Thread: E Trade W8Ben form and IRS nightmare, 28% funds withold

Hi

I'm not much involved yet with Panama but came up to this forum following a google link and the issue should well be of interest to other investors dealing through Panama corporations - and hopefully some of you will have some input to ad to my problem

I opened a month ago an account with Etrade to trade US securities for a Hong Kong Company from which a Belize company is the director and I'm director of the Belize company, hence the end beneficiary of the Hong Kong company and the Etrade account.


An I'm encountering a serious issue ... After I noticed Etrade mispelled my middle name on my internet account, I let them know . They asked me another W8Form, without warning me of anything. I posted the W8ben forms a couple of days ago, wired in more funds, and yesterday sold one position for around 55K usd before buying a different stock.

Today I see for the first time my account in negative of almost 16K, so I call the US customer service and after quite a bit of research I'm told that due to my new W8form not received yet, my tax status is not clear and there is a 28% witholding tax on all my sale applied by the IRS - on the total value of my sales , not only on the capital gains ! It might be called a "back up witholding tax" ??

This witholding on next sales will be cancelled a few working days after they receive the new w8 form... but they can't do anything with the 16k withold ! I need to see directly with the IRS ! He says it should be refunded at the end of the year if the situation is cleared when I do my tax return - but Etrade can't do anything, except charging me interests on the 16K on margin

I'm completely lost !! What tax return ?? I'm not a US citizen and also non resident in the US and I thought Etrade withold 30% of the dividends on the sales of shares and dealt directly with the IRS ??! The Etrade phone agent asked me to contact a tax advisor.

I'm more than a bit upset because my first wben forms were properly filled and the issue arised after Etrade mispelled my name on the computer, than I wasn't aware of the witholding put in place on my account. I wasn't even notified of it after the withold the funds, but had to call to discover what was going on when I saw the 16K negative balane . Now I need to put more funds in to cover the debit because if I sell shares to cover it there will be again a 28% witholding.

I'm also paying interests on the debit of the account.

Well quite a mess !!

Do you have any advice on how to recover this amount from the IRS or Etrade ? Again, he account is in the name of a HK company and I'm a non american citizen, non resident in the US, the director of the corporate director of this company.

Thanks for all advice !
Luis

Call customer service and ask them where they accept service of process and that you will file a lawsuit in the coming weeks.

Thanks Ed,

I definetely see mistakes from Etrade as they mispelled my name whereas the first w8ben form was properly filled plus I wasn't informed when the "back up witholding tax " as it seems to be called was set up, nor even after it was applied to my securities sale but not sure it would work.

The only information related to this issue I received from them was after I asked them to change the name spelling :

"Mon Sep 06 23:34:32 2010 Foreign Tax Status: Update

body { margin: 0pt; padding: 0pt; color: rgb(0, 0, 0); background-color: rgb(255, 255, 255); text-align: left; }
Dear E*TRADE Customer:

A recent change was made to your account; as a result the treaty benefits that may have been claimed earlier on IRS Form W-8 by you may be affected and/or removed. Your Form W-8 is still valid.

You may claim treaty benefits again by providing a new Form W-8. In the case of joint accounts, all account holders must provide a new Form W-8.

Account #:

IF YOU ARE NOT A CITIZEN OR TAX RESIDENT OF THE U.S.
Submit a new Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding), or if applicable, other Form W-8 (i.e. W-8ECI, W-8EXP, or W-8IMY).

Certain account types are eligible for online recertification. This can be done by logging on to your account at etrade.com and following the screen prompts. If you are not prompted to recertify online, you can download the appropriate Form W-8 at etrade.com/forms. Be sure to include your account number on the form and mail it to:

E*TRADE Securities
P.O. Box 1542
Merrifield, VA 22116-1542
IF YOU HAVE BECOME A CITIZEN OR TAX RESIDENT OF THE U.S.
Submit Form W-9 (Request for Taxpaying Identification Number). This form is available for download at etrade.com/forms. Be sure to include your account number, and mail the form to the address shown above.

