Under Section 1441 of the Internal Revenue Code, U.S. payors of certain types of income to nonresidents (e.g., U.S. source interest, dividends, and rents) are obligated to withhold tax at 30% (or lower treaty rates) when such income is paid to a nonresident. This assists the IRS in collecting these taxes that might not otherwise be paid by foreign persons by shifting the payment obligation to the U.S. payors.
Since September 29, 2004, the IRS has had a program for U.S. payors that have withholding obligation issues. Under the program, the U.S. withholding agent agrees to identify to the IRS areas in which it isn't in compliance with obligations on payments to foreign persons, pays tax, interest, and any penalties, and implements corrective procedures to ensure future compliance. In turn, the IRS agrees not to impose penalties on underpayments that are due to reasonable cause, and will provide the withholding agent with written acknowledgement that its compliance procedures and policies are acceptable.This program was set to expire on December 31, 2005. However, due to the heavy volume of use, the IRS has now extended the deadline of the program to March 31, 2006. Revenue Procedure 2005-71.