Withholding procedures for non resident vs. resident aliens?

[Guest amfam2]

We are researching the withholding requirements for resident aliens. My co worker and I are reviewing the same paragraph in the same IRS publication and are interpreting it in opposite ways. Which is correct interpretation?:

Here is an example:

Alien has retirement account. Alien files W-9 (not W-8) to attest that they are resident alien, but does not provide any additional required information as to eligibility for tax treaty (per IRS Publication 515).

If they were NON resident alien, we are required to w/h 30%. This seems simple enough...

But if they are resident aliens and they fail to provide documentation to support an exemption to any type of withholding due to treaty, should our system default the withholding as if they were any other ordinary US taxpayer (thereby withholding at the 20% rate)? Or should the default be the 30% withholding?

One viewpoint is that a resident alien has a special right under tax law to claim an exemption from withholding due to tax treaty. If a resident alien does not exercise that right, we are to treat the resident alien as if they were an ordinary U.S. taxpayer (i.e. 20% withholding).

Another viewpoint agrees that a resident alien has a special right under tax law, but if they do not exercise their rights under tax treaty, we are to withhold as if they were non resident aliens (i.e. 30% withholding)

Your thoughts?

[Guest b2kates]

Resident aliens are taxed as all residents in the United States. There is no special status difference between resident alien and resident citizen.

The only difference is when there is a NRA, then the treaty or 30% withholding rate. For all residents, assuming they provide you a valid SSN, withholding is at the statutory 20% for lump sums. IRC 3405 ( I believe)

.

just follow the definition, resident versus nonresident is what creates the different treatment.

[Appleby]

Agreed.

The resident alien is treated no differently from the US citizen for withholding purposes. Therefore, if the distribution is rollover eligible, 20% federal tax must be withheld if the distribution is not processed as a direct rollover….Remember that Pub 515 applies to non-resident aliens ---for withholding rules for resident aliens see Form W-4P instead.

Only a non-resident alien may waive the 20 % withholding at which point, he/she will be subject to the treaty rate, providing the requisite documentation is provided.

I am curious about the W-9. Usually these are not provided for retirement plans- only non-retirement accounts; although there is no rule against obtaining it as certification of the TAX ID # as far as I know... Are you requesting it just because the individual resides overseas?

[Guest amfam2]

Thanks to both of you for your reply.

Our company uses a W-9 for all non-retirement & retirement accounts in order to verify tax id #....

thanks again,

jlg