Financial Institutions and their account holders have been dealing with FATCA now for 5 years, and whilst most firms and now comfortable with compliance many still have non-compliant accounts.
What do we mean by non-compliant? Well, leaving aside thresholds which may be applied, essentially any pre-existing entity (as at 30th June 2014) is required to have completed a self-cert and any individual with US Indicia, i.e.:
· U.S. citizenship or lawful permanent resident (green card) status;
· A U.S. birthplace;
· A U.S. residence address or a U.S. correspondence address (including a U.S. P.O. box);
· A U.S. telephone number (regardless of whether such number is the only telephone number associated with the account holder)
· Standing instructions to pay any amounts from the account to an account maintained in the U.S.;
· An “in care of” address or a “hold mail” address that is the sole address with respect to the client; or
· A power of attorney or signatory authority granted to a person with a U.S. address.
Three things happen if an account holder has U.S. indicia – the indicia is cured (for example, a U.S. place of birth can be cured with a self-certification and a certificate of loss of nationality), the account holder provides their U.S. Tax ID, or the account holder is reported as U.S.
If you have non-compliant entities they could still be reported for FATCA purposes as U.S. using a “dummy” TIN (AAAAAAAAA and 000000000 have both been used).
However, Financial Institutions, particularly Qualified Intermediaries, may begin to face a decision of what to do with non-compliant accounts. Reporting a US Person without a TIN for reporting periods after 2019 may be considered significant non-compliance.
In theory, firms have until May 2021 to resolve the issue, but if the firm allows the account to have receive income, or even have a balance, in 2020 and still cannot obtain a form we may have a compliance problem. So, for example, if a dividend is paid in January 2020 the firm will have no option but to report the account, but if the account holder refuses to supply a self cert, or indeed a US TIN, the firm may have significant non-compliance issues and potentially large penalties.
Also, this may cause great anxiety to individuals concerned who may face the prospect of losing access to financial services, or a $2350 bill for renouncing their citizenship – in addition to any outstanding tax issues.
The relevant passage is in IRS Notice 2017-46
“The Treasury Department and the IRS understand that some reporting Model 1 FFIs need additional time to implement practices and procedures to obtain and report required U.S. TINs for preexisting accounts that are U.S. reportable accounts. Accordingly, with respect to reporting on preexisting accounts that are U.S. reportable accounts, for calendar years 2017, 2018, and 2019, the U.S. Competent Authority will not determine that there is significant non-compliance with the obligations…”
If a U.S. Person refuses to supply a TIN the FFI (Foreign Financial Institution) may be obliged to close the account.
However, it is often assumed (often by FFIs!), that if you were born in the USA you are a U.S. person unless you have renounced your citizenship and been supplied with a certificate of loss of nationality (CLN). This may not be the case, especially, for example, if you became a citizen of another jurisdiction prior to June 4th 2004. There may be other avenues for an account to be cured of US indicia. If an account is held by an elderly person, who left to take up UK citizenship many years ago and who never had any intention of returning as a citizen of the U.S. there is a strong chance that the indicia can be cured without a CLN, whether the FFI realises it or not.
This is not intended as tax advice in any way. The rules of expatriation are complicated and not well understood. The rules are generally under section 877 of the IRC, but even the advice given by the IRS website can seem contradictory. For anyone who is unsure of their position the best thing to do is obtain professional U.S. tax advice or contact the Financial Institution to discuss options.