By Robyn Guilliams
Yes, just when you thought you had mastered the IRS’s procedures for obtaining a Central Withholding Agreement (“CWA”), the IRS has changed the requirements. Is this just another bureaucratic effort to frustrate the arts community? Not entirely. It just seems that way.
Apparently, the IRS has discovered certain “loopholes” in their prior procedures for obtaining a CWA that permitted artists, agents and managers to submit budgets that artificially lowered the taxable income of a foreign artist or tour. Whether or not you were aware of such loopholes, it is now too late. The IRS is tightening up their CWA requirements in order to close these loopholes. Most of the changes address the degree of detail that you will now need to provide with regard to your budget and expenses. While some of these changes were put in place earlier this year, others were instituted only recently. In neither event were these changes accompanied by any official announcement or warning. However, we have now been able to confirm the following new IRS requirements:
1) The IRS now requires that all individual performers be listed on a CWA request. For instance, if an individual who performs with back-up musicians, dancers, etc. wants to obtain a CWA, all of the back-up performers must now be included on the request. (In the past, an individual artist could apply for a CWA without having to list the accompanying performers being paid by that artist.)
2) Because the IRS is scrutinizing artist budgets much more closely than in the past, the IRS is now requiring as much detail as possible when you submit your budget with your CWA. Otherwise, the IRS will contact you to request more detail after you’ve submitted your budget. (These requests can result in much communication back-and-forth between you and the IRS, causing unnecessary delay in the process!) Examples of such detail include…
> Expenses for non-performing personnel (e.g., tour manager, technical crew, etc.): The IRS is now asking for the names of all non-performing personnel touring with the artist, the amount each non-performing individual is earning on the tour, as well as each non-performing individual’s country of citizenship and residence. If any of the non-performing personnel are non-US residents, 30% withholding will be required on the payments to these individuals UNLESS the individual a) resides in a country with which the U.S. has a tax treaty; and b) submits a valid IRS Form 8233 to the IRS to claim an exemption from withholding. NOTE: For the Form 8233 to be valid, it must include the individual’s U.S. tax identification number. If the individual does not have a U.S. tax ID number (i.e., this is his or her first time working in the U.S.), there can be no exemption from withholding. If you are the withholding agent, the IRS will require you to show proof that taxes were withheld when you submit your final accounting.
***Because IRS Form 8233 works differently for performing artists and non-performing artists, here’s a quick review regarding IRS Form 8233: This form is used to claim an exemption from withholding on compensation earned by a foreign independent contractor. The “exemption” is, in most cases, based on a tax treaty. Most, but not all, treaties treat compensation earned by performing artists differently than that earned by non-performing artists. These treaties put a cap on the amount an individual performing artist may earn tax-free in the U.S. For example, the U.S./U.K. tax treaty permits a performing artist who is a resident of the U.K. to earn up to $20,000 tax free. However, if an artist earns more than $20,000, the entire amount earned is subject to U.S. tax. As discussed in detail on the Artists from Abroad website (www.artistsfromabroad.org), the exemption available to performing artists is usually inapplicable at the withholding stage. It would apply only to claim a refund from withholding when the artist files his or her US tax refund. (This is because it’s impossible for the person paying the performing artist to know whether or not the performer will be over or under the cap at the end of the tax year.) By contrast, tax treaties rarely impose the type of cap referenced above on independent contractors who are non-performing artists. If a non-performing artist otherwise qualifies for an exemption, the non-performer’s entire U.S. income is usually exempt from tax in the U.S. For this reason, these individuals may submit Form 8233 at the withholding stage to claim the treaty exemption from tax and avoid any withholding.
>All Sources Of Income: If any of the performance contracts provide for contingent fees, box office splits, or back-end fees (i.e., a bonus or percentage of the gross ticket sales after a certain number of tickets are sold), the IRS will expect these additional fees to be included in your budget. Claiming that “we never make the overages” or "its impossible to predict" usually will not be accepted by the IRS. Also, be sure to include estimated figures for merchandising (e.g., t-shirt sales, CD/DVD sales, etc.) as well as for sponsorship or tour support, if any.
>Hotel Accommodations: You will not only have to show your costs for hotel or other accommodations, but you will have to show how those numbers were calculated. How many rooms? For which nights on the tour? For those of you hoping that, based on past experience, the IRS won’t take the time to go through each contract to count how many nights/rooms of hotel are being provided by the venues – au contraire! This has now become their standard operating procedure.
