On 15 October 2019, the IRS amended its FATCA FAQs (aimed at Foreign Financial Institutions – FFIs) by adding Q3 to the questions on Reporting. The new Q3 outlines the procedures that FFIs subject to a Model 1 IGA will be subject to in the event that they report accounts with missing or invalid identification numbers (SSNs). This new question is clearly aimed at easing the anxiety of Accidental Americans at the expiry of Notice 2017-46, which allowed FFIs to report date of birth instead of SSN on existing accounts if the FFI was unable to obtain an SSN.
This is significant because there have been many news outlets reporting that a large number of bank accounts (especially in Europe) would be closed at the end of 2019. The problem arises because there are many US citizens who have always lived outside of the US and may not have a Social Security number. Many of these individuals don’t even identify as Americans and don’t understand why they must go through the bureaucratic hassle of obtaining an SSN (not easy if you’re an adult and living outside the US). In September, the IRS made it possible for these individuals to renounce their US citizenship and follow US tax law without obtaining an SSN. However, the cost of renouncing (USD2,350 per person) is prohibitive for many, and the cost of having US tax returns prepared professionally can also be excessive.
The new question reads:
Q3. We are a Model 1 FFI and the TIN relief provided under Notice 2017-46 regarding treatment of pre-existing accounts will expire with the reporting of the 2019 data. Do we need to report all required TINs when we provide 2020 and future tax year data?
The IRS answer includes:
… a reporting Model 1 FFI is not required to immediately close or withhold on accounts that do not contain a TIN beginning January 1, 2020.
The IRS explains that missing or invalid SSNs will generate an IRS notice only after the reporting date for 2020 data (30 Sept 2021). At that point, the IRS will evaluate each situation:
The IRS will not automatically conclude that the absence of a TIN leads to a determination of significant non-compliance. Instead, the IRS will take account of the facts and circumstances leading to the absence of the TIN, such as the reasons why the TIN could not be obtained, whether the FI has adequate procedures in place to obtain TINs and the efforts made by the FI to obtain them.
While the new response does not remove the “nuclear option” of 30% withholding on US source payments, the FFI will have at least 18 months from the notification date to correct the error before the FFI risks being subject to withholding.
This response and its slow and measured approach is likely the result of pressure applied by several European governments in response to what many saw as a looming deadline. However, this is not a solution to the FATCA problem. FATCA still means that huge amounts of data are flowing to the US on accounts belonging to people who may not identify as Americans, and who, after the application of FEIE and FTC, will owe little or no US tax. FATCA also means that outside the US, US citizens are treated differently to their non-US neighbours – their bank accounts are reported to a country they don’t live in. These issues are the basis of current lawsuits in both Canada and the UK (both of these are still raising funds from supporters).