Part 1 – Notice 2023-11: The Carrot, The Stick And Heightened FATCA Enforcement On Overseas Americans

Welcome To 2023 – A Year Of Heightened FATCA Enforcement

On December 30, 2022 US Treasury released Notice 2023-11. The broad purpose of the Notice is to prescribe conditions that would allow non-US banks to temporarily avoid a designation of “significant non-compliance” under the FATCA IGAs. It is important to note that Notice 2023-11 is NOT simply a “stay of execution”. It is a “stay of execution” that is conditional on both non-US banks and their governments participating in a significant escalation of FATCA enforcement on US citizens who live outside the United States.

The purpose of this post is to comment on and analyze the provisions of Notice 2023-13 which strongly incentivize non-US banks to purge themselves of existing US citizen clients. In Part 2 I will explain why I believe that non-US banks may be forced to close the accounts of all their US citizen customers.

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Prologue And Summary Of The Issue

Through a combination of FATCA (“Foreign Account Tax Compliance Act”) found Chapter 4 of the Internal Revenue Code and the FATCA IGAs (the mechanism for countries to comply with FATCA) the United States has created conditions where US citizen customers are a burden and risk to non-US banks. These provisions have created conditions that threaten punitive financial sanctions on non-US banks who cannot notify the IRS of a US citizen’s Social Security Number. Generally this is because the US citizen has lived abroad for many years and does NOT have a SSN. This situation has created worry for the banks and for their US citizen customers. The fact that the US citizen does NOT have a SSN is NOT relevant to the reporting obligation imposed on the bank. To be clear: The FATCA IGAs mean that non-US banks can easily be in “significant non-compliance” for the failure to comply with something that is impossible to comply with.

How Notice 2023-11 frames the issue

According to the Notice …

The Treasury Department and the IRS have received communications from Model 1 IGA jurisdictions, FFIs, and U.S. citizens expressing concern that FFIs are closing or may close bank accounts of U.S. citizens who have failed to provide a required U.S. TIN, including accounts of U.S. citizens resident outside the United States. FFIs have indicated that these closures are based on concerns about being treated as in significant non-compliance with their obligations under a Model 1 IGA. Model 1 IGA jurisdictions have also indicated that FFIs are unable to close certain accounts, which may increase the risk that the FFI is found to be in significant noncompliance with its obligations.

It bears repeating that:

1. The non-US banks are required to supply the IRS with the US citizen’s SSN, even though;

2. The US citizen either does not have or will not disclose a SSN to the bank.

Treasury’s response to the problem of looming “significant non-compliance”

On December 30, 2022 US Treasury issued Notice 2023-11. The primary purpose of the Notice was to prescribe temporary conditions pursuant to which (1) the bank could avoid being deemed to be in “significant non-compliance” under the FATCA IGAs while (2) retaining certain US citizens who are unable or unwilling to provide US SSNs. This relief is an interim measure and will last for three years. In addition, the relief is contingent upon both the banks and the government of the Model 1 jurisdiction taking additional steps to “encourage” FATCA compliance from US citizens. Separately, the relief requires that the government of the IGA Model 1 jurisdiction to take additional steps to “enforce” FATCA compliance on its banks. It is obvious that the words “encourage” and “enforce” have very different meanings.

To be clear Notice 2023-11 does NOT simply provide an extension. The extension is conditional on taking additional steps designed to strengthen FATCA compliance generally. Interestingly, early commentary has ignored this troubling escalation of FATCA enforcement.

Early Commentary About Notice 2023-11 Focuses ONLY On The Carrot Without Regard To The Stick

Interested persons can read Notice 2023-11 here. It has been the subject of thoughtful commentary by Helen Burggraf of American Expat Financial News Journal and the Democrats Abroad Taxation Tax Force. Both articles allude to the fact that the FATCA problems of today are because of the US policy of “citizenship taxation”. This is reflected in the following excerpts from their respective articles:

And because of the U.S.’s globally-unique tax regime based on an individual’s citizenship (if they happen to be American, even if only as a result of having been born in the U.S.) rather than their current country of residence, FATCA has made life extremely difficult for tens of thousands – some say as many as a million – U.S.-born citizens of other countries.

