The most common question I get during international meetings and presentations revolves around the W-8 series of forms. The question arises under two situations: 1) Taxpayer is opening a new bank account; or 2) A financial institution is updating its records for FATCA compliance. Regardless of why the taxpayer is asked to complete the form, the analysis is the same.
First of all, it may be helpful to understand the background. Under FATCA, foreign financial institutions are required to report American owned accounts back to the U.S. In order to determine which accounts should be reported, the bank requests a declaration from the taxpayer, this is the reason for the form. This also illustrates a key point, the form is between the taxpayer and the bank. Therefore, the IRS cannot give an exemption and the taxpayer cannot refuse to sign because in either case the bank will simply not do business with the taxpayer or will close the account. No single account is worth the risk of FATCA noncompliance.
The correct form to file is very straightforward. A W-9 is required for all taxpayers that are American. This is regardless of whether or not the taxpayer holds dual citizenship. The W-8 is for non-Americans, it is not for foreign citizens. Therefore, if taxpayer is American the W-9 must be signed and there is no other option. Signing a W-8 could be viewed as fraudulent if the taxpayer is aware they are an American. Businesses must sign a more detailed version of the W-8, the W-8BEN-E. This is because in order to be FATCA compliant, the foreign financial institution must also certify that business account holders are FATCA compliant. There are other versions of the form as well for other non-individual taxpayers. Overall, the reporting system and penalties of FATCA have created a system where the banks enforce the rules, and through compliance the reach of FATCA will eventually touch nearly every financial institution in the world.
In summary, the question of W-8 or W-9 is simple – Americans sign W-9 regardless of other foreign status, and everyone else signs a W-8. The complexity comes from the next step – taxpayer must make sure they are in compliance with foreign accounts before their information gets reported to the IRS. Also, foreigners opening accounts in the U.S. should make sure to take the proper treaty position on their W-8. But both of these are topics for another day.