecting the payments. Free efile taxes The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Free efile taxes The account holders are the payees of the interest payment. Free efile taxes You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Free efile taxes S. Free efile taxes person on Form 1099-INT. Free efile taxes Qualified intermediary. Free efile taxes   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Free efile taxes S. Free efile taxes intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Free efile taxes You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Free efile taxes In this situation, the QI is required to withhold the tax. Free efile taxes You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Free efile taxes   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Free efile taxes If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Free efile taxes S. Free efile taxes person. Free efile taxes Branches of financial institutions. Free efile taxes   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Free efile taxes The countries with approved KYC rules are listed on IRS. Free efile taxes gov. Free efile taxes QI withholding agreement. Free efile taxes   Foreign financial institutions and foreign branches of U. Free efile taxes S. Free efile taxes financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Free efile taxes   A QI is entitled to certain simplified withholding and reporting rules. Free efile taxes In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Free efile taxes   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Free efile taxes These forms, and the procedures required to obtain a QI withholding agreement are available at www. Free efile taxes irs. Free efile taxes gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Free efile taxes Documentation. Free efile taxes   A QI is not required to forward documentation obtained from foreign account holders to the U. Free efile taxes S. Free efile taxes withholding agent from whom the QI receives a payment of U. Free efile taxes S. Free efile taxes source income. Free efile taxes The QI maintains such documentation at its location and provides the U. Free efile taxes S. Free efile taxes withholding agent with withholding rate pools. Free efile taxes A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Free efile taxes   A QI is required to provide the U. Free efile taxes S. Free efile taxes withholding agent with information regarding U. Free efile taxes S. Free efile taxes persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Free efile taxes   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Free efile taxes This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Free efile taxes Form 1042-S reporting. Free efile taxes   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Free efile taxes Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Free efile taxes Collective refund procedures. Free efile taxes   A QI may seek a refund on behalf of its direct account holders. Free efile taxes The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Free efile taxes U. Free efile taxes S. Free efile taxes branches of foreign banks and foreign insurance companies. Free efile taxes   Special rules apply to a U. Free efile taxes S. Free efile taxes branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Free efile taxes If you agree to treat the branch as a U. Free efile taxes S. Free efile taxes person, you may treat the branch as a U. Free efile taxes S. Free efile taxes payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Free efile taxes S. Free efile taxes branch on which the agreement is evidenced. Free efile taxes If you treat the branch as a U. Free efile taxes S. Free efile taxes payee, you are not required to withhold. Free efile taxes Even though you agree to treat the branch as a U. Free efile taxes S. Free efile taxes person, you must report the payment on Form 1042-S. Free efile taxes   A financial institution organized in a U. Free efile taxes S. Free efile taxes possession is treated as a U. Free efile taxes S. Free efile taxes branch. Free efile taxes The special rules discussed in this section apply to a possessions financial institution. Free efile taxes   If you are paying a U. Free efile taxes S. Free efile taxes branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Free efile taxes S. Free efile taxes person for amounts subject to NRA withholding. Free efile taxes Consequently, amounts not subject to NRA withholding that are paid to a U. Free efile taxes S. Free efile taxes branch are not subject to Form 1099 reporting or backup withholding. Free efile taxes   Alternatively, a U. Free efile taxes S. Free efile taxes branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Free efile taxes In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Free efile taxes See Nonqualified Intermediaries under  Documentation, later. Free efile taxes   If the U. Free efile taxes S. Free efile taxes branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Free efile taxes Withholding foreign partnership and foreign trust. Free efile taxes   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Free efile taxes A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Free efile taxes   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Free efile taxes A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Free efile taxes You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Free efile taxes WP and WT withholding agreements. Free efile taxes   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Free efile taxes Also see the following items. Free efile taxes Revenue Procedure 2004-21. Free efile taxes Revenue Procedure 2005-77. Free efile taxes Employer identification number (EIN). Free efile taxes   A completed Form SS-4 must be submitted with the application for being a WP or WT. Free efile taxes The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Free efile taxes Documentation. Free efile taxes   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Free efile taxes The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Free efile taxes The Form W-8IMY must contain the WP-EIN or WT-EIN. Free efile taxes Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Free efile taxes A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Free efile taxes S. Free efile taxes person. Free efile taxes It also includes a foreign branch of a U. Free efile taxes S. Free efile taxes financial institution if the foreign branch is a qualified intermediary. Free efile taxes In most cases, the U. Free efile taxes S. Free efile taxes branch of a foreign corporation or partnership is treated as a foreign person. Free efile taxes Nonresident alien. Free efile taxes   