SECTION 1. GENERAL

.01 Background . This revenue procedure describes the Voluntary Compliance on Alien Withholding Program (“VCAP”), which is available to certain public and other not-for-profit colleges

and universities, and their charitable affiliates, with respect to the payment, withholding, and reporting of certain taxes due on payments made to alien individuals.

The Internal Revenue Service (“Service”) will begin VCAP as a temporary and experimental program. See sec

tion 6 of this revenue procedure for the effective date and sunset date of VCAP. See section 2 of this revenue procedure for the organizations that are eligible to participate in VCAP (eligible organizations). See section 3 of this revenue procedure for the taxes, including excise

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taxes, and the withholding and reporting obligations covered by VCAP.

.02 Applicable law . The objective of VCAP is to enhance voluntary compliance among public and other not-for-profit colleges and universities, and their affiliated charitable organizations, making payments of wages, grants, scholarships, and other income to alien individuals. Generally, income received by a nonresident alien individual from sources within the United States is subject to tax under § 871(a) of the Internal Revenue Code (“Code”) unless an exception applies. The tax is imposed, generally on the gross amount of income, at a 30-percent rate if the income is not effectively connected with the conduct of a trade or business in the United States or at a 14-percent rate in the case of income from certain scholarships, fellowships and grants. Section 1441 of the Code requires any person who pays income subject to tax under § 871(a) of the Code to a nonresident alien individual to deduct and withhold the 30% (or 14%) tax from the gross amount paid. The rate of tax, and therefore withholding, may be reduced or eliminated under an income tax treaty. A withholding agent may rely on a claim of treaty benefit if the nonresident alien individual has furnished appropriate documentation. See § 1.1441 –6 of the Income Tax Regulations. See also IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations, and IRS Publication 901, U.S. Tax Treaties .

Section 871(b) of the Code imposes a graduated rate of tax on a nonresident alien individual’s income that is effectively connected with the individual’s conduct of a trade or business in the United States. This provision is relevant to income earned for personal services because, under § 864(b) of the Code, the performance of personal services in the United States is considered to be the conduct of a trade or business within the United States. Further, under § 871(c) of the Code, a nonresident alien individual with a specified nonimmigrant status who is a participant in certain exchange or training programs is treated as being engaged in a trade or business within the United States (regardless of whether he is actually so engaged) with regard to income derived in connection with that exchange or training program. A nonresident alien individual’s

effectively connected services income may also be subject to withholding under § 1441 of the Code (or § 3402 of the Code for most income constituting wages). With respect to reporting obligations, a nonresident alien individual’s effectively connected personal services income constituting wages under § 3402 of the Code is subject to wage reporting under chapter 61 of the Code (i.e., on Form 941 and Form W-2), and such individual’s nonwage income is subject to reporting under § 1.1461–1(c)(2) of the Income Tax Regulations (i.e., on Form 1042 and Form 1042–S). Additionally, taxes may be imposed on wages paid to alien individuals under §§ 3101 and 3111 of the Code (social security and Medicare taxes).

.03 Definitions . For purposes of this revenue procedure, the following definitions apply:

(1) The term “alien individual” means an individual who is not a citizen or a national of the United States. See § 1.1–1(c) of the Income Tax Regulations.

(2) The term “resident alien” means an alien individual described in § 7701(b)(1)(A) of the Code.

(3) The term “nonresident alien” means an alien individual described in § 7701(b)(1)(B) of the Code.

.04 Summary of VCAP . Organizations that request consideration under VCAP agree to (1) identify those areas in which they are not in compliance with tax, withholding, and reporting obligations on payments to alien individuals; (2) compute and pay any tax due; and (3) institute procedures and policies which will assure compliance in the future with the organization’s tax, withholding, and reporting obligations. Organizations will receive assurance that their proposed procedures and policies relating to tax, withholding, and reporting obligations applicable to alien individuals are acceptable to the Service, and the Service generally will not impose penalties for identified underpayments or deficiencies, if the liability is due to reasonable cause. See sections 5.02(3) and 5.06 of this revenue procedure.

.05 No waiver of excise tax, FICA, or other tax obligations . VCAP does not waive or reduce any applicable tax and does not alter an employer’s obligations to satisfy any applicable Federal Insurance Contributions Act (FICA) or Federal income tax withholding require

ments with regard to any employee. (However, see §§ 3121(b)(10) and 3121(b)(19) of the Code for certain taxexempt wages.) In addition, VCAP does not affect any other obligations of the taxpayer or the Service that are not within the scope of this revenue procedure or the acknowledgment described in section 5.06 of this revenue procedure. .06 Request for comments . Because of the experimental nature of VCAP, the Service welcomes comments on the format and operation of this program, including suggestions regarding whether the program should be expanded to cover other organizations, such as proprietary colleges and universities and other educational organizations, not listed in section 2 of this revenue procedure, or other types of defects not listed in section 3 of this revenue procedure. The Service also welcomes suggestions regarding possible standardized correction methods for specified defects that could be appropriately addressed under VCAP. Any modifications will be made only by announcements, revenue procedures, notices or other guidance published in the Internal Revenue Bulletin. Comments on VCAP should be mailed to:

Internal Revenue Service Attention: T:EO:RA:T:G (VCAP) 1111 Constitution Avenue, N.W. Washington, D.C. 20224 Comments may also be sent electronically via the Internet to *TE/GE-EO3@irs.gov.