FIRE System Update

The purpose of the following information is to brief non-U.S. withholding agents and, mainly, Qualified Intermediaries (QIs) about the updates to the "IRS Filing Information Returns Electronically (FIRE)" system, as well as the changes to the Transmitter Control Code (TCC) application procedure.

A QI is affected by the changes if they are required to file information returns via FIRE by using their own TCC. Readers of affected QIs will discover that the upgrades and changes made to the FIRE system will have wide-reaching consequences to how QIs will submit information returns to the IRS. Please find some of the proposed solutions, as well as what service PQ Solutions can provide, below.

Although some statements made below apply only to Swiss QIs, most of the content in this information applies to other non-U.S. withholding agents as well.

Background

QIs are required to annually file information returns such as Forms 1042-S or 1099. To do so, the IRS requires QIs and other withholding agents, since January 1, 2014, to file the returns (or have the returns filed on their behalf) electronically via the "Filing Information Returns Electronically (FIRE)" system. The system requires QIs to have their electronic returns submitted by a transmitter, an entity registered on the FIRE system to submit electronic returns to the IRS. To become a transmitter, an entity needs to apply for a so-called "Transmitter Control Code" (TCC).

Up until now, the commonly applied practice was that each QI became a transmitter by applying for a TCC via Form 4419 (Rev. May 2020, now replaced) to subsequently file its own information returns directly on the FIRE system.

In September 2021, the IRS started to revise the TCC application process (Phase 1) and has announced that those changes will, at a later stage, also apply to the filing process (Phase 2). The IRS informed about those changes in July 2021, as well as in June 2022.

Phase-out of Form 4419

Until September 2021, TCCs have been assigned to withholding agents by them filing a Form 4419 with the IRS. Since then, new TCC applications are processed by the new "IR for TCC application system" (IR-TCC, more on this system in the next section), and the Form 4419 has been updated to only allow entities with an existing TCC to use the Form to modify their FIRE account information such as entity name, address, or contact information.

The 2021 Form 4419 will be short-lived, as the IRS has announced that it will be phased out by August 1, 2022. From then on, the IRS will only allow modifications made to existing FIRE registrations via the IR-TCC system. The IRS has therefore recommended that the entities which will continue to use the FIRE system without going through the IR-TCC system and which have updates to report, to file the 2021 Form 4419 before August 1, 2022.

Due to reasons which we will specify below, we expect all QIs to continue using the FIRE system without going through IR-TCC until the last possible moment, which is August 1, 2023. We therefore recommend QIs to log in to FIRE, review the information entered on the system (as informed by us in our newsletter "Information for Users of the FIRE System"), and if there are any changes to report, to use the 2021 Form 4419 to report those changes by August 1, 2022.

Changes to the TCC Application Process (Phase 1)

Readers of QIs that already have a TCC should still read this section as its content becomes relevant in the following section.

In September 2021, the IRS updated the FIRE system to not accept the Form 4419 for TCC applications anymore, and instead started to require TCC applicants to use the new "IR application for TCC" (IR-TCC) system. As of the date of this information, IR-TCC is solely used to assign new TCCs to an entity – the filing process on the separate FIRE system remains unchanged so far.

Contrary to the previous Form 4419 application process, the IR-TCC system increased the security standards significantly, which in turn makes it much more restrictive to access. The IR-TCC system only allows entities to apply for a TCC if they fulfill the following conditions:

1. The entity needs an EIN (Employer Identification Number), a physical location, a business mailing address, and a business phone number.

2. The entity needs to assign a minimum of two natural persons, so-called "Responsible Officials" (RO), which act as officers on behalf of the entity. The system will also require indicating a minimum of two contact persons, which can be the same individuals as the ROs. The role as Responsible Official does not correspond with the QI Responsible Officer, which remains unchanged.

3. Each RO needs to set up a "Secure Access Account" within IR-TCC. This secure access account is a proprietary authentication system used for the IRS services "e-Services for Tax Professionals", "PTIN", and "FIRE" systems. The authentication system is different from "id.me", an authentication system used for other IRS systems.

4. Creating a secure access account has itself significant restrictions. The two RO individuals need to fulfill certain criteria to be able to create an account. The most relevant are:

• 4a. Each RO is required to have a Social Security Number (SSN) or International Tax Identification Number (ITIN). An ITIN is a tax processing number only available for certain nonresident and resident aliens who cannot get a Social Security Number (SSN).

• 4b. The RO is required to let the IRS verify their identity by providing the personal account number from a creditcard, student loan, home mortgage loan, home equity (second mortgage) loan, home equity line of credit (HELOC), or car loan. The IRS will subsequently use that account number to automatically verify the RO’s identity.

Setting up an account for an entity unavoidably requires setting up a secure access account for the two ROs first. This will prove to be the major limitation for non-US entities determined to open an account with IR-TCC. Regarding criteria 4a, the IRS recently confirmed directly to us that using an ITIN for signup will stop working late summer of 2022 as there will be a technical migration to SADI in the backend of the system. Notwithstanding, even if an aspiring RO had an ITIN now, the requirement 4b essentially prevents non-U.S. resident persons gaining access to the system. The IRS uses Experian, a U.S. credit reporting agency, to verify the identity of the person creating a secure access account. Without being a US resident, having a U.S. credit score is virtually impossible. In addition, our experience has shown that even with an ITIN, IR-TCC does not even allow an individual to proceed to the verification step when a non-U.S. address is specified during the account creation process.