A nonresident alien is an individual who is not a U. Free efile taxes S. Free efile taxes citizen or a resident alien. Free efile taxes A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Free efile taxes Married to U. Free efile taxes S. Free efile taxes citizen or resident alien. Free efile taxes   Nonresident alien individuals married to U. Free efile taxes S. Free efile taxes citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Free efile taxes However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Free efile taxes Wages paid to these individuals are subject to graduated withholding. Free efile taxes See Wages Paid to Employees—Graduated Withholding . Free efile taxes Resident alien. Free efile taxes   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Free efile taxes Green card test. Free efile taxes An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Free efile taxes This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Free efile taxes Substantial presence test. Free efile taxes An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Free efile taxes Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Free efile taxes   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Free efile taxes This exception is for a limited period of time. Free efile taxes   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Free efile taxes Note. Free efile taxes   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Free efile taxes For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Free efile taxes Resident of a U. Free efile taxes S. Free efile taxes possession. Free efile taxes   A bona fide resident of Puerto Rico, the U. Free efile taxes S. Free efile taxes Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Free efile taxes S. Free efile taxes citizen or a U. Free efile taxes S. Free efile taxes national is treated as a nonresident alien for the withholding rules explained here. Free efile taxes A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Free efile taxes   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Free efile taxes S. Free efile taxes Possessions. Free efile taxes Foreign corporations. Free efile taxes   A foreign corporation is one that does not fit the definition of a domestic corporation. Free efile taxes A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Free efile taxes Guam or Northern Mariana Islands corporations. Free efile taxes   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Free efile taxes Note. Free efile taxes   The provisions discussed below under U. Free efile taxes S. Free efile taxes Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Free efile taxes U. Free efile taxes S. Free efile taxes Virgin Islands and American Samoa corporations. Free efile taxes   A corporation created or organized in, or under the laws of, the U. Free efile taxes S. Free efile taxes Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Free efile taxes S. Free efile taxes Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Free efile taxes S. Free efile taxes Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Free efile taxes Foreign private foundations. Free efile taxes   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Free efile taxes Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Free efile taxes Other foreign organizations, associations, and charitable institutions. Free efile taxes   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Free efile taxes In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Free efile taxes   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Free efile taxes   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Free efile taxes U. Free efile taxes S. Free efile taxes branches of foreign persons. Free efile taxes   In most cases, a payment to a U. Free efile taxes S. Free efile taxes branch of a foreign person is a payment made to the foreign person. Free efile taxes However, you may treat payments to U. Free efile taxes S. Free efile taxes branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Free efile taxes S. Free efile taxes regulatory supervision as payments made to a U. Free efile taxes S. Free efile taxes person, if you and the U. Free efile taxes S. Free efile taxes branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Free efile taxes For this purpose, a financial institution organized under the laws of a U. Free efile taxes S. Free efile taxes possession is treated as a U. Free efile taxes S. Free efile taxes branch. Free efile taxes Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Free efile taxes The payee is a U. Free efile taxes S. Free efile taxes person. Free efile taxes The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Free efile taxes In most cases, you must get the documentation before you make the payment. Free efile taxes The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Free efile taxes See Standards of Knowledge , later. Free efile taxes If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Free efile taxes For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Free efile taxes The specific types of documentation are discussed in this section. Free efile taxes However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Free efile taxes As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Free efile taxes Section 1446 withholding. Free efile taxes   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Free efile taxes In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Free efile taxes This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Free efile taxes Joint owners. Free efile taxes    If you make a payment to joint owners, you need to get documentation from each owner. Free efile taxes Form W-9. Free efile taxes   In most cases, you can treat the payee as a U. Free efile taxes S. Free efile taxes person if the payee gives you a Form W-9. Free efile taxes The Form W-9 can be used only by a U. Free efile taxes S. Free efile taxes person and must contain the payee's taxpayer identification number (TIN). Free efile taxes If there is more than one owner, you may treat the total amount as paid to a U. Free efile taxes S. Free efile taxes person if any one of the owners gives you a Form W-9. Free efile taxes See U. Free efile taxes S. Free efile taxes Taxpayer Identification Numbers , later. Free efile taxes U. Free efile taxes S. Free efile taxes persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Free efile taxes Form W-8. Free efile taxes   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Free efile taxes Until further notice, you can rely upon Forms W-8 that contain a P. Free efile taxes O. Free efile taxes box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Free efile taxes S. Free efile taxes