Smashwords have updated their information on withholding tax from non U.S. resident writers. It seems aimed at making things as complicated as possible. Smashwords have said they were told you need a signed letter on Smashwords letterheaded paper to attach to a W-7 form. (You tick options a and h and say that you are selling books with a U.S. distributor.) This coincides with one IRS "help" documentation I've read but not another. According to Amazon, all you need to attach is a copy of their terms & conditions, the date you registered your dtp account and links to your books on Amazon. Although the Smashwords method sounds time consuming, it also sounds more legit. I'm not 100% certain but I think you have to accumulate enough payments on Smashwords to cash out before you can apply for the headed letter for free.
Also worth noting that the IRS busy period is coming to an end at the end of April. They have stated they won't look at W-7 forms until May but we're just there. Don't forget the notarised copy of your identification. It can take 8-10 weeks to receive a reply from the IRS assigning you an ITIN. Once you receive this, you can fill out a W8-BEN form with the ITIN and then send this off to Smashwords and Amazon so they are in a position to end withholding. If you don't do any of us then you'll be paying a withholding tax of 30%. Lots of countries have tax treaties with the U.S. - Ireland's treaty provides a 0% tax rate on these earnings. Although Smashwords seem to be making out that it isn't worth your while, it all depends on what you're earning and how much you'll stand to lose.
It is quite a bit of hassle and there is a small chance that Smashwords will work some magic on the IRS and work out some sort of deal but I wouldn't pin my hopes on it. Thankfully, Smashwords are willing to defer payments in order to give people time to sort out the tax issues. I don't think Amazon do this but their payout limit is at a much higher amount than Smashwords because they will only pay overseas authors by cheque.
There are quite a few Irish writers who are self publishing ebooks, not to mention those from the U.K. and beyond. We're all bound to go through this ITIN mess - nobody tells you about that before you start! It would be so much easier if we could supply through a European office that could handle the IRS but until somebody comes up with a reasonably uncomplicated solution, we're all stuck with the above methods. Part of the problem is the relatively new process of self publishing ebooks. There aren't many precedents in place. It's changing things slowly but some things are slower than others.