This article is meant to provide some transparency to the
FATCA reporting (Foreign Account Tax Compliance Act) process through clarifying how the forms interrelate to the processes on the front end and IRS enforcement on the back end.
FATCA Reporting Background
FATCA is a United States federal law that can be summarized into two general requirements. First, the law requires United States persons (citizens and green card holders), including individuals who live outside the U.S., to report their financial accounts held outside the country. Second, the law requires Foreign Financial Institutions (FFIs) to report to the Internal Revenue Service (IRS) about their U.S. clients.
Congress enacted FATCA to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts and shell corporations, and thus to recoup federal tax revenues. FATCA is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act. FATCA can be found in the Internal Revenue Code (IRC), Chapter 4, Subtitle A, sections 1471-1474 along with the corresponding treasury regulations.
“Accidental Americans“, dual-citizens, and expats need to know the basics about FATCA. In an effort to provide transparency and visibility, I will attempt to show these complex compliance regulations in the simplest possible manner. Please note that I am not giving legal advice and, should you find yourself subject to any of these requirements, I highly recommend enlisting the services of a Federally Authorized Tax Practitioner (FATP) that has a strong background with these issues.
Compliance Forms
The forms used to comply with FATCA have recently changed. There are now three basic forms that are used (Note: there are other forms in play such as W-8ECI, W-8EXP, W-8IMY, but for the purposes of this article we will discuss only these main three).:
- W9
- W8-BEN
- W8-BEN-E
W9 – Applies to Whom?
Form W9 is to be completed and submitted by an individual United States taxpayer, be it an individual, U.S. corporation, partnership, or other entity.
W9 – What Information is Shared?
The information that is shared is your name, address, taxpayer identification number (social security, TIN or EIN), status (i.e., individual, corporation, etc.), FATCA exemption if applicable, and requesting bank’s name and address.
W9 – What Happens After I Submit this Document?
The FFI will conduct TIN matching and issue the appropriate year- end forms to you as the taxpayer. TIN matching allows a payer or authorized agent who is required to file Forms 1099-B, DIV, INT, K, MISC, OID, and/or PATR to match TIN and name combinations with IRS records before submitting the forms to the IRS.
W9 – What Happens If I Refuse to Submit a W9?
There are two basic outcomes that may occur. First, the Foreign Financial Institution (FFI) may close your current existing account or, if you try to open a new account, they may deny the opening. Second, you may be classified as a “recalcitrant account holder.” This means that you will be reported as such to the IRS (which increases the chances of a FATCA audit or examination) and subject to a 30% withholding tax.
W8-BEN – Applies to Whom?
Form W8-BEN applies to individuals who are nonresident aliens of the United States. You will need to fill this form out if:
- You are receiving payment subject to U.S. withholding
- Are a bank account holder at an FFI and/or
- A single owner of a disregarded entity (i.e. the equivalent of a U.S. sole proprietorship)
Please note that with the second requirement, this form will be used very broadly. In essence, any person who holds a bank account at a designated FFI may have to fill out this form regardless of their citizenship or ties to the United States. The FFIs will need these forms to segregate the non-U.S. from the U.S. account holders.
W8-BEN – What Information is Shared?
The information reported is similar to the W9. If you do not have a TIN, you will need to provide your date of birth on line 8 of the form instead. One distinct difference here is that if you fall into requirement (1) or (3) above and you have the ability to claim a tax treaty benefit (avoiding double taxation or lowering your FATCA withholding), this form allows you to enter that information in Part 2.
As a final note, the foreign identification number is the number issued to you by your taxing authority. For example, all citizens and permanent residents of Singapore receive an NRIC card and number. This number would be your foreign identification number on form W-8BEN.
W8-BEN – What Happens After I Submit this Document?
The outcome here is different from the W9. The determination made here is whether there needs to be an amount withheld and how much the amount to withhold should be (taking into consideration treaty benefits, etc.). The ultimate form that is created is Form 1042-S.