person and that a street address is available. Free efile taxes You may rely on Forms W-8 for which there is a U. Free efile taxes S. Free efile taxes mailing address provided you received the form prior to December 31, 2001. Free efile taxes   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Free efile taxes You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Free efile taxes S. Free efile taxes possession. Free efile taxes Other documentation. Free efile taxes   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Free efile taxes The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Free efile taxes These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Free efile taxes Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Free efile taxes Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Free efile taxes   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Free efile taxes   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Free efile taxes For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Free efile taxes Claiming treaty benefits. Free efile taxes   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Free efile taxes S. Free efile taxes TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Free efile taxes   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Free efile taxes   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Free efile taxes See Fiscally transparent entity discussed earlier under Flow-Through Entities. Free efile taxes   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Free efile taxes For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Free efile taxes   The exemptions from, or reduced rates of, U. Free efile taxes S. Free efile taxes tax vary under each treaty. Free efile taxes You must check the provisions of the tax treaty that apply. Free efile taxes Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Free efile taxes   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Free efile taxes You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Free efile taxes Exceptions to TIN requirement. Free efile taxes   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Free efile taxes Income from marketable securities (discussed next). Free efile taxes Unexpected payments to an individual (discussed under U. Free efile taxes S. Free efile taxes Taxpayer Identification Numbers ). Free efile taxes Marketable securities. Free efile taxes   A Form W-8BEN provided to claim treaty benefits does not need a U. Free efile taxes S. Free efile taxes TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Free efile taxes For this purpose, income from a marketable security consists of the following items. Free efile taxes Dividends and interest from stocks and debt obligations that are actively traded. Free efile taxes Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Free efile taxes Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Free efile taxes Income related to loans of any of the above securities. Free efile taxes Offshore accounts. Free efile taxes   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Free efile taxes   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Free efile taxes However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Free efile taxes An offshore account is an account maintained at an office or branch of a U. Free efile taxes S. Free efile taxes or foreign bank or other financial institution at any location outside the United States. Free efile taxes   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Free efile taxes This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Free efile taxes In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Free efile taxes Documentary evidence. Free efile taxes   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Free efile taxes To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Free efile taxes Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Free efile taxes Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Free efile taxes In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Free efile taxes 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. Free efile taxes   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Free efile taxes (See Effectively Connected Income , later. Free efile taxes )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Free efile taxes   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Free efile taxes S. Free efile taxes trade or business is subject to withholding under section 1446. Free efile taxes If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Free efile taxes    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Free efile taxes Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Free efile taxes   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Free efile taxes S. Free efile taxes possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Free efile taxes   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Free efile taxes   See Foreign Governments and Certain Other Foreign Organizations , later. Free efile taxes Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Free efile taxes The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Free efile taxes The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Free efile taxes Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Free efile taxes S. Free efile taxes Branches for United States Tax Withholding. Free efile taxes   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Free efile taxes S. Free efile taxes branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Free efile taxes S. Free efile taxes branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Free efile taxes S. Free efile taxes person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Free efile taxes For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Free efile taxes 1446-5. Free efile taxes Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Free efile taxes A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Free efile taxes The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Free efile taxes The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Free efile taxes Responsibilities. Free efile taxes   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Free efile taxes However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Free efile taxes Instead, it provides you with a withholding statement that contains withholding rate pool information. Free efile taxes A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Free efile taxes A qualified intermediary is required to provide you with information regarding U. Free efile taxes S. Free efile taxes persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Free efile taxes