Information reporting and indirect tax considerations for financial institutions.

1. 1
financial services
Information Reporting
Wayne Boody, Senior Manager
DHG Tax Advisory

2. 2
financial services
Key Elements of Information Reporting
• Reviewing and maintaining knowledge of
the rules and requirements surrounding
1099/1098/1042S/5498 reporting.
• Central oversight to ensure that filing
deadlines to the IRS, state agencies and
customers are met timely.

3. 3
financial services
Tax Year 2016 Changes to the Information Reporting
Requirements
• Mortgage Interest, Form 1098 - effective
for returns filed after 12/31/2016 (2016
filing year), in addition to interest paid by
the borrower, you must now capture and
report:
A. The address or description of property
securing the mortgage;
B. The outstanding mortgage principle as
January 1, 2016 and;
C. The mortgage origination date.

4. 4
financial services
2016 Tax Year Changes
• Form 1099-Miscellaneous – for tax year
2016 returns, the due date to the IRS has
changed when reporting non-employee
compensation in Box 7. The due date to
the IRS for calendar year 2016 when
reporting amounts in Box 7 is January 31,
2017.

5. 5
financial services
2016 Changes – 1099-Miscellaneous
• Otherwise, follow the normal due dates
to the IRS:
A. February 28 if filing paper copies
B. March 31 if filing electronically
• Due dates for sending statements to the
recipients remain the same which is
January 31, 2017.

6. 6
financial services
Mergers and Acquisitions
• Information reporting and how forms will
be reported for a merger year should be
clearly addressed in the M&A agreement.
• Revenue Procedure 99-50 provides
guidance on reporting considerations for
the successor and predecessor in a
merger year. The predecessor may
choose to report amounts through merger
date, or the successor may combine
reporting for both parties.

7. 7
financial services
Mergers and Acquisitions
• Combined reporting is allowed when all the
following conditions are met:
A. The successor acquires substantially
all the property used in the trade or
business of the predecessor.
B. The predecessor is required to report
amounts, including withholding on
information returns for the year of merger.
C. The predecessor is not required to report
amounts for the year following merger.

8. 8
financial services
Mergers and Acquisitions
• Under the combined reporting procedure:
A. Both parties must agree on the specific forms
to combine and the successor assumes the
predecessor’s entire reporting obligation.
B. Combined reporting may be used on all
forms, or limited to (a) specific forms, or
(b) specific reporting entities, i.e., business
units or branches.
C. The successor must combine reportable
amounts, including withholding.

9. 9
financial services
Mergers and Acquisitions
• The successor must also notify the IRS in writing
that forms are being reported on a combined
basis. This will allow the IRS to reconcile
withholding amounts for both parties.
• Considerations:
A. Involve back-office and technology
early to ensure reportable fields can be
mapped and combined.
B. Consider customer impact and
communication.

10. 10
financial services
Information Reporting Penalties
• Substantial penalties may apply for failure
to file returns correctly or by the due date.
This includes:
A. Failure to file timely;
B. Failure to include all information
required to be shown on the return;
C. Including incorrect information on the
return, for example, incorrect Taxpayer
identification number;
D. Filing on paper when you were
required to file electronically.

11. 11
financial services
Penalties
• The amount of penalty is based on when you file
file the corrected return:
A. $50/return if you file correctly within 30
days of the due date – maximum
$500,000/year.
B. $100/return if you file corrected returns more
than 30 days after the due date but
before August 1 – maximum
$1,500,000/year.
C. $250/per return after August 1 – maximum
$3,000,000/year.

12. 12
financial services
Penalties
• You may also be assessed a penalty for failure to
file correct information returns to the recipient.
The penalties apply for:
A. Failure to furnish the statement to the
recipient by the due date.
B. Failure to include correct information,
or all information required on the return.
• Intentional disregard – if any failure is due to the
intentional disregard of the filing requirements, the
penalty is at least $500/return with no maximum.

13. 13
financial services
Penalties
• Penalties may be waived or abated if “reasonable
cause” can be demonstrated by the filer.
Examples of reasonable cause are:
A. An event beyond the filer’s control, i.e.,
the recipient provided incorrect
information;
B. The failure was due to significant
mitigating factors, i.e., system issues,
etc. However, you must show that you
acted in a responsible manner and took
steps to avoid the failure(s).