If you have questions or need assistance, please call us at 1-800-ETRADE-1 (1-800-387-2331). From outside the U.S., dial +1 678 624 6210.

(c) 2009 E*TRADE Securities LLC, Member FINRA/SIPC. All rights reserved. The information contained in this Smart Alert does not constitute a recommendation by E*TRADE Securities, and is subject to the Smart Alerts Terms and Conditions and the E*TRADE Securities Customer Agreement. We cannot respond to e-mails sent to this mailbox. If you have questions, please contact us through the Online Service Center. "\\


I definetely had no notice of the "back up witholding " beeing in place and still know this 16K witholding doesn't appear on my account , and I still have received no communication on the isue except when talking with the representative - who had to do further checks to find out what had happened

Anyway surfing the net for solutions it seems this tax is called "back up witholding tax" although I still have no idea how to claim it back.

Definetely uneasy with the etrade account, it was also frozen right after I wired the first funds in for security reasons - they wanted to check my identity and the security question asked for my social security number - as a non resident it was a obviously a dead question and it took me quite some effort to unfreeze it !

All further leads on how to solve this issue, be it by arguing with Etrade or deal with the IRS will be most welcome !

You need to apply for US tax payer identification number. If private you then file a 1040NR and get your money back.

Americans give up easily. Call them and threaten with lawsuits, just keep calling and demand to speak to management. Take down their name and inform them that they will personally be targeted in the lawsuit unless they resolve the issue.

Also make sure to file a Better Business Bureau complaint while you are at it.

Actually I haven't received any notification of this witholding yet, so don't even know if the money should be claimed back through the Hong Kong Company or personally.

As of threatening of lawsuit, it might end up with more trouble than I have. Just if the upset etrade agent - in HK or in the US - decides to leak some corporate documents to the wrong tax entities, it could raise quite some mess. Besides do I have ground for a winning lawsuit and is Etrade even able to fix the issue at the moment, besides refunding the interests charget for my account negative balance ?

There are quite a few very negative comments on Etrade on the internet, I suspect they will be well prepared to fight off those threats if there is not a serious danger for them.

I'm going to file a BBB complain for sure, see if it goes somewhere.

Lawsuits are not won, they are negotiated. Surely they don't want one so hopefully they will fix it.

You will need a tax id number for the entity holding the account and file a corporate tax return in that case, 1120.

You can start by reading these instructions: http://www.irs.gov/pub/irs-pdf/i1120f.pdf

I am sure it will be less than 2 weeks of full-time work to get everything in order!

Thanks for the link ! The refund from IRS is apparently manageable but it seems I must file it after tax year end Will probably ask a professionnal accountant to file it otherwise I might indeed spend a couple of weeks buried in paperwork ...

Also filed a complain with BBB , will see how they consider it before attacking personally Etrade

Originally Posted by EdBowers

Lawsuits are not won, they are negotiated. Surely they don't want one so hopefully they will fix it.

You will need a tax id number for the entity holding the account and file a corporate tax return in that case, 1120.

You can start by reading these instructions: http://www.irs.gov/pub/irs-pdf/i1120f.pdf

I am sure it will be less than 2 weeks of full-time work to get everything in order!

I think that if the witholding occurred this year no tax return is necessary to obtain the refund but rather just submitting a NEW W-8 that complies with the requirements of the broker dealer and clearing agent or broker dealer will (almost immediately) release the impounded funds as they haven't been transmitted to the IRS yet. Lawsuits or threats will help nothing as a properly filed W-8 is a manditory requirement to avoid the withholdings. We ran into this problem one month ago with two accounts with $100,000 impounded and after our investigation we found that the problem as the original W-8's that we filed (more than three years ago) were considered "DATED" (too old to still be effective) and we only needed to file new fresh W-8s (we did by fax and mailed originals later) and within 24 hours the impounded funds were released in these two accounts and we were back to business as usual. In both cases the broker dealer had advised the clients they needed new W-8's (and sent the forms) filled out and returned but the clients never responded. Don't blame the broker dealers as it's not them that are doing this by rather the custodians that are holding the funds and securities. It's just the increasing array of rules and enforcement that are the problem. Don't expect any solution by tough talk or lawsuit threats. Our broker dealer back office now understands this problem and knows how to correct it within a day. If it's a foreign enitity you need NO tax number and you don't need to file a return for funds impounted in 2010. This (W-8) requirement is a small price to pay for having your funds in SAFE hands as opposed to having them in small local "self clearing" broker dealer accounts where they may be commingled with other client securities in an omnibus account.

