International Implications of Changes to Form W-9 for Pass-through Entities

The IRS has announced changes to Form W-9, Request for Taxpayer Identification Number and Certification, which will impact the information that will need to be furnished by pass-through entities. These changes include the requirement to provide information that applies to schedules K-2 and K-3.

What is a Form W-9?

Form W-9 is a document that an entity or organization requests when it is required to report certain types of income. This form is not filed with the IRS but is given to the paying entity to help with the preparation of certain Information Returns.

There are many reasons a taxpayer might be requested to fill out Form W-9, but some of the most common instances include freelancers or gig workers or if the taxpayer will be compensated in dividends or interest. The information provided on a Form W-9 helps the payer entity prepare Form 1099, one of which is required for each party these payments were made to during the year.

Previously, Form W-9 required taxpayers to provide their taxpayer identification number (TIN), Federal Tax Classification (such as LLC, S-Corporation, Partnership), address, and other miscellaneous information. The IRS has recently announced the addition of a new line to the form, line 3b.

Line 3b is reserved for flow-through entities such as partnerships, trusts, and estates with direct or indirect control by a foreign partner, owner, or beneficiaries. One caveat to be aware of is that this line is only required to be filled out by a flow-through entity that is providing a W-9 to another flow-through entity. This requirement is to help the latter satisfy IRS reporting requirements effectively and accurately.

The Impacts on Foreign Reporting

Most pass-through entities will likely see no discernable difference in their foreign reporting from these changes. The most impactful changes likely to be seen are among domestic partnerships that divest an interest in another partnership.

Due to the reporting on line 3b, the domestic partnership would now be aware that they have an indirect foreign partner, which would result in:

(a) a requirement to file Schedule K-3, and

(b) to notify the lower-tier partnership that the domestic partnership now requires information to furnish Schedule K-3.

The impacts of changes like these may seem trivial, but international compliance can be nuanced, and the penalties can be hefty. It’s essential to stay current on changes in taxation policy to ensure your organization has the most effective tax planning tools.

For any questions on changes to Form W-9 and for guidance on our international service lines, feel free to contact us.