IRS Issues Proposed Regulations Regarding Withholding on Retirement Payments Made Outside U.S.
IRS Notice 87-7 has provided the requirements for withholding on retirement payments for U.S. citizens made from employer-deferred compensation plans, IRAs, and commercial annuities that are requested to be sent to locations outside of the U.S. Much of the proposal mirrors Notice 87-7; however, there are certain changes as well as expansions intended to address open issues under the Notice. Until the regulations are finalized, Notice 87-7 continues to be applicable. The proposed regulations do not apply to the 20% withholding applicable to certain eligible rollover distributions.
Determining withholding requirement
- An Army Post Office (APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO) address will be considered to be an address within the U.S. for these purposes.
- If the payee’s residence address provided to the payer is located within the U.S., the payer must withhold unless the payee has made a valid election of no withholding. However, even where a U.S. residence address is provided, any election of no withholding is not valid if the payee directs that the payment is to be sent to a financial institution or other person located outside of the U.S., or to a financial institution or other person located within the U.S. but with instructions that the financial institution or person is to then forward the funds to a financial institution or other person located outside of the U.S.
- If the payee’s residence address provided to the payer is located outside of the U.S., the payer must withhold without regard to any delivery instructions (e.g., to deliver the payment to a financial institution or other person located within the U.S.) or the payee’s purported election of no withholding.
- If the payee does not provide the payer with a residence address, the payer must withhold without regard to the payee’s purported election of no withholding. For this purpose, a payee who provides the payer with an address for the payee’s nominee, trustee, or agent – without also providing the payee’s residence address – is treated as not having provided a residence address.
- These rules do not apply to payments to nonresident aliens or other foreign persons.
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