Do you have financial accounts or foreign assets overseas? If so, did you know that there is a big deadline looming under the Foreign Account Tax Compliance Act (FATCA)? Foreign institutions are required to obtain IRS Forms W-9/W-8BEN from US clients.
Under FATCA, foreign financial institutions (FFI) must obtain US taxpayer-identification numbers by December 31, 2019, for specific US individuals who have financial accounts abroad. This explains why you may have received a request recently from your foreign banks to confirm your status as a US tax resident or nonresident.
Why are Financial Institutions Required to Obtain IRS Forms W-9/W-8BEN?
For years, US financial institutions have had to send Forms 1099 and 1042-S to both you and the IRS each year to report your income. This enabled the IRS to match what you reported on your tax return with the income that your financial institution said you received. It improved the likelihood that you would report your full taxable income. And it enabled the IRS to follow up with you if you didn’t.
Foreign financial institutions did not have the same requirement to provide information to the IRS. FATCA changed that.
The calendar year 2020 will be the first year that FFIs will be required to formally report foreign financial asset and income information to the IRS for matching against US tax return information (i.e., Form 8938, Schedule B, Schedule D, etc.).
To do so, the FFIs need confirmation from you about whether you are a US tax resident or nonresident. So, they are reaching out to their clients with US ties and requesting that you complete Forms W-9 or W-8BEN (or some equivalent).
What Happens if the Information is Not Provided?
If taxpayer-identification is not provided to the FFI by January 1, 2020, then the FFI has 120 days to obtain the information from the taxpayer and correct it. If, after 120 days, the information has not been corrected, the FFI will forward any information it has on the taxpayer to the IRS for a “facts and circumstances” evaluation. The IRS may then deem the taxpayer “recalcitrant,” which in turn could trigger an audit or examination of their US individual income tax returns and related international informational reports, such as FBARs or 8938s.
Which US Taxpayers are Subject to FATCA Reporting?
The majority of taxpayers subject to FATCA reporting are US tax residents. These include:
- US citizens
- Green cardholders
- Individuals satisfying the “Substantial Presence Test” of residency
These individuals must provide IRS Form W-9 to the requesting FFI.
US taxpayers who have not fully reported their foreign financial assets or income to the IRS should consider using one of the various IRS amnesty programs to come back into compliance before the FATCA exchange of information takes place.
Former US citizens who have renounced their citizenship and were not in full compliance with the IRS before renunciation should consider using the new IRS Relief Procedures for Certain Former Citizens.
Trouble, Too, for G-4 Visa Holders
Although G4 visa holders are typically nonresidents, and thus not subject to FATCA reporting, this FATCA requirement is causing headaches for both G4s and their FFIs.
Why? Because G4s have special tax treatment that is not well understood by FFIs. And the Form W-8BEN was not designed with G4s in mind.
G4 visa holders who are full-time employees of international organizations do not count their days inside the United States for purposes of the Substantial Presence Test. Therefore, even though they are living in the United States, for federal tax purposes, they are taxed as nonresident aliens. This is unusual (from a tax perspective).
The proper course of action for G4s is to list their US resident address (as their mailing address), US taxpayer identification number, and foreign taxpayer identification number on IRS Form W-8BEN. They should not complete Form W-9.
FFIs sometimes become confused when they see that the G4 visa holder lives in the US and provided a US address as their mailing address on the W-8BEN. Usually, individuals who have US mailing addresses and live in the US are tax residents (because they meet the Substantial Presence Test). So, the FFIs may believe that the G-4 has filled out the wrong form and is really a US tax resident who should be completing the Form W-9.
An additional complication is that G4s are not allowed to claim tax treaty benefits on Form W-8BEN because they are nonresidents of both the United States and their home country. FFIs may have a hard time understanding this specific treatment. They may require G4 visa holders to have their tax professional submit a letter or conduct a phone call with the FFI to explain their residency situation and the US tax treatment.