IRS Notice 2023-11 for FATCA reporting update

WITH NOTICE 2023-11, IRS TEMPORARILY RELAXES SOME FILING REQUIREMENTS FOR FOREIGN BANKS AS IT WORKS TO MAKE FATCA OPERATE AS INTENDED. WHAT’S HAPPENING HERE? AND READING BETWEEN THE LINES.


Notice 2023-11, dated January 3, 2023 but released in advance on December 30, 2022, temporarily relaxes a number of reporting requirements for certain foreign financial institutions (FFIs). These are FFIs, typically banks, in so-called Model 1 IGA jurisdictions (countries). In these countries, banks perform Foreign Account Tax Compliance Act (FATCA) reporting by sending information to their local tax authority, which automatically reports the information to the IRS. FFIs in other jurisdictions, including so-called Model 2 IGA jurisdictions, are not “covered” by this Notice. 113 foreign countries have IGAs and all but approximately a dozen of them are Model 1 IGAs. Most Americans abroad deal with FFIs in Model 1 IGAs.

At first blush, Notice 2023-11 deals with technical reporting issues relating to FFIs/banks and the governments of Model 1 IGA jurisdictions, and these issues surround the handling of Tax Identification Numbers (TINs). A TIN in almost all cases is a US Social Security number. A careful reading of the Notice in the context of FATCA and how FATCA has been rolled out over the last 12 years, shows that the Notice tells us a great deal about the “state of play” with FATCA and where tax compliance, including compliance affecting Americans abroad, is going.

Recalling the purpose of FATCA

FATCA, at bottom, is a set of withholding tax rules which sits in the Internal Revenue Code alongside normal withholding tax provisions that collect US tax on payments going outside the US. Enacted in 2010, FATCA is intended to combat noncompliance by US taxpayers who have foreign financial accounts. Together with rules in the IGAs, they require FFIs to provide the IRS with US TINs for accounts of US persons, who may be resident in the US or in a foreign country, which foreign country might or might not be where the FFI is located. If this requirement is not met, the FFI could, and likely would, be treated under FATCA as “nonparticipating”. Being cast outside FATCA, contrary to what one might think, would be a terrible result because FATCA actually protects FFIs from imposition of US withholding tax at the highest rates. Without this action, payments of interest, dividends, and other types of passive income coming out of the US would be subjected to withholding tax at the highest rates. Foreign banks want to avoid this outcome at all costs.

TINs make the world go-round.

TINs are essentially what makes FATCA work. They permit the IRS to identify noncompliant taxpayers because the income appearing on foreign bank accounts can be matched, or not, to income reported on individuals’ tax returns.

While FATCA, since its enactment in 2010, has required banks to provide TINs for all reportable accounts, years have passed without the IRS receiving anywhere near the number of TINs that it should have received. Reports continue to be made that do not include a TIN. This is a problem for the IRS, but it is also a problem for the FFIs that are flirting with being hit with crippling withholding taxes. No one wants this – not the FFIs, not the foreign jurisdictions where the FFIs operate, not the US taxpayers, especially those resident in foreign countries, who are being pushed away from foreign banks and having their accounts closed.

Several prior IRS Notices, in 2017, 2019 and 2021, have offered limited relief and additional time to FFIs and taxpayers. They were given up to six years to obtain and report the required TINs. The problem of missing TINs, nevertheless, has persisted. Much of what is being done in Notice 2023-11 echoes and builds upon prior steps.

Treasury and the IRS are not going to sit idly by.

Banks and individuals say that there are a number of reasons for the lack of TINS, although it is not clear exactly what all the problems are and why they are preventing banks and individuals from coming forward with the TIN information.  In some cases, it is due to an individual’s reluctance to apply for a Social Security number. Others may never have been issued one at birth and are unfamiliar with the process. Individuals applying for the first time may experience long delay times for procuring, and some lack the necessary documentation that Social Security requires in order to apply for a Social Security number.

Which problems are big problems which exist as to many accounts, and which are small and in fact isolated. In the eyes of the Treasury Department and the IRS, simply providing more time for things to improve is not the solution. It feels it must elicit better, more detailed information. Members of Congress also are losing patience.

What Notice 2023-11 does.

In a few words, the Notice is saying that the IRS’s push for FATCA compliance is not going to go away. FATCA is to be made to “work” as originally intended. The Notice’s provisions are aimed at the banks and the foreign jurisdictions, but clearly taxpayers can “read the tea leaves” as to where all this leads.

Notice 2023-11 provides some interim relief, but at the same time it bears down hard on the subject. The FFI will not be treated as non-compliant and therefore not exposed to withholding provided, as to each account with a missing TIN, it obtains and reports the date of birth of the account holder and, starting right away, it requests annually from each account holder a TIN. Also, the bank must annually search electronically all “searchable” data for any missing TINs. In addition, for accounts missing a required TIN, in its reports to the IRS, it must report using special TIN codes issued by the IRS. In short, in the “TIN field”, a hard and fast answer, in the form of a series of numbers, must be inserted. For example, if the FFI is saying that there is no TIN available for a particular account, it must provide information explaining what’s going on. If it says there is only US indicia in the form of a US place of birth and nothing else, it must insert a defined numerical code, which happens to be “222222222“. With this approach, the IRS can get more specific data as to the size and shape of the problem.

