Failure to obtain tax ID number may not be ‘serious non-compliance’, says US IRS

The US Internal Revenue Service (IRS) has told foreign financial institutions (FFIs) that they are not automatically required to close the accounts of US nationals who have not provided their tax identification number by January 2020.

US nationals, especially those living abroad, have become increasingly nervous about provisions of the Foreign Account Tax Compliance Act (FATCA) that take effect next year. These require all FFIs to collect their US clients’ dates of birth and tax identification numbers (TINs), and report them to the IRS. Most major countries have enacted legislation forcing their financial institutions to comply with FATCA.

Under the original guidance, any FFI that fails to comply with the TIN reporting requirement could be considered to be in ‘serious non-compliance’ with FATCA, which would mean having a 30 per cent withholding tax applied to all its returns from its US investments. They therefore have a strong incentive to end their dealings with accountholders who do not provide a US TIN.

Last week, however, the IRS amended its FATCA guidance page to ease the transition period. It says that failure to obtain an accountholder’s US TIN is not necessarily ‘serious non-compliance,’ and does not imply that the client’s account must automatically be closed. Instead, it sets out a procedure for resolving the difficulty, at least in jurisdictions which have a so-called Model 1 FATCA agreement with the US.

Where an FFI in a Model 1 jurisdiction does not have the accountholder’s US TIN, it can continue the existing practice of entering an obviously invalid TIN on the FATCA reporting form. This will generate an error notice when the data is reported to the IRS, some time before 30 September 2021. The FFI will then be granted 120 days to get the TIN and report it.

Failing that, the IRS will ‘determine through a consideration of the facts and circumstances if there is significant non-compliance’, such as the reasons why the TIN could not be obtained, whether the FFI has adequate procedures in place to obtain TINs, and the efforts made by the FFI to obtain them.

Even if the IRS decides that the financial institution is in ‘significant non-compliance’, it will discuss the problem with the foreign jurisdiction’s tax authority over the following 18 months. The institution concerned would therefore have at least 18 months from the date of the notification of non-compliance to correct the missing TIN before the IRS took any other further action.