Thanks Viewpoint for your post. Some of this information corroborates other input I found on in the internet since yesterday - which anyway all point to the a resolution of this issue, but often going through tax filing !

Yet there are a few differences in the cases you relate and the one I encountered.

I opened the Etrade account 1 month ago, not 3 years, and with a properly filled W8ben , Etrade mispelled my middle name on their records and following the correction asked me for new wben forms - although those would be the same as the original ones. Yet it did fill those forms, first emailing them to my HK etrade agent for reviewing them last monday, than posting them to the US office on wednesday. So they should receive the form beginning of next week.

It would be great if Etrade released the funds once the issue is cleared as you imply they would, yet according to the customer representative on the phone, I will have to deal with the IRS.

Below is a link to a thread treating the same issue, and it seems some agents do release the funds, whereas others let their customer deal with the IRS.

Forums - 31% Backup Withholding tax

As of having our funds in safe hands, sometimes I'm afraid they are so safe , even the depositor can't get hold on his money ! Shortly after I opened the etrade account as I logged in from a couple of different countries it triggered a security question , which would be great, if only the question was related to my file.

Instead it asked my social security number ... could be funny as a non US resident non US citizen I never had any US SSN, but there was little matter to laugh as not beeing able to answer that question provoked the freezing of my account _ with new funds wired in sitting iddly in the cash account... and some aggravation to unfreeze it !

Anyway I will send a polite email on monday to Etrade describing the situation - but stressing their faults- and see if it can solved directly with them.

Thanks as well for all further input on the topic!

Originally Posted by luisHK

Thanks Viewpoint for your post. Some of this information corroborates other input I found on in the internet since yesterday - which anyway all point to the a resolution of this issue, but often going through tax filing !

Yet there are a few differences in the cases you relate and the one I encountered.

I opened the Etrade account 1 month ago, not 3 years, and with a properly filled W8ben , Etrade mispelled my middle name on their records and following the correction asked me for new wben forms - although those would be the same as the original ones. Yet it did fill those forms, first emailing them to my HK etrade agent for reviewing them last monday, than posting them to the US office on wednesday. So they should receive the form beginning of next week.

It would be great if Etrade released the funds once the issue is cleared as you imply they would, yet according to the customer representative on the phone, I will have to deal with the IRS.

Below is a link to a thread treating the same issue, and it seems some agents do release the funds, whereas others let their customer deal with the IRS.

Forums - 31% Backup Withholding tax

As of having our funds in safe hands, sometimes I'm afraid they are so safe , even the depositor can't get hold on his money ! Shortly after I opened the etrade account as I logged in from a couple of different countries it triggered a security question , which would be great, if only the question was related to my file.

Instead it asked my social security number ... could be funny as a non US resident non US citizen I never had any US SSN, but there was little matter to laugh as not beeing able to answer that question provoked the freezing of my account _ with new funds wired in sitting iddly in the cash account... and some aggravation to unfreeze it !

Anyway I will send a polite email on monday to Etrade describing the situation - but stressing their faults- and see if it can solved directly with them.

Thanks as well for all further input on the topic!

I am 100% positive that the funds have not left your account and been transfered to the IRS. The funds are within the control of the broker dealer (E Trade) and once you have satisied their W-8 requirement they will be released to your account for your access. I would keep moving up the ladder asking for a supervisor and finally if you get no results ask for the compliance officer of E Trade. E Trade (and not the IRS) can release these funds but clicking a key on their computer if they are satisifed with your W-8 document. E Trade and NOT the IRS is holding these funds as it's only been one month. These funds are within the control of E Trade soley. Talk to the compliance officer and tell them you will file a complaint with FINRA or the SEC (that should get their attention). A FINRA complaint can be filed online in 15 minutes. You may have to wait until they receive (and approve) the new W-8 form that you mailed to them.