S. Free efile taxes person unless it has assumed Form 1099 reporting and backup withholding responsibility. Free efile taxes For the alternative procedure for providing rate pool information for U. Free efile taxes S. Free efile taxes non-exempt persons, see the Form W-8IMY instructions. Free efile taxes   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Free efile taxes   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Free efile taxes Primary responsibility not assumed. Free efile taxes   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Free efile taxes Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Free efile taxes S. Free efile taxes person subject to Form 1099 reporting and/or backup withholding. Free efile taxes The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Free efile taxes Primary NRA withholding responsibility assumed. Free efile taxes   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Free efile taxes S. Free efile taxes person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Free efile taxes The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Free efile taxes Primary NRA and Form 1099 responsibility assumed. Free efile taxes   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Free efile taxes It is not necessary to associate the payment with withholding rate pools. Free efile taxes Example. Free efile taxes You make a payment of dividends to a QI. Free efile taxes It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Free efile taxes S. Free efile taxes individual who provides it with a Form W-9. Free efile taxes Each customer is entitled to 20% of the dividend payment. Free efile taxes The QI does not assume any primary withholding responsibility. Free efile taxes The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Free efile taxes S. Free efile taxes individual. Free efile taxes You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Free efile taxes The part of the payment allocable to the U. Free efile taxes S. Free efile taxes individual (20%) is reportable on Form 1099-DIV. Free efile taxes Smaller partnerships and trusts. Free efile taxes   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Free efile taxes It is a foreign partnership or foreign simple or grantor trust. Free efile taxes It is a direct account holder of the QI. Free efile taxes It does not have any partner, beneficiary, or owner that is a U. Free efile taxes S. Free efile taxes person or a pass- through partner, beneficiary, or owner. Free efile taxes   For information on these rules, see section 4A. Free efile taxes 01 of the QI agreement. Free efile taxes This is found in Appendix 3 of Revenue Procedure 2003-64. Free efile taxes Also see Revenue Procedure 2004-21. Free efile taxes Related partnerships and trusts. Free efile taxes    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Free efile taxes It is a foreign partnership or foreign simple or grantor trust. Free efile taxes It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Free efile taxes For information on these rules, see section 4A. Free efile taxes 02 of the QI agreement. Free efile taxes This is found in Appendix 3 of Revenue Procedure 2003-64. Free efile taxes Also see Revenue Procedure 2005-77. Free efile taxes Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Free efile taxes S. Free efile taxes branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Free efile taxes S. Free efile taxes branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Free efile taxes The NQI, flow-through entity, or U. Free efile taxes S. Free efile taxes branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Free efile taxes A withholding statement must be updated to keep the information accurate prior to each payment. Free efile taxes Withholding statement. Free efile taxes   In most cases, a withholding statement must contain the following information. Free efile taxes The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Free efile taxes The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Free efile taxes The status of the person for whom the documentation has been provided, such as whether the person is a U. Free efile taxes S. Free efile taxes exempt recipient (U. Free efile taxes S. Free efile taxes person exempt from Form 1099 reporting), U. Free efile taxes S. Free efile taxes non-exempt recipient (U. Free efile taxes S. Free efile taxes person subject to Form 1099 reporting), or a foreign person. Free efile taxes For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Free efile taxes S. Free efile taxes branch. Free efile taxes The type of recipient the person is, based on the recipient codes used on Form 1042-S. Free efile taxes Information allocating each payment, by income type, to each payee (including U. Free efile taxes S. Free efile taxes exempt and U. Free efile taxes S. Free efile taxes non-exempt recipients) for whom documentation has been provided. Free efile taxes The rate of withholding that applies to each foreign person to whom a payment is allocated. Free efile taxes A foreign payee's country of residence. Free efile taxes If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Free efile taxes ). Free efile taxes In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Free efile taxes The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Free efile taxes S. Free efile taxes branch from which the payee will directly receive a payment. Free efile taxes Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Free efile taxes Alternative procedure. Free efile taxes   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Free efile taxes S. Free efile taxes exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Free efile taxes To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Free efile taxes You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Free efile taxes    This alternative procedure cannot be used for payments to U. Free efile taxes S. Free efile taxes non-exempt recipients. Free efile taxes Therefore, an NQI must always provide you with allocation information for all U. Free efile taxes S. Free efile taxes non-exempt recipients prior to a payment being made. Free efile taxes Pooled withholding information. Free efile taxes   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Free efile taxes A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Free efile taxes For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Free efile taxes The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Free efile taxes Failure to provide allocation information. Free efile taxes   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Free efile taxes You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Free efile taxes An NQI is deemed to have f