American Expat Finance

FATCA is a symptom of the extraterritorial nature of the U.S. tax code, which is why Democrats Abroad continues to support changing the U.S. to a Residency Based Tax system: taxing based on residency and source of income.

Democrats Abroad Taxation Tax Force

It is absolutely correct that the FATCA problem experienced by Americans abroad is because and only because of US citizenship taxation. To be clear, for US citizens living outside the United States, this means that the United States imposes full taxation on their non-US source income and subjects them to a comprehensive, penalty-laden reporting scheme which requires reporting of their local accounts and financial assets. It is equally clear that the Biden administration continues to be absolutely intent on the continuation of citizenship taxation on US citizens living outside the United States. For example in it’s August 29, 2022 letter to the Dutch Embassy Treasury confirmed the intention of the United States to impose the Internal Revenue Code on Dutch residents who happen to be US citizens. Specifically the letter noted:

We value our collaboration with the Netherlands in countering offshore tax evasion and improving international tax compliance. We believe that it is in our mutual interest for U.S. citizens resident in the Netherlands to continue to be able to access basic bank accounts in the Netherlands in order to conduct their ordinary course daily financial activities like the receipt of wages and the payment of bills. However, we wish to again emphasize that obtaining U.S. TINs from U.S. citizens holding accounts at foreign financial institutions (FFIs), including accounts located in their country of residence, is crucial to ensuring that the U.S. Internal Revenue Service (IRS) has the tools it needs to determine whether U.S. citizens are complying with their U.S. tax obligations

In other words, the purpose of FATCA is to enforce US citizenship taxation on residents of non-US countries who happen to be US citizens only because they born in the United States.

Brief aan Nederlandse ambassadeur inzake FATCA

Notice 2023-11 reconfirms the intention to impose US citizenship taxation on US citizens who live outside the United States. On page 6 the following appears:

Obtaining U.S. TINs from U.S. taxpayers connected to accounts at FFIs, including accounts located in the taxpayer’s country of residence, is crucial to ensuring that the IRS has the necessary information to determine whether U.S. taxpayers are complying with their U.S. tax obligations.

https://www.irs.gov/pub/irs-drop/n-23-11.pdf

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What Notice 2023-22 Gives (The Carrot) And What Notice 2023-11 Requires (The Stick)

The Carrot: SECTION 3. U.S. TIN REPORTING BY REPORTING MODEL 1 FFIS

.01 In general

In order for the Treasury Department and the IRS to determine an appropriate permanent solution to the concerns expressed above, the IRS needs to collect additional information from reporting Model 1 FFIs explaining why they have not provided all required U.S. TINs. Accordingly, as an interim measure, sections 3.02, 3.03 and 3.04 of this notice provide that reporting Model 1 FFIs that follow specified procedures will not be treated as in significant non-compliance with their obligations under an applicable Model 1 IGA solely because of the failure to report a required U.S. TIN with respect to a preexisting account. Section 3.05 of this notice limits this relief to reporting Model 1 FFIs that are in a Model 1 IGA jurisdiction that makes good faith efforts to increase the likelihood that U.S. citizens residing in that jurisdiction will report their U.S. TINs to the FFIs and that takes other steps specified in section 3.05.

JR Commentary: Treasury is NOT extending the time to supply US SSNs. Rather it is creating the opportunity for non-US banks to avoid being deemed to be in “significant non-compliance” provided that the conditions in 3.02 to 3.05 are met. One consequence of avoiding the “significant non-compliance designation” is that the banks will not be REQUIRED to close the “preexisting” accounts of US citizens without SSNs. That said, this does NOT require the banks to maintain the accounts and they are free to close the accounts on their own initiatives. Notice also that this relief comes at a very high price (as outlined in 3.02 to 3.05).

