Tuesday, March 1, 2011

IRS Steps Up Enforcement of Foreign Artist Tax Withholding!

FTM Arts Law is receiving an increasing number of reports from artists, managers, agents and presenters that the Internal Revenue Service is contacting presenters and venues where non-resident foreign artists are scheduled to perform and directing them to withhold 30% of the artists’ gross fee.

The IRS is sending out letters called Directed Withholding Letters (“DWLs”) and they have serious implications. Unless a foreign artist qualifies for an exemption from tax withholding, or enters into a Central Withholding Agreement (“CWA”) with the IRS, then 30% of the artist’s gross fee must be withheld. (Note that not all exemptions from taxation entitle an artist to an exemption from withholding!) Those who represent or present foreign artists in the U.S. and who continue to choose not to address tax issues are taking an enormous risk.

Why is this happening? How is this happening?

Until recently, the IRS did not actively pursue non-resident artists for U.S. taxes. This led to lax attention to, and even complete disregard of, applicable tax obligations. However, the IRS is now using the internet to search for, find, and aggressively pursue nonresident artists who will be touring the U.S. The IRS finds the touring non-resident artist on the internet and then sends out DWLs to all presenters and venues on that artist’s U.S. tour. Unfortunately, in many cases, these letters are being sent to presenters and venues much too late for the artist to obtain a Central Withholding Agreement and, therefore, the artist is stuck with the 30% withholding—even where the artist has previously been able to avoid withholding by providing presenters and venues with a W-8BEN!

To make matters worse...
To make matters worse, it appears as if the IRS very recently has revised its rules for obtaining a CWA and now is examining CWA requests much more closely.

Among the new procedures:
  • Budgets are being more closely scrutinized, and artists are required to provide much more detail than in the past. For instance, if an artist's budget shows a cost of $10,000 for airfares, the IRS will require detailed information as to how the $10,000 was computed, i.e., exactly how many airfares are included, what is the origination and destination point of each ticket, etc. If a budget includes a cost of $5,000 for hotel, the IRS will require information on how many rooms this figure covers, and in what cities.
  • Even more importantly, the IRS now requires an artist requesting a CWA to identify, by name and country of residence, each member of the artist’s touring party, including each performer who will be performing with the artist. Each performer touring with the artist must be in compliance with their U.S. tax returns. If any performer is not in compliance with their U.S. tax returns, the IRS will direct that 30% of that person's income must be withheld for U.S. taxes.
Its time to abandon long-cherished myths!
The IRS's history of non-enforcement led many artists, agents, managers and presenters into a false sense of security that there were exemptions, actions, or forms that would automatically exempt an artist from withholding or tax – as well as exempt the presenter from the withholding requirements. While these beliefs may have worked in the days of a less-vigilant IRS, this is no longer the case.
Here are the two most common myths:
  • The most enduring misconception is that the W-8BEN form is an easy cure-all for U.S. tax issues, including tax withholding. FTM Arts Law is being contacted more and more frequently by frustrated managers and agents who are accustomed to avoiding all withholding by issuing a W-8BEN form to each venue or presenter. Many venues and presenters – particularly those receiving DWLs – will no longer accept this form to exempt the artist from tax withholding. In fact, the W-8BEN is applicable only in very limited circumstances. For a W-8BEN to be applicable, the foreign group or company cannot be owned by the artists themselves. This excludes almost all quartets, bands, or any ensemble where the artists in any way split the profits. In most situations, such groups, even if they are legitimately incorporated entities in their home countries, must obtain a CWA, or the presenters will be required to withhold 30%. And a W-8BEN is never applicable for an individual artist, even if he/she has formed his/her own corporation. Which brings us to...
  • The second most popular misconception, which is perpetuated by U.S. accountants unfamiliar with taxation issues for nonresidents, is that a foreign artist may avoid U.S. taxation and withholding altogether by forming a U.S. corporation. As an example, we currently are working to resolve the tax quagmires of several foreign artists who had set up U.S. corporations through which all of their U.S. tour income and expenses would flow. In most cases, this plan will NOT avoid U.S. taxes – it will only cause the artist to incur late filing and payment penalties, interest, and unnecessary accountant fees. Most tax treaties provide that income paid to a foreign performing artist through a corporation (U.S. or otherwise) is attributable to the artist individually, and not to the corporation. Our clients - who believed they were in compliance with U.S. tax law under their accountants' plan - are now paying the consequences. One artist in particular has been advised by the IRS that he must file past individual U.S. tax returns going back seven years before the artist will be eligible for a CWA!
Forewarned is Forearmed!
Don't panic! Be proactive! There are several steps that foreign artists and their managers and agents can take toward compliance with U.S. tax law:

1). Be realistic. If the presenters or venues on a nonresident artist’s tour have received DWLs,and it’s too late to obtain a CWA, accept the fact that the artist will be subject to 30% withholding. When the artist files his U.S. tax return, he may claim deductions and exemptions to offset income, or claim the benefits of a tax treaty, and likely receive a refund of part or all of the withheld tax.

2) Plan ahead. Foreign artists and their agents and managers must address tax planning (along with visas and work authorization!) when planning U.S. tour, not after. Determine at the outset if the artist is eligible for a CWA, and if not, what steps must be taken to make the artist eligible (e.g., filing past U.S. tax returns.) If applicable, factor taxes into the engagement fees and budget. If these issues are not addressed at the planning stage, the IRS's current enforcement efforts can impose an insurmountable barrier to a successful U.S. tour.

3) Educate yourself:
  • There is a wealth of information on www.ArtistsFromAbroad.org. This website, sponsored by the League of American Orchestras and the Association of Performing Arts Presenters, is regularly updated by FTM Arts Law. The site includes a multitude of information on visa and tax issues for foreign artists, including what artists are eligible for a W-8BEN tax exemption, and how to obtain a CWA. However, if you find the volume of information on this site a bit overwhelming, you might first…
  • Go to www.FTMArtsLaw-pc.com. Our website contains additional free information and resources that simplify the legal issues involved in U.S. tours of foreign artists - including a foreign artist taxation memorandum which summarizes the information contained in the Artists from Abroad website. (Its also a good resource to print out and provide to anyone who thinks you're making this stuff up!)
  • Go to www.IRS.gov. The Internal Revenue Service's website, though not known for its depth of wit and good humor, is a valuable source of information that includes complete tax treaties, and forms and publications that offer guidance as to both withholding and taxation. Publications relevant to taxation of foreign guest artists are Publication 515 ("Withholding of Tax on Nonresident Aliens and Foreign Entities"); Publication 519 ("U.S. Tax Guide for Aliens") and Publication 901 ("U.S. Tax Treaties").
4) Don't be afraid to ask for help. There are times when you can self medicate and other times when you really need to see a doctor before you get worse!

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