Date expirations, whether it be on a milk carton or for a tax grace period, often will require attention and corresponding action. Financial institutions maintaining accounts in the U.S. for certain non-U.S. customers have been able to rely over the past two years on transitional relief provided in IRS Notice 2017-46 related to the requirement to collect foreign taxpayer identification numbers (FTINs) from such customers. That transitional relief expires at the end of this year and will have its attendant consequences for a withholding agent’s due diligence, withholding and tax reporting functions.
By way of background, IRS tax regulations issued in 2017 generally require a withholding agent, such as a bank or broker, maintaining a U.S.-based financial account for a non-U.S. person to obtain the person’s FTIN (tax identification number issued by customer’s country of residence) and, for individuals, the date of birth. This information is generally obtained through the Form W-8 provided by the account holder. The regulations, in particular, provide that a Form W-8 would generally be invalid for individuals if the date of birth were missing or for payments made on or after January 1, 2018 if the FTIN is not provided and the account holder has not provided a reasonable explanation that the account holder has not been issued an FTIN.
In Notice 2017-46, however, the IRS provided withholding agents limited transitional relief for certain pre-existing customers who had provided a Form W-8 signed prior to January 1, 2018. For these customers, the IRS generally allowed the Form W-8 to remain valid for payments through December 31, 2019 even if no FTIN had been provided. Date of birth, whether provided on the form on collected as part of the customer’s account record, needed to be in place under the transitional rules for payments made on or after January 1, 2019 (so that grace period has already expired as of last year).
From a due diligence perspective, what this means is that Forms W-8 signed in 2017 that might ordinarily expire at the end of the 3-year period ending in 2020 could be treated as “expired” as of the end of this year if no FTIN or reasonable explanation has been obtained. These forms need to be reviewed to determine whether other potential exceptions apply. Exceptions to the FTIN requirement may include an account holder being a government entity or international organization or a resident of a U.S. possession, a resident of a “no-FTIN” country (Bermuda, BVI, Cayman Islands and Australia) or a resident of a country NOT on the IRS list of information-exchange countries.
If the Form W-8 expires due to FTIN failure, the account holder may be treated as an undocumented account holder that could trigger tax withholding. Undocumented accounts for individuals maintained in the U.S. generally default to U.S. non-exempt recipient status and thus could be subject to 24% backup withholding; however, if the withholding agent has actual knowledge the account holder is a non-U.S. person and the income is otherwise subject to 30% NRA withholding, the higher withholding rate would be applicable.
The transitional relief expiration will also affect tax reporting since FTIN and date of birth information is generally required to be reported on Form 1042-S when available. For 2019 tax year reporting filed in 2020, it would be expected that certain accounts may still lack an FTIN due to reliance on the Notice 2017-46 transitional relief. But for the 2020 tax year reporting that would occur in 2021, a financial institution may wish to establish procedures to confirm that Forms 1042-S that are missing FTINs are either ones that fall into one of the enumerated exceptions (including documentation of a reasonable explanation for no FTIN) or reflect appropriate withholding as an undocumented account.
Form 1042-S reporting for the 2019 tax year though should generally be reflecting a date of birth for individuals.
The December 31, 2019 expiration date for FTIN transitional relief should be attended to. Much as in the case of milk expiration dates, the goal is to avoid spoiled milk.