The Stick: SECTION 3. U.S. TIN REPORTING BY REPORTING MODEL 1 FFIS

.02 Relief for reporting on certain preexisting accounts that are U.S. reportable accounts

For reporting on calendar years 2022 (due by September 30, 2023), 2023 (due by September 30, 2024), and 2024 (due by September 30, 2025), the U.S. Competent Authority will not determine that there is significant non-compliance with the obligations of a reporting Model 1 FFI under an applicable Model 1 IGA with respect to reporting required U.S. TINs for preexisting accounts solely because of a failure to obtain and report each required U.S. TIN for such accounts, provided that the reporting Model 1 FFI complies with the conditions set forth in sections 3.03 and 3.04 of this notice and is in a Model 1 IGA jurisdiction that satisfies the requirements of section 3.05 of this notice.

This relief is limited to reporting on preexisting accounts. It does not apply to U.S. reportable accounts opened after the determination date specified in the applicable Model 1 IGA (new accounts), including new accounts held by account holders of preexisting accounts.

Nothing in this notice prevents the U.S. Competent Authority from finding significant non-compliance for a failure to satisfy any obligation under the applicable Model 1 IGA other than a failure to obtain and report each required U.S. TIN for preexisting accounts. Furthermore, nothing in this notice affects a reporting Model 1 FFI’s obligations under chapter 3 or chapter 61 with respect to a reportable amount or reportable payment.

JR Commentary: The relief is narrow (applies only to preexisting accounts). Furthermore, relief from both past and future designations of “significant non-compliance” is conditioned on meeting each of the requirements designated in 3.03, 3.04 (applying to the bank) and 3.05 (applying to the government). This is a significant escalation of FATCA enforcement.

The NEW necessary conditions to avoid being deemed to be in “significant non-compliance”

3.05 – Compliance Obligations Imposed On The Government Of The IGA Jurisdiction

.05 Eligible Model 1 IGA jurisdictions

For a reporting Model 1 FFI to be eligible for the relief described in this section with respect to reporting for a particular calendar year or other appropriate reporting period, the applicable Model 1 IGA 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 the following:

(1) Encourage U.S. citizens resident in the jurisdiction to provide U.S. TINs to FFIs when requested;
(2) Take measures to enforce compliance by reporting Model 1 FFIs identified by the U.S. Competent Authority to the Model 1 IGA jurisdiction as potentially noncompliant;
(3) Encourage FFIs located in a Model 1 IGA jurisdiction to not discriminate against U.S. citizens that do provide a U.S. TIN; and
(4) If notified by the U.S. Competent Authority, take steps to conclude Competent Authority Arrangements with the U.S. Competent Authority, to implement an IGA, amend an Annex II to an IGA, or exchange country-by-country information.

In order to provide a transition period for the satisfaction of these conditions, section 3.05 will be deemed to have been satisfied for reporting on calendar year 2022.

JR Commentary: This is a very significant escalation in required FATCA compliance and enforcement. Treasury is requiring the government to take steps to ENFORCE FATCA compliance on its own banks. Furthermore, the government agrees to do the bidding of Treasury with respect to the matters described in paragraph (4). In other words, the country must agree to:

– take steps to enforce FATCA compliance on its banks; and

– comply with any and all demands by Treasury that are related to FATCA enforcement.

This is a complete surrender by the FATCA partner jurisdiction …

In addition, the Model 1 IGA jurisdiction is required to take steps to (1) encourage US citizens directly to comply with FATCA and (3) encourage (but not require) banks to NOT discriminate against US citizens with SSNs. Note that the banks (subject to their local laws) are free to refuse to deal with US citizens.

.03 and .04 – Obligations Imposed Specifically On The Banks

.03 Requirements for reporting Model 1 FFIs

A reporting Model 1 FFI is eligible for the relief described in section 3.02 of this notice only if, for each U.S. reportable account (including new accounts) with a missing required U.S. TIN, the reporting Model 1 FFI: (1) obtains and reports the date of birth of each account holder that is an individual and controlling person whose U.S. TIN is not reported; (2) starting in calendar year 2023, annually requests from each account holder any missing required U.S. TIN, as described in further detail in section 3.04 below; (3) starting in calendar year 2023, annually searches electronically searchable data maintained by the reporting Model 1 FFI for any missing required U.S. TINs; and (4) reports an accurate TIN Code for each account that is missing a required U.S. TIN. For reporting on calendar year 2022, the fourth condition may be satisfied by a reporting Model 1 FFI by using either the TIN Codes issued by the IRS in May 2021 or updated TIN Codes issued by the IRS in early 2023. For reporting on calendar years 2023 and 2024, the fourth condition must be satisfied by a reporting Model 1 FFI by using the most recent TIN Codes issued by the IRS.