14. 14
financial services
Foreign Account Tax Compliance Act (FATCA)
• FATCA was added as part of the Hiring Incentives to
Restore Employment Act (HIRE) in 2010.
• Final regulations on FATCA were issued in Feb. 2014.
• Key objectives and requirements:
A. Reduce tax evasion by U.S. persons holding assets
in foreign financial institutions (FFIs).
B. Requires FFIs to identify and report on U.S.
accounts held in their institution.
C. Imposes a 30% withholding tax on FDAP income
paid by U.S. institutions to FFIs that fail to comply
with FATCA.

15. 15
financial services
FATCA
• In order to enhance compliance by FFIs, an
FFI is required to register on an IRS
database or enter into an inter-governmental
agreement (IGA) with the IRS.
• Burden on U.S. financial institutions:
A. Requires reviewing the IRS FFI database
before making payments of FDAP income
to FFIs.
B. Requires certification of an FFI’s status.
C. Must withhold 30% withholding on
income payments to non-compliant FFIs.

16. 16
financial services
FATCA
• FATCA also imposes additional burden on
identifying non-financial foreign entities
(NFFEs).
• An NFFE is a foreign entity that is not an FFI, i.e.,
foreign companies, etc.
• NFFEs are required to disclose whether or not
they have substantial U.S. owners. A substantial
U.S. owner means a U.S. person that has a 10%
direct or indirect stake in the foreign entity.

17. 17
financial services
FATCA
• As a result of FATCA, the IRS has added
new form W-8BEN-E to the W-8 family of
forms.
• Form W-8BEN-E must be completed by
FFIs and NFFEs to certify their FATCA
status.
• Form W-8BEN-E is 8 pages in length and
has 32 FATCA categories.

18. 18
financial services
FATCA
• Due to FATCA, the IRS has modified Form
W-8-BEN.
• Form W-8BEN is now used solely by
individuals to certify their foreign status.
• Specific changes require the foreign person
to provide his/her foreign taxpayer number, or
date of birth if the individual’s country of
residence does not provide foreign tax I.D.
numbers.
• Latest form updates may be found under the
forms and publications tab at www.irs.gov.

19. 19
financial services
Other Key Changes to Reporting Requirements
Another key change to note involves reporting
deposit interest on accounts owned by foreign
persons.
• Prior to 2012, reporting deposit interest was
only required to residents/citizens of Canada.
• Several subsequent Revenue Procedures
have expanded the reporting requirement.
The latest Rev. Proc., 2016-18 lists 37
countries in which reporting is required on
Form 1042-S using income code 29 and
exemption code 02.

20. 20
financial services
Contact
Wayne Boody | Senior Manager
Dixon Hughes Goodman LLP
wayne.boody@dhgllp.com
202.212.5322

21. 21
financial services
Sales & Use Tax
Considerations for Financial
Institutions
Tony Buffkin, Director
DHG Tax Advisory

22. 22
financial services
Why Should I Be Concerned
with Sales & Use Tax?

23. 23
financial services
Responsible Parties
• Who are responsible persons?
• Typically, tax law imposes personal responsibility for payment of
sales or use tax on certain owners, officers, directors,
employees, partners or members (together, responsible persons)
of a business that has an outstanding sales or use tax liability.
– Being personally liable means that your personal assets could be
taken by the tax department to satisfy the sales tax liability of your
business.
• You may be held personally responsible even if you have an
employee or an accountant handle your sales tax matters.
• In addition, you may be held personally responsible even though
your business is a corporation or a limited liability company.

24. 24
financial services
NCGS § 105-242.2 Personal Liability
• Responsible person is defined to include any of the following:
president, treasurer, chief financial officer or other officer of a
corporation
• Responsible person liability for:
– all sales and use taxes collected by the business entity upon its
taxable transactions;
– all sales and use taxes due upon taxable transactions of the
business entity that it failed to collect but only if the person knew
or in the exercise of reasonable care, should have known that the
tax was not being collected;
– all taxes due from the business entity under Articles 36C and 36D,
as specified, and all taxes payable under those articles by it to a
supplier for remittance to North Carolina or another state; and
– all income taxes required to be withheld by the business entity.

