Mitigating Audit Red Flags

Mitigating Audit Red Flags: Understanding and Managing Undocumented Accounts for CRS Compliance

Tax authorities frequently scrutinize undocumented accounts due to potential compliance issues. Financial institutions must understand the criteria and reporting requirements to manage these accounts appropriately. These accounts are queried by tax authorities mainly because of three reasons:

1. The misinterpretation of ‘undocumented accounts’.

Undocumented accounts are specific to the Common Reporting Standard (CRS) and involve individual account holders. To classify an account as undocumented, it must meet the following criteria:

1. Must be an Individual Account Holder.

2. Must be a Pre-existing Account (early adopter timeline = an account opened before 1 January 2016).

3. There must be NO residential, mailing or PO Box addresses on record for this account.

2. The way in which the information is submitted to the Tax Authority.

Proper submission of information to the tax authority is crucial. The following XML schema fields must be completed accurately:

1. Resident Country Code:
   1. If the Reporting Financial Institution (“RFI”) has the TIN and TIN country of the account holder, then the Resident Country Code must = the code of the country that issued the TIN; or
   2. If the RFI does not have the TIN, then the Resident Country Code must = the country code of the RFI.
2. TIN must be reported if it is on the records of the RFI, otherwise follow jurisdictional guidance which could include:
   1. Leave Blank;
   2. Use terms such as NOTIN or N/A; or
   3. Remove the TIN element from the xml schema.
3. TIN issued by:
   1. If the RFI has the TIN and TIN country of the account holder, then the Resident Country Code must = the code of the country that issued the TIN; or
   2. If the RFI does not have the TIN, then the Resident Country Code must = the country code of the RFI.
4. Name Person Type must be OECD202= individual.
5. First Name = mandatory.
6. Last Name = mandatory.
7. Address = Undocumented.
8. Country Code [of address] = country code of RFI.
9. City = [mandatory field] Undocumented.
10. Date of Birth = depending on jurisdictional guidance, may be mandatory.
11. Account Holder Type = CRS102: CRS Reportable Person.
12. Account Balance = mandatory.
13. Payment = mandatory where a payment was made during the reporting period.
14. Payment Type = CRS501 to CRS504, whichever is applicable where a payment was made during the reporting period.
15. Undocumented Flag = Yes.

3. The number of undocumented account holders has increased year on year.

A notable red flag is the increasing number of undocumented accounts yearly. In theory, the number of pre-existing individual accounts should not increase annually. The only time pre-existing individual account holders should increase is when:

1. An investment fund merges with another fund. Fund Two is purchased along with its client due diligence and know your client information and analysis. Fund Two is then legally merged with Fund One. Fund Two’s name changes to Fund One. Fund Two was established some time ago and has account holders from 1994. Some of the account holders between 1994 and 2016 are undocumented. Thus, when Fund One submits its next CRS report to its Home Country Tax Authority (“HCTA”), its number of undocumented accounts would have increased year on year.

Understanding and correctly reporting undocumented accounts is essential for financial institutions to maintain compliance with tax authorities. By following the outlined criteria and reporting requirements, institutions can minimize audit red flags and ensure accurate reporting.

To mitigate regulatory and reputational risk, take advantage of Complere Consulting’s expertise. With years of experience and in-depth knowledge of FATCA and CRS guidance and legislation, Complere offers trustworthy expert guidance on all FATCA and CRS matters tailored to provide personalized attention.

Additionally, consider using Trans World Compliance's CRS/FATCA One solution. This tool aids in navigating FATCA and CRS regulations swiftly and precisely, thanks to its jurisdiction-specific rule bases and XML generation engines. These features enhance reporting accuracy and provide proof and evidence to regulators and stakeholders, demonstrating the quality of your due diligence efforts.

By Avril Bell

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