JR Commentary: This is designed to prescribe specific procedures for dealing with a situation where a US SSN is not available. The procedures clearly include heightened harassment of US citizens and additional work for the banks. In other words: it’s not good enough to not have the SSNs. The question is: what are the banks doing about it to facilitate compliance?

.04 Annual request for missing required U.S. TINs

To satisfy the requirement to make an annual request from each account holder for missing required U.S. TINs, reporting Model 1 FFIs must use the method of communication that is, in the FFI’s reasonable judgment, most likely to reach the account holder. In addition, the communication must include either of the following:

• the web address of the State Department’s Joint FATCA FAQs
(https://travel.state.gov/content/travel/en/international-travel/whileabroad/Joint-Foreign-Account-Tax-Compliance-FATCA-FAQ.html),1 or
• (i) a copy of the FAQs described in the preceding bullet and (ii) either a copy of the relief procedures provided by the IRS for certain former citizens, or the web address for such procedures
(https://www.irs.gov/individuals/international-taxpayers/reliefprocedures-for-certain-former-citizens).

An FFI must retain records of the policies and procedures adopted to satisfy this requirement and documentation that those policies and procedures were followed to establish its compliance with the requirements of this section 3.04 until the end of calendar year 2028.

JR Commentary: Very interesting. The banks are now being specifically required to direct US citizens to US websites that provide education on FATCA compliance and renouncing US citizenship. It’s clear that US citizenship is about and only about taxation.

Conclusion – Notice 2023-11 Is A Significant Escalation Of Enforcement Of FATCA And Citizenship Taxation

Part of the human condition is that people see what they want to see. The initial reaction to Notice 2023-11 was positive in some quarters because it provided the banks with a legal mechanism to NOT close the accounts of certain US citizens. Although, true, this is only part of what the Notice says. The reality is that Notice 2023-11 “kicks the can further down the road” while significantly escalating FATCA enforcement on the part of BOTH the banks and the governments.

At best Notice 2023-11 benefits a small group of US citizens without SSNs at the expense of the significant escalation of enforcement of FATCA and citizenship taxation on all US citizens. Any rational analysis of Notice 2023-11 in its entirety will likely result in a determination that it is wise for the banks to close the accounts of ALL US citizens.

Finally, as the Democrats Abroad Tax Force states FATCA is a symptom of US citizenship taxation. Even if the FATCA problem were solved, this would do nothing to solve the “original sin” of citizenship taxation. Individual US citizens, their organizations, their political parties and foreign governments must unite to achieve the goal of ending the US citizenship based extra-territorial tax regime. Ending citizenship taxation (severing citizenship from tax residency) is the only solution that will solve the problem of all people, all the time and under all circumstances.

John Richardson – Follow me on Twitter @Expatriationlaw

1 thought on “Part 1 – Notice 2023-11: The Carrot, The Stick And Heightened FATCA Enforcement On Overseas Americans

  1. Shalom Bresticker

    Hi, John. You wrote:

    To satisfy the requirement to make an annual request from each account holder for missing required U.S. TINs, reporting Model 1 FFIs must use the method of communication that is, in the FFI’s reasonable judgment, most likely to reach the account holder. In addition, the communication must include either of the following:

    • the web address of the State Department’s Joint FATCA FAQs
    (https://travel.state.gov/content/travel/en/international-travel/whileabroad/Joint-Foreign-Account-Tax-Compliance-FATCA-FAQ.html),1 or
    • (i) a copy of the FAQs described in the preceding bullet and (ii) either a copy of the relief procedures provided by the IRS for certain former citizens, or the web address for such procedures
    (https://www.irs.gov/individuals/international-taxpayers/reliefprocedures-for-certain-former-citizens).

    Neither of those 2 links works.

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    From John Richardson: Thanks for your comment. The links came directly from Notice 2023-11. I am not sure what to make of this.

    Reply

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