To summarize: The nature of the requirements listed above makes it inconceivable for a natural person not resident in the U.S. to create a secure access account. Without the possibility to create a secure access account, an individual cannot initiate a TCC application for an entity. Therefore, QIs that do not have a TCC and that do not have at least two employees or officers that are resident in the U.S., will not be able to gain access to IR-TCC and thus not be able to apply for a TCC.

Changes to the Filing Process (Phase 2)

So far, IR-TCC is only used to apply for a TCC, which does not present a limitation for many established QIs that have requested a TCC before September 2021 ("existing TCC holders"). However, the IRS announced to extend the use of IR-TCC by updating the FIRE system to require existing TCC holders to also go through IR-TCC to file information returns. Although the linked IRS webpage states that the timeline of Phase 2 is yet to be determined, on June 16, 2022, the IRS informed via newsletter that between September 2022 and August 1, 2023, existing TCC holders will be required to complete and submit the IR-TCC application as well. To do so, existing TCC holders will go through the same registration process described above for Phase 1 and their ROs must therefore fulfill the same requirements. The IRS noted that it will ensure that the previous TCCs will be automatically added to the IR-TCC application once the application is completed by an existing TCC holder.

The IRS has confirmed that by August 1, 2023, every existing TCC holder must complete the new IR-TCC Application process to continue to file electronically and retain the use of the current TCC. While retaining the current TCC will only be of minor importance, not being able to act as a transmitter anymore is a big concern for most QIs.

To summarize: The restrictions to IR-TCC listed above in Phase 1 mean that QIs that had a TCC before September 2021 but that do not have at least two employees or officers that are resident in the U.S., will, starting August 1, 2023, not be able to open an account with IR-TCC. Therefore, from that date on, QIs that are existing TCC holders that cannot create a Secure Access Account, will lose their TCC, will not be able to act as a transmitter anymore and will therefore not be able to submit information returns to the IRS with their own TCC anymore.

Evaluation and Possible Solutions

Since September 2021, some QIs that do not have a TCC filed information returns in paper form, notwithstanding the limitations set by the IRS, as this was the only possibility for them to file returns at all. We have seen leniency and understanding from the IRS in this regard, as, to our knowledge, no penalties have been imposed so far, but we would like to emphasize that this was and is no viable long-term alternative. Since 2014, filing information returns electronically is mandatory for all withholding agents and there is an active effort from the IRS to even increase electronic filing requirements in the future (such as, for example, the Form 1042).

Therefore, QIs must continue to file electronically. To do so, because of the limitations outlined above, most QIs and other non-U.S. withholding agents will not be able to act as transmitter anymore. We and many other affected first and third parties have made the IRS aware of this fact and have been continuing to highlight to the IRS how limiting IR-TCC is for non-U.S. filers and transmitters. The IRS has been listening to the comments they received, but there have been no signs yet that there will be any changes to the requirements to gain access to IR-TCC. So far, the only solution presented by the IRS is their March 3, 2022 addition of question 17 on the IR-TCC Frequently Asked Questions website, where the IRS states that " Customers who cannot authenticate through Secure Access are provided with the option to enlist a third party to file on their behalf".

This would mean that QIs would first send the information returns to a third-party transmitter (TPT) capable of registering with IR-TCC, who in turn transmits the information returns on behalf of the QI to the IRS.

For many QIs, this is not a satisfactory solution for, among others, the following reasons:

• The information returns contain sensitive information which is problematic for data security, data protection and banking secrecy reasons. The TPT must therefore adhere to locally approved security standards.

• The TPT may not be physically located in the country of the QI, which raises legal questions. In Switzerland, for example, QIs need a specific approval from the Federal Department of Finance to transmit sensitive information across the border. In Switzerland, transmitting information to parties outside of Switzerland may also be penalized according to Art. 271 of the Swiss Penal Code.

• The QI would delegate tax filing procedures outside of the entity, which would require the QI to set up extensive procedures to ensure control and oversight.

For some of these reasons, even members of bigger banking groups with subsidiaries or head offices in the U.S. may have trouble filing their returns via their U.S. entity, as they may not possess the necessary permissions to transfer sensitive information within the group.

For Swiss QIs, receiving a letter from the Swiss government which would relieve them potential penalties or liabilities under Art. 271 of the Swiss Penal Code would be highly beneficial, because it would allow Swiss QIs to use a non-Swiss TPT to file their information returns. We have reached out to advocacy groups in Switzerland to discuss the possibility of such a letter.

In addition, we, PQ Solutions, have been recently approved by IR-TCC which would allow us to act as TPT for QIs and other withholding agents. We are currently undergoing extensive testing of a potential transmitter service which we hope to provide to our clients. Once complete, we, as Swiss-based TPT, would be capable to file the information returns on behalf of our clients, which would alleviate at least some of the concerns they may have when engaging a U.S.-based TPT. Please feel free to contact us if you are interested. We will also notify you in a separate information soon regarding this service.

Final Comments

We appreciate the efforts the IRS has made to improve the security standards of FIRE and other platforms. FIRE is a system used by millions of filers which is why it is important that the IRS continues to increase authentication, data protection and data security standards. We also understand that the FIRE system is mostly used by U.S.-based filers and transmitters, which is why the IRS may have not paid sufficient attention to the (comparatively small number of) filers that are not domestic. Unfortunately, the solutions presented by the IRS for these entities are not practical.

We do not expect the IRS to change IR-TCC in the near future. We have had the chance to see and experience the system in the past few months and it is sophisticated. We expect that changing or extending the authentication methods chosen by the IRS would be a years-long process, should the IRS even be willing to consider any changes.

Regrettably, the third-party-transmitter solution presented by the IRS is currently the only viable option, however unsatisfactory it may be.

We will continue to inform on this topic in the future if there are any updates.