W8-BEN – What Happens If I Refuse to Submit a W8-BEN?
The outcome here is the same as with W9; however, the recalcitrant status will mean a 30% withholding only.
W8-BEN-E – Applies to Whom?
A foreign entity (include hybrid and reverse hybrid) should complete the form W8-BEN-E if:
- It receives a payment subject to FATCA withholding
- It receives a payment that is subject to the normal IRS withholding rules and/or
- It maintains an account with an FFI
Similarly to the W8-BEN, there are many foreign entities that will need to complete the W8-BEN-E.
W8-BEN-E – What Information is Shared?
The information requested here is substantial. The form itself is eight pages long and has over 30 parts, some of which are applicable and some not. This is not a “do-it-yourself” form by any means and should always be completed by a tax professional. One item to note is that, if the foreign entity has a “substantial” (meaning more than 10%) U.S. owner, that person’s information must be reported.
W8-BEN-E – What Happens After I Submit this Document?
Very similar to the W8-BEN form, there is a determination as to the amount of withholding for payment.
W8BEN-E – What Happens If I Refuse to Submit a W8-BEN-E?
The outcome here is the same as with W9; however, the recalcitrant status will mean a 30% withholding only.
Steps for the FFI
FFIs must follow certain steps when conducting due diligence processes with obtaining and using these forms. First, they must determine the type of foreign payee. Is the payee an individual or business entity? Do they have a US TIN, foreign TIN, or no TIN?
Second, they must determine the payment type, and when the payment was made. FATCA only applies to FDAP income – fixed or determinable annual or periodical gains, profits, or income. The types of income that fall into this category are interest, including certain original issue discount (OID), dividends, rents, royalties, premiums, annuities, compensation for, or in expectation of, services performed, and substitute payments in a securities lending transaction. The payment type must fall into one of these categories, and must occur during the year in which the reporting is to happen.
Third, the FFI must conduct a withholding analysis. Does the W9, W8, W8-BEN-E form match the IRS database? Are there tax treaty benefits that need to be considered or applied? Are there FATCA exemptions that need to be considered or applied? What corresponding forms need to be prepared and submitted if there is a withholding requirement?
Backup Withholding - CP 2100
The corresponding form filed with the IRS for the W8 series is form 1042. The corresponding form filed with the IRS for the W9 series is the 1099. If the IRS receives these forms and they are incorrect, then a CP 2100 (also known as a B notice) will be issued to the payee indicating that they have 30 days to correct the issue, or be subject to both penalties and backup withholding.
FATCA Reporting Forms
U.S. taxpayers may have a FATCA report filing requirement (IRS Form 8938) and/or FinCEN form 114 (FBAR). There are separate thresholds in regards to foreign financial assets that trigger these filing requirements. The analysis for these requirements is substantial and complex. Therefore, I will not explore this topic here. I can say though that there is matching that occurs between certain forms that needs to be correct or an audit/examination with the IRS will be triggered.
Example:
A single taxpayer living in the United States has interest in a foreign bank account that generated and paid interest. The account has a balance of $65,000. This taxpayer must make sure to properly report the interest on Schedule B of the 1040, notate the foreign account on Schedule B, and report the highest balance of the account as well as account and bank details on both Forms 8938 and FinCEN 114. The IRS will perform a triple or triangle matching on these three forms. The forms should reflect all of the same numbers and information.
Summary
In summary, the compliance with and reporting through the FATCA forms with FATCA is substantially complex. Taxpayers facing these issues should consult with an experienced practitioner to ensure that all items are filled out correctly.
About Five Stone Tax Advisers
Five Stone Tax Advisers has years of experience negotiating directly with the IRS to get the best possible outcome for you. Our International Tax Advisory and Compliance unit has a team of tax attorneys, certified public accountants and enrolled agents that form a single sourced point of contact that will provide services for all the legal, compliance and financial reconstruction aspects of offshore account cases.
