Many individuals who are neither citizens nor residents of the United States are surprised to find that they are nevertheless subject to U.S. tax rules and regulations on certain transactions. One of the more common instances where this happens is with respect to the so called ―Backup Withholding Rule.

The backup withholding rule is triggered where the U.S. Internal Revenue Service (IRS) suspects that some income may be subject to U.S. taxation and does not have the applicable documentary evidence to support an exemption. The reason for the rule is simple. In the absence of evidence to the contrary, the IRS will assume that income from U.S. activities are subject to tax and will do its best to capture those taxes. There are several types of payments which the IRS has identified as being subject to backup withholding. These are interest, dividends, rents, royalties, commissions, non-employee compensation, and other payments including broker proceeds and barter exchange transactions, reportable gross proceeds paid to attorneys, and, for some reason, certain payments made by fishing boat operators.

There are also certain payments which are excluded from backup withholding. These include real estate transactions, foreclosures and abandonments, cancelled debts, distributions from Archer Medical Savings Accounts (MSAs), long-term care benefits, distributions from any retirement account, distributions from an employee stock ownership plan (ESOP), fish purchases for cash, unemployment compensation, state or local income tax refunds, and qualified tuition program earning.

In many cases, the IRS will issue a refund of backup withholding where no tax liability exists and where the proper filing and reporting obligations have been met. Ultimately, whether or not a refund can be obtained depends on the specific circumstances of each individual taxpayer.

The backup withholding rule is typically triggered because the IRS believes it has insufficient documentation evidencing an exemption. This commonly occurs in three major instances: (i) the IRS does not have a proper taxpayer identification number (TIN) for the person receiving a payment, (ii) Interest and dividend have been underreported, and (iii)"payee" has failed to comply with the proper certification procedures. The process of obtaining a refund for backup withholding will depend on the underlying reasons for the backup withholding rule being triggered.

If you receive correspondence from the IRS or if you have tax questions, don't delay. Your options become limited the more time passes. Visit the Badaki Law Firm today at www.badakilawfirm.com or email badakilawfirm@gmail.com.