August 8, 2023
IRS updates Form W-9 with new requirement for flow-through entities
The IRS has released an updated draft of Form W-9, Request for Taxpayer Identification Number and Certification, with a new reporting requirement for flow-through entities. The updated form will inform partnerships when direct or indirect foreign partners, owners or beneficiaries are involved in the transaction, which would require reporting on Schedule K-3.
Form W-9 requires taxpayers to furnish their taxpayer identification number (TIN) and federal tax classification to an individual or entity (e.g., bank, fund, partnership) when making payments. While Form W-9 is not filed with the IRS, the entity requesting the Form W-9 is generally required to use the information to file various information returns to the IRS that report amounts paid to a payee, financial relationships maintained and other information. The last time the IRS revised Form W-9 was in October 2018.
New Line 3b
The updated draft includes a new Line 3b for flow-through entities (e.g., partnerships, trusts or estates) that have direct or indirect foreign partners, owners or beneficiaries. Line 3b must be completed by a flow-through entity that is providing a Form W-9 to another flow-through entity to allow the recipient to satisfy the IRS reporting requirements. For example, according to the draft, a partnership that has any indirect foreign partners may be required to complete Form 1065, US Return of Partnership Income, Schedules K-2, Partners' Distributive Share Items — International and K-3, Partner's Share of Income, Deductions, Credits, etc. — International. Schedules K-2 and K-3 are reporting forms of US-international tax relevance that pass-through entities generally must complete, beginning in the 2021 tax year (See Tax Alert 2022-0152).
The draft Form W-9 was released on July 26, 2023, and shows a revision date of October 2023. Once finalized, withholding agents are generally required to accept the current version Form W-9.
The update appears to require a partnership to provide Schedules K-3 with respect to sales of partnership interests even when the partnership has not received notice from the partner selling the interest (the notifying transferor). Treas. Reg. Section 1.864(c)(8)-2 requires that a partnership give a notifying transferor information about any effectively connected gain or income from the hypothetical sale of the partnership's assets if the partnership has knowledge that the transferor is foreign or is a partnership with a foreign partner. A Form W-9 would appear to give the partnership that knowledge even if it does not receive it from the notifying transferor.
The new Line 3b may also result in more notifications by domestic partnerships that divest themselves of interests in other partnerships. Those domestic partnerships would know that they have an indirect foreign partner and would, as a result, be required within 30 days of divestment to notify the lower-tier partnership that the domestic partnership requires the Schedule K-3 information.
In addition, US partnerships may be required to implement mapping procedures to identify when selecting (or de-selecting) Line 3b would be appropriate. For example, a US partnership with all domestic partners that subsequently acquired a foreign partner may require sufficient processes to update its Form W-9 with a withholding agent and select Line 3b.
Separately, substitute Forms W-9 will also be required to be updated so that their content is substantially similar to the official IRS form.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor