Forms W-8BEN And W-9: Which To Use, When, And Why Many Get It Wrong

Using the correct IRS form (W-9 for U.S. persons and W-8BEN for foreign individuals) is essential to avoid tax withholding errors and reporting problems. Complications, delays, and surprise tax withholding can be prevented if taxpayers understand their tax status and provide the proper form from the outset. Green card holders and dual nationals residing abroad are at the greater risk of making errors about their U.S. tax status. It is crucial to understand the differences between Form W-8BEN and Form W-9 when receiving payments from U.S. sources. This is especially so if the taxpayer operates, invests, or maintains financial accounts overseas. Many taxpayers get this wrong, often to their detriment. This article provides the guidance needed to understand which form is required and when. It highlights common misunderstandings, especially for individuals living overseas who hold U.S. green cards or those having dual citizenship. What Is Form W-8BEN? Form W-8BEN is entitled “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals).” The IRS Form W-8BEN, Instructions and other useful information about the Form W-8BEN are available at the IRS website. The form serves two distinct purposes depending on who requests it. When a U.S. payer (such as a bank, broker, or U.S. corporation) requests the form, it is generally used under Chapter 3 of the Internal Revenue Code to establish that the individual is a non-U.S. person and to claim any applicable reduced withholding rate under an income tax treaty on U.S.-source income, such as dividends, interest, or royalties. After the “Foreign Account Tax Compliance Act” came along in 2010, a new and revised version of Form W-8BEN made its appearance. Now, when a foreign (non-U.S.) financial institution requests Form W-8BEN, it uses the form for Chapter 4 (FATCA) purposes, to document the account holder’s non-U.S. status. This is needed so the foreign financial institution itself can properly report to the IRS about U.S. account holders at its institution, as required by FATCA. In this context, the form is not about claiming treaty benefits but about verifying FATCA classification and compliance. This article will focus on the Form W-8BEN when it is used by individuals for withholding tax purposes. In the withholding tax context, Form W-8BEN is used by individuals who are non-U.S. persons (that is, not U.S. citizens or resident aliens). When such persons receive U.S. source income, the form is used to certify their foreign status, claim treaty benefits (if applicable) to reduce or eliminate U.S. income tax withholding, or provide the withholding agent (payer) with documentation so the correct rate of U.S. withholding tax applies. The form is not filed with the IRS. Instead, it is provided to the U.S. payer of the income, who is treated as the tax withholding agent for the IRS. MORE FOR YOU Form W-8BEN: Payment Types And Withholding Rates When a U.S. source payment is made to a non-U.S. person and the income is not effectively connected to a U.S. trade or business, the payer generally must withhold tax at a flat 30% rate unless a lower treaty rate or exemption applies. When the U.S. tax law refers to the “sourcing" of income, it is referring to the origin of the income as being earned in the United States or in a foreign country. The sourcing rules depend on the type of income being paid. In other words, different sourcing rules apply for different categories of income. Typical types of U.S. source payments include dividends, certain interest income (though many types of bank interest and portfolio interest are exempt), royalties, rents, and other “fixed or determinable annual or periodical income” commonly called FDAP. By submitting Form W-8BEN, the beneficial owner recipient of that income is certifying: “I am a non-U.S. person, I am the beneficial owner of the income, and if applicable I claim treaty benefits.” The withholding agent relies on this to determine whether and how much tax to withhold. If the wrong form is used (e.g., a U.S. payer accepts a W-8BEN when the recipient is actually a U.S. person) the payer may face exposure for incorrect withholding or reporting. How Long Is the Form W-8BEN Valid? If no U.S. Taxpayer Identification Number, or TIN, is provided on the Form W-8BEN, it will generally be valid for three full calendar years after it has been signed. For example, a Form W-8BEN signed on August 30, 2020, remains valid through December 31, 2023. A Form W-8BEN with a U.S. TIN will remain in effect until a change of circumstances makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S at least one payment annually to the beneficial owner. Sometimes individuals forget that the form must be updated and this can lead to withholding headaches or denial of access to the individual’s financial account. Form W-9 (“Request for Taxpayer Identification Number and Certification”) is used only by U.S. persons. These are U.S. citizens, green card holders and those who spend enough time in the U.S. to meet the substantial presence test, and domestic U.S. entities. They must provide their taxpayer identification number (e.g., for U.S. citizens this is the Social Security Number), in order to certify their U.S. status, and avoid income tax withholding. The key point that is sometimes missed is that if the individual is a U.S. person for tax purposes, he should not provide a W-8BEN. The individual should provide a W-9 instead. The payer uses the Form W-9 to determine that the 30% withholding imposed on foreign persons is not required. A tax enforcement mechanism, so-called “backup withholding,” may still apply in certain cases such as when a taxpayer fails to provide a correct Taxpayer Identification Number or has been notified by the IRS of underreported income. Mistakes Happen: Green-Card Holders, Dual Nationals, and Overseas Residents A major area of confusion arises for certain individuals living abroad, typically those who hold a U.S. green card or are dual nationals. Many such individuals mistakenly treat themselves as “foreign persons” and submit Form W-8BEN. That is incorrect. Under U.S. tax law, an individual is considered a U.S. resident alien if they pass either the “green-card test” or the “substantial presence test.” Green-card holders automatically meet the green-card test (unless the status has been formally terminated). Thus, a green-card holder is a U.S. person for tax purposes and must provide a Form W-9, not a W-8BEN, even if the green card has expired but formal termination of the status has not been undertaken. It often comes as a surprise for the green card holder who lives entirely abroad and earns only non-U.S. source income, that their U.S. tax status remains as a U.S. person and that they are subject to worldwide income taxation. This status remains until they have formally relinquished the green card in accordance with specific procedures. The same applies to dual nationals who are U.S. citizens and hold citizenship of another country. For U.S. tax purposes, including completing the correct form, U.S. citizenship controls. If an individual mistakenly submitted Form W-8BEN instead of Form W-9, the error should be corrected with the payer or financial institution as soon as possible. This is the first step and allows the payer or financial institution to update its records and obtain a properly completed and signed Form W-9. Corrected tax documentation can then be issued. Acting promptly is important to avoid continued misreporting, or potential compliance issues for both the taxpayer and the payer. For payers and withholding agents, collecting the correct documentation is critical to avoid liability. “Reason To Know” Use Of Form W8-BEN Is Not Correct The U.S. payer (or withholding agent) must consider whether they have “reason to know” that a Form W8-BEN submitted by the taxpayer is unreliable. The “reason to know” standard is set out in Treasury Regulations and puts a difficult burden on the U.S. payer. The payer will be treated as if it has reason to know that a claim of foreign status may be incorrect if the information on the form, or other information in the payer’s records, contains U.S. indicia, for example a U.S. address, U.S. place of birth, U.S. telephone number. If this occurs, the agent must obtain additional documentary evidence or a reasonable written explanation from the individual. If the inconsistency cannot be resolved, they are required to treat the payee as a U.S. person, request a properly completed Form W-9, and may need to withhold tax or file corrected information returns. These compliance obligations under the “reason to know” rules can trigger backup withholding, delays, or reporting corrections that could have been avoided. Tax and wealth planning advisors can help to ensure their clients use the right form. This is increasingly important in today’s global environment of information exchange and FATCA compliance. Stay on top of tax matters around the globe. Reach me at vljeker@us-taxes.org Visit my U.S. tax blog www.us-tax.org NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision. Editorial StandardsReprints & Permissions