Thanks Viewpoint, I will by all means try and push Etrade to do this refund ( it's not even 1 month, the witholding took place on September 16th as until I asked Etrade to correct my middle's name spelling there had been no such issue). I'll also check with the Finra if necessary, but it seems that in many cases the brokers didn't release the funds. Wonder if Finra or SEC would even consider Etrade at fault if it didn't wish to release the funds...

One more reason to avoid the USA completely when doing business for all foreigners considering investing here.
There are too many other stock markets and world markets available.
If you really want to invest in US securities do it through a foreign market with a similar vehicle.

Who needs the USA?

Well, in the US you can trade for free with Zecco.com for example. I feel that I need that :-). I could probably mention another 200-300 things I need from the US.

This seems like a really stupid mistake. In Panama that is the standard.

Actually, in the link I gave above ( Forums - 31% Backup Withholding tax) Zecco appears to have been very uncooperative with its customers when it came to release the money withold.

Ameritrade and Fidelity seems better in that regard.

Any experience with other brokers, see if you can force them to release those funds ? Upset as well to read one poster solved it by sending fax, whereas Etrade said nothing could be done until they received the hardcopy by post.

Originally Posted by luisHK

Actually, in the link I gave above ( Forums - 31% Backup Withholding tax) Zecco appears to have been very uncooperative with its customers when it came to release the money withold.

Ameritrade and Fidelity seems better in that regard.

Any experience with other brokers, see if you can force them to release those funds ? Upset as well to read one poster solved it by sending fax, whereas Etrade said nothing could be done until they received the hardcopy by post.

You are correct in that Fidelity is easier to work with. We use a broker dealer that uses Fidelity to provide the clearing services on a "fully disclosed basis". Once we understood what the problem was it was easy to correct. In the end we found that the witholding of the two effected accounts was caused in both cases by the failure of the account holders to respond to requests from Fidelity to provide a new W-8 (including mailing a new form) were ignored but after the withholdings began to hit the accounts it got everyones attention especially the account holders and the securities firm that managed the account. Luis, I know your situation is different but I am confident that it will be solved quickly in your favor after they receive the new W-8.

If there was any serious threat of the US IRS of withholding 31% of all transactions they would lose the foreign accounts overnight and all that money would move offshore. The greatest threat to the security of your money is to put your money offshore in thinly capitalized broker dealers that clear their transactions on a self clearing basis in omnibus accounts where your securities and cash are co-minigled with other customers funds and securities. Single accounts in the larger USA broker dealers like Fidelity, Merrill and most other firms are insured not just by SIPC (100,000 cash & 400,000 securities) for $500,000 by also by private insurance in the millions per single account.

Just using Panama as an example broker dealers have no manditory government insurance (known to me) other than provided by the clearing firms of broker dealers that clear on a fully disclosed basis using USA clearing firms like Fidelity, Pershing, JP Morgan, Merrill, Southwest and many others that are covered by large capital balance sheets and private insurance as well as the $500,000 in SIPC insurance. It's not uncommon to see all accounts insured for $10 or 25 million.

You need to do your homework outside the USA to make sure HOW your funds are held as well as investsigate the financial condition of the broker dealer you consider placing an account (not all are created equal). Has everyone forgot MADOFF, MARC HARRIS, STANFORD. If you are issuing your checks to a broker dealer (and not their clearing firm) you have some degree of risk unless it's a well capitalized broker dealer. There are well capitalized broker dealers in Panama but they are few in number compared to the total of licensed firms. In third world countries the regulatory oversight, compliance and legal system is lacking in most cases. Even in the USA firms like Madoff stole billions and got away with it for years as a self clearing firm they just cooked the books.

If you are dealing in a third world country (or the USA) with a "stand alone" broker dealer having less than $5,000,000 in stockholder equity ASK if they clear their transactions on a "fully disclosed" basis and ASK who their custodian is. A fully disclosed broker dealer NEVER receives checks payable to them but rather the checks are payable to the custodian (clearing agent). If you are dealing with local security firms that are well capitalized or units (subsidaries) of large well capitalized local or global multinational banks or other insitutions you have no worries either way (self clearing or fully disclosed).