25. 25
financial services
Some Key Sales & Use Tax
Issues to Watch

26. 26
financial services
What Is Changing?
• Law changes to broaden the tax base
– States are taxing more services (ex., RMI
services in NC)
– SaaS and related software services
• Increased M&A activity
• More state audit activity

27. 27
financial services
Some Services Could Trigger Sales Tax
• Banks may have legal entities that provide “back office”
services to related affiliates or external customers
– Automated Valuations, Income Tax Verifications, Pre-Foreclosure
Title Reports and Flood Certificates are taxable in a number of
states as information services or data processing services.
– Various credit related services and products may be taxed as credit
reporting services, information services or investigative services
depending on the taxing jurisdiction.
– A mortgage company may offer software hosted by a third party
application provider to simulate debt implications to a consumer.
This software could be taxable as Software as a Service.
• Even though related entities may be disregarded for income
tax purposes, that is generally not the case for sales & use
tax
– States could consider charges for those services, even if they are
only accounting entries, to constitute a sale of services.

28. 28
financial services
Common Use Tax Issues
• Purchases of software – canned software,
SaaS, software maintenance agreements
– Seller may not have nexus
• Promotional and marketing materials
• Signage
– Is it considered to be real property or tangible
personal property?
• Equipment maintenance and service
contracts

29. 29
financial services
M&A Issues

30. 30
financial services
Due Diligence
• In any acquisitive transaction, tax due
diligence should be performed covering
sales and use tax
• From a sales and use tax perspective,
what should be reviewed in the context of
due diligence?
– Historical sales & use tax filings
– Outcomes of past audits
– Sales & use tax policies, including those
related to AP review for use tax

31. 31
financial services
Successor Liability
• In a stock acquisitions the acquirer inherits all the
liabilities of the acquired entity – including sales and use
tax liabilities
• In an asset sale, sales or use tax can transfer to the
purchaser
– Not just for the tax on assets purchased but:
» For tax the was collected and not remitted; or
» For other taxable transactions where for instance
the wrong rate was used; or
» Other error

32. 32
financial services
Certificate or Letter of Clearance
• When negating an acquisition transaction, the
purchase documents should require the escrowing
of a portion of the purchase price until a sales & use
tax clearance letter is obtained by the seller in each
state in which they operate
– The withheld amount should be sufficient to
incent the seller to expedite the process
» Some states require that a certain amount be
withheld by the buyer
– Note: states can be slow in issuing letters of
clearance; it is a cumbersome process

33. 33
financial services
Asset Purchases – What is Subject to Sales Tax?
• Typically, when making an asset purchase in a
dealership context some of the assets may be
subject to sales or use tax
– Intangibles, such as goodwill is typically not subject
to tax;
– Inventory can be purchased tax free by extending
properly executed resale certificate
– Fixed assets are typically subject to sales or use tax
– Real property may be subject to real property transfer
taxes or recordation taxes
– Vehicles, including motor vehicles and airplanes,
typically, are excluded from the occasional sale
exemption

34. 34
financial services
How to Protect the Purchaser
• It is not uncommon for purchasers to opt out of the
notification requirements and rely on the seller's
representation that it has complied with all of its
sales & use tax obligations.
• In such cases the purchaser should require that the
seller perform a sales & use tax review prior to the
acquisition to identify any areas of exposure.
• The most common issues to address:
– Failure to collect and remit sales tax
– Failure to accrue and pay use tax on purchases
– Taxability determinations
– Nexus in states where they have not filed

35. 35
financial services
Protection in the Purchase Agreement
• Once issues are identified, the seller can take corrective
measures to minimize any potential liability for the buyer.
• Voluntary disclosure agreements (VDA) can be obtained
from states where it has nexus but did not collect or
remit sales or use tax.
• If purchasers waive the notification requirement, they
should also require indemnification provisions in the
sales contract. Such as:
– Indemnification by the seller for any unpaid sales and
use tax incurred while the business was operated by
the seller; or
– Escrowing funds.

36. 36
financial services
Contact
Tony Buffkin | Director
Dixon Hughes Goodman LLP
tony.buffkin@dhgllp.com
704.367.7057