>Travel expenses: Again – detail, detail, detail. How many flights are included in your budgeted cost? From and to which cities is the tour party flying? If a number is budgeted for a motorcoach, on what legs of the tour will it be used, and how is the cost calculated (i.e., by the mile or by the day)?
>Backline: If there is a significant number in the budget for backline, what does this number cover? Note that while you can deduct rentals, you cannot deduct purchases. Also, note that if the performance contract provides that “house sound and lights will be provided,” the IRS will not let the artist deduct any additional costs for sound and lights provided by the artist. On several occasions I’ve argued with the IRS that house sound and lights are sometimes inadequate for our client’s needs and sometimes we don't know this until we arrive at the venue. The IRS does not accept this argument. Thus, if you know in advance that the artist is not going to use house sound and/or lights, or will be providing additional sound and/or lights at the artist's expense, this needs to be reflected in the engagement contract.
3) If there is a loss on the tour, the IRS now requires a letter to the IRS, signed by the artist, stating who is absorbing the loss. (Is the artist bearing the loss? The artist's record company? Perhaps the loss is being made up on the Canadian portion of the tour?) The artist must provide an explanation.
4) If you are an agent, manager, promoter, producer, or some other third party who is requesting a CWA on behalf of an artist, and you’ve submitted a Form 8821 authorizing you to communicate with the IRS on behalf of the artist, you are no longer permitted to sign the cover letter accompanying the CWA request. The IRS now requires that such letter be signed by each artist requesting a CWA. The reason is that the cover letter must include language certifying “under penalties of perjury” that the information submitted in the request is true and accurate. (see the instructions for requesting a CWA, IRS Form 13930.) The artist must also now sign the CWA itself.
5) As in the past, an artist must be “in compliance” with the IRS to qualify for a CWA. This means that each individual artist must file a tax return for every year in which he or she worked in the U.S., even if no tax was due. While the IRS used to look back no more than three years or so to determine if an artist was compliant in filing U.S. tax returns, the IRS is now looking back as many as six or seven years to see if past returns have been filed!
6) With regard to per diems, the new IRS procedures allow artists to claim only 50% of their per diem as a deduction – the other 50% is considered income to the artists. Lest you think you can simply double the amount of the per diem for CWA purposes, the amount of per diem is limited by the current government per diem rate, which varies from city to city. The current rates may be found here: http://www.gsa.gov/portal/category/21287. For instance, the current meal per diem rate for Manhattan is $71. Therefore, the most that you can deduct as a per diem expense per individual is $35.50. Anything above that amount will be considered income to the person receiving the per diem and cannot be deducted from gross income.
7) If an artist has performed in the U.S. earlier in the calendar year, the IRS is now requiring that the artist provide each date and venue for the earlier performances, the gross revenues for each date, and any taxes that were withheld. The IRS will add the gross income from the earlier performances to the income on the upcoming U.S. tour – and also take into consideration any withholding from the earlier performances – to calculate the amount of withholding necessary to cover the artist’s taxes.
Here are a few additional reminders and tips:
- The IRS has designated a new mailing address for CWA requests. It is:
Central Withholding Agreement Program
Internal Revenue Service
3651 S. I H 35, Stop 4302 AUSC
Austin, TX 78741
To avoid delays, do NOT send your CWA request to the old address in Nevada!
- Be sure to respond to any IRS questions about your CWA request in a timely manner! If the IRS asks for additional information, and they don’t hear back from you within a certain time frame, your CWA request may be denied, and letters will be sent to each venue on your artist’s tour directing the venue to withholding 30% of the gross performance fee.
- Regardless of your level of frustration, always be nice when dealing with the IRS! They have all of the power, and you have none. Remember that the IRS regards the CWA as a privilege, not a right, and if your request is denied, there is no appeal process. Besides, in my experience, it’s usually much easier to give the IRS what they are asking for rather than arguing with them about why they don’t need it, why the information and paperwork is burdensome, and why foreign artists are no longer willing to tour the U.S. Having said that, I must also note that all of the IRS agents I have dealt with in the CWA division have been friendly and helpful when presented with calm and reasonable questions and comments and you express a willingness to comply. Also, bear in mind that IRS agents can and will be inconsistent in their application of the rules for obtaining a CWA. This is partly because they are themselves trying to figure out the new rules and requirements.
- Bookmark the following websites for future reference:
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.
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.
www.IRS.gov. The Internal Revenue Service's website 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").