There is an existing set of TIN codes which was published as part of a Frequently Asked Questions released in 2021. (https://www.irs.gov/businesses/corporations/frequently-asked-questions-faqs-fatca-compliance-legal#reporting.) The TIN codes show that a TIN has not been obtained by the bank in certain specified scenarios. Now the reporting bank will have to give additional, more specific information about why a TIN is missing. And there will be, presumably, many more TIN codes and they will be quite specific and carefully crafted. It will no longer be possible simply to say it is missing or the taxpayer didn’t provide one. In effect, saying that “my dog ate my homework” will not suffice.

The Notice foreshadows that more TIN codes will be announced quite soon – early this year. These will be very important.

What Notice 2023-11 is not doing.

The Notice is not saying that individuals who are “out of compliance” will somehow be given a “pass”. Quite to the contrary. It is possible, however, that rules will be written to make it easier for taxpayers to “catch up” and to mitigate some of the consequences, including penalties. But nothing appears to be leading to anything approaching amnesty.

The Notice is not amending or somehow changing FATCA. It remains highly unlikely that Congress will repeal FATCA. Also, not to be overlooked, there is no movement anywhere to change foreign bank account reporting (FBAR).

In passing, it should be noted that none of the principal “players” have ever pushed for repeal of FATCA. The banks are almost as interested in cleaning up compliance problems as the US Treasury Department. Among other things, the amount of unjustifiable wrongdoing and the appearance of wrongdoing is too great a reputational risk. Foreign jurisdictions, while they disagree with some aspects of FATCA, have instituted FATCA-like regimes of their own.

The foreign jurisdictions are involved alongside the banks, the taxpayers, and the IRS.

Significantly, the Notice places requirements on the foreign jurisdiction, not merely the individual FFIs. The jurisdiction must make “good faith efforts, by the date that is nine months after the end of the calendar year to which the information relates,” to do several things.

It must encourage US citizens resident in the jurisdiction to provide TINs to FFIs when requested. It must take measures to enforce compliance by reporting FFIs identified by the US Competent Authority as potentially noncompliant. It must encourage FFIs located in the jurisdiction to not discriminate against US citizens that do provide TIN. Lastly, if requested, it must take steps to conclude Competent Authority Arrangements, akin to IGAs, with the US, so as to implement an IGA, to amend an annex to an existing IGA or to exchange country-by-country information. A “sweetener” of sorts is added in that the jurisdiction can be deemed to have complied as to 2022.

A number of foreign jurisdictions and international organizations have approached the Treasury Department with concerns about the workings of FATCA and effects on FFIs and individuals, including so-called 'Accidental Americans'. Treasury Department has expressed a willingness to work on solutions. The provisions in Notice 2023-11, however, show that the US is not willing simply to back off enforcement of FATCA.

FFIs will probably view this Notice as a reasonable step forward. There are already indications to this effect. Taxpayers should view it as a warning that this problem is not going away and that, if they are out of compliance, they need to do something sooner rather than later.

What might change?

With better FATCA reporting and especially the information pried out with more and more insightful TIN codes, Treasury will have better data which it can use for changing the reporting rules in the FATCA regulations.

A silver lining may be that Treasury undoubtedly will have a better handle on the underlying tax liability figures and, therefore, the size of the “tax gap”. The recent ACA/District Economics Group analysis of revenue effects of residence-based taxation is another big step forward. That analysis lays out uniquely detailed information about number of US citizens abroad (in 2022, 3,921,240); the number of US citizens resident overseas as filers (in 2022, 2,292,000; the number of US citizens resident overseas as non-filers (in 2022, 1,629,000. https://www.americansabroad.org/articles/aca-deg-analysis-of-revenue-effects-of-residence-based-taxation/.

Putting together the data falling out from FATCA compliance and this analytical data, it may be possible finally to achieve adoption in the FATCA regulations of a same country exemption (SCE)[1]. Treasury may feel more comfortable when it sees that the amount of tax dollars involved is really not that great. And an SCE might be a very good way to finish this FATCA compliance exercise. An additional advantage to Treasury having strong data on FATCA is it helps with tax reform and interest in Residence-based taxation (RBT). 

Providing a better understanding of the community of overseas taxpayers helps support what ACA and others have been saying; there are serious compliance issues for overseas taxpayers and the time has come for Congress and the Administration to make regulatory and legislative changes. The lack of TINs and difficulty in procuring them demonstrates that there is much that needs to be learnt about the community. This can only come about through hearings. The issues Treasury is facing with “fixing” FATCA demonstrate that the need for hearings was in advance of implementation, in that manner some of these problems could have been addressed. Let’s not make that mistake again. Join the campaign calling on the House Ways & Means Committee to hold hearings: https://www.americansabroad.org/new/write-to-your-representatives-in-congress/

 

[1] https://www.americansabroad.org/advocacy/campaigns/fatca-same-country-exemption/

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