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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28082
Experience:  Taxes, Immigration, Labor Relations
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Hello. Im an Australian business, located solely in Australia.

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Hello. I'm an Australian business, located solely in Australia.

I'm selling a digital product in the US by an online retailer. The US retailer takes a royalty on sales.

To do this, I registered for an EIN and received it. This was to avoid the US company withholding tax.

I then received a letter from IRS stating I need to file a tax return for the past 2 years and a Form 1065.

Do I need to do these things? What can I do or change to *not* have to do these things?

Lev :

Hi and welcome to our site!

Customer:

Hello there

Lev :

Please clarify - when you wrote "I registered for an EIN and received it" - did you register an US entity or you received EIN for a foreign entity?.

Customer:

I received an EIN as a foreign entity.

Lev :

Thanks for clarification. And your foreign entity is a corporation or a partnership?

Customer:

It's a corporation. Limitied liability in Australia.

Customer:

(ie, proprietary limited)

Lev :

Then - I am not clear why the IRS send you a form 1065...
As a foreign corporation - you need to file form 1022F - http://www.irs.gov/pub/irs-pdf/f1120f.pdf

Lev :

However - the issue is different - because you registered with the IRS - you are considered an US located entity - and the payer reported your income as taxable in the US. In additional - because you represented yourself as an US entity - there were no mandatory withholding.
The IRS received information that your entity received income - thus your tax return was expenses - but because the IRS did not received your tax return - you were sent a letter.
That is my assessment of your situation.

Customer:

That's quite strange because I haven't earned any income via the US just yet.

Customer:

Also, the letter I received seemed to be just a standard letter information me about the EIN.

It was titled "WE ASSIGNED YOU AN EMPLOYER IDENTIFICATION NUMBER". It then mentioned that I need to file form 1065.

Lev :

Yes - that is strange. It looks as the EIN was provided for the US LLC with several members.
The form 1065 is the tax return for the partnership. Genberally - the LLC with several members is treated as a partnership.
I suspect that when the EIN was assigned - not all information was correct - and suggest to contact the IRS and verify.

Customer:

Ok, thanks. I'll contact them and try and sort it out. The EIN application was filled out over the phone by a representative, so perhaps something was lost in translation.

Lev :

That is most likely. However - if your entity applied for EIN - that means -at the time the application was provided - you gave the purpose - most likely - you stated that you are doing business in the US as a purpose. That also might be a reason the IRS asking for the tax return.

Customer:

Very bizarre. I specifically stated what I was doing to the rep. Hopefully this is something that can be sorted out over the phone.

Lev :

The next step woudl be to determine if your income is considered from US sources.
There are some complex rules to determine the source of income. You may take a look - page 12 IRS publication 519 - http://www.irs.gov/pub/irs-pdf/p519.pdf - Table 2-1. Summary of Source Rules for Income of Nonresident Aliens.
If that is income from US sources - it will be taxable in the US and will be subject of withholding. The purpose of withholding - to cover your possible tax liability. Your tax liability is determined when you prepare your tax return - and if overpaid - you will be entitled for a refund.
If that is NOT income from US sources - it is NOT subject of neither income taxes nor withholding.

Lev :

You wrote that you are "selling a digital product in the US by an online retailer".
I assume that is the product you produced. In this case see in the table "Sale of inventory—produced" - allocated. That means - if you sell the product to US customers but the product was produced in a foreign country - a part of the income should be allocated as from US sources.
That doesn't not nessasery means you will owe income taxes - but means - you might be required to file the tax return.

Customer:

Yeah, it's a computer game sold internationally, including to customers in the US. The income to me is a royalty payment.

Lev :

Unfortunately the situation is not as simple as we might want....
You might be aware that there is US-Australia tax treaty in effect - which effectively allow your business to avoid US tax liability as long as you do not have any permanent establishment in the US - but the exclusion based on the tax treaty provisions must be claimed on your tax return.

Customer:

Is this because I'm a corporation, not an individual? That would mean all those folks selling games, books and music on US retailers (iTunes etc) would be filing tax returns...?

Lev :

In determination if income is from US sources or not - it doesn't matter if you are an individual or a corporation.
For filing requirements - if the entity is required to file the US tax return or not - rules are different.

Customer:

So to summarise.
First, I contact the IRS and work out why I need to file tax returns and the 1065 form.

Then, assuming it's an error (at least as far as the 1065 is concerned), I should file a tax return as soon as possible.

Lev :

The second issue is based on the reason the IRS will provide. The wild guess is that is because of information provided when EIN was requested.
Based on your information - I think that you do have income from US sources - but may use tax treaty provisions to exclude that income from US tax liability.
If your entity is a foreign corporation - it should file 1120F.
In any case - I suggest to have a qualified tax preparer helping you to sort things out and avoid IRS levies on your income from retailers.

Customer:

Great, thanks for your help. Ah, how to 'accept' this answer? Do I click one of the ratings below?

Lev :

My goal is to provide EXCELLENT service. You 'accept' the answer by rating it.
You are welcome back if you need any clarifications or additional information.

Customer:

Cheers, thanks.

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