If you receive customer statements from the broker dealer and not the clearing agent then that's a signal they are self clearing and your securities are held one single omnibus account.

There are ways to invest in the European stock exchanges into funds listed there that are comprised of US Securities.

There is no reason to deal with the USA, US clearing houses or to put yourself at risk of US Government confiscation. This is one of the huge advantages of leaving the USA.

Why bring yourself back into the Imperial net and subject yourself to the IRS?

Many thanks Viewpoint for your post, which goes way beyond the OP's issue.

I also worry of smaller brokers or even entrusting too much in the hands of law firms or brokerages in smaller remote countries ( Panama founadtions and BVI trusts were offered to me as a solution to some needs I may have but I'm a bit suspicious - besides finding them slightly expensive options to solve those needs ). So far all my stock investing (which is a very new hobby) and a lot of my regular trade goes through Hong Kong where one finds a lot of well capitalised -and hopefully reputable - firms .

Yet where can one see the amount of insurance linked to an account ? All i see from etrade is 500 000 FDIC insurance, which seems to come down to 250K for international sweep accounts ?

Expat123, any more advice on trading centers you use in Europe, that offer convenient and very low tax platform to trade ? I would like to invest under personal name rather than through a corporation for a couple of reasons but need to keep it confidential. Wonder if Luxembourg or Switzerland would be satisfactory

As of the backup witholding issue, Etrade HK office contacted me this morning , to say I shouldn't place any order with my account at the the moment - Thanks I'd unfortunately noticed that already - and also that if the US office receives the forms by tuesday, they would release the funds witheld. Had I received this information on friday from the Etrade US representative I could have sent it by courrier...

There is still hope they receive the forms I mailed a few days ago by tomorrow. Yet, if they don't, do you reckon they will still be in position to release the funds at a later date - though I might have to influence that decision ?

As previously mentionned, and considering the comparatively large number of complaints about Etrade on the internet, this is not the easiest company to deal with once a problem arises.

Originally Posted by luisHK

Many thanks Viewpoint for your post, which goes way beyond the OP's issue.

I also worry of smaller brokers or even entrusting too much in the hands of law firms or brokerages in smaller remote countries ( Panama founadtions and BVI trusts were offered to me as a solution to some needs I may have but I'm a bit suspicious - besides finding them slightly expensive options to solve those needs ). So far all my stock investing (which is a very new hobby) and a lot of my regular trade goes through Hong Kong where one finds a lot of well capitalised -and hopefully reputable - firms .

Yet where can one see the amount of insurance linked to an account ? All i see from etrade is 500 000 FDIC insurance, which seems to come down to 250K for international sweep accounts ?

Expat123, any more advice on trading centers you use in Europe, that offer convenient and very low tax platform to trade ? I would like to invest under personal name rather than through a corporation for a couple of reasons but need to keep it confidential. Wonder if Luxembourg or Switzerland would be satisfactory

As of the backup witholding issue, Etrade HK office contacted me this morning , to say I shouldn't place any order with my account at the the moment - Thanks I'd unfortunately noticed that already - and also that if the US office receives the forms by tuesday, they would release the funds witheld. Had I received this information on friday from the Etrade US representative I could have sent it by courrier...

There is still hope they receive the forms I mailed a few days ago by tomorrow. Yet, if they don't, do you reckon they will still be in position to release the funds at a later date - though I might have to influence that decision ?

As previously mentionned, and considering the comparatively large number of complaints about Etrade on the internet, this is not the easiest company to deal with once a problem arises.

Fidelity provides 1 Billion insurance coverage on equities and 1.9 million coverage of cash awaiting investment per account. Fidelity Investments: Site Search

ETrade provides 600 million of additional insurance coverage in addition to the SIPC insurance coverage which in turn provides up to 150 million coverage on equities and 900 thousand cash.
https://us.etrade.com/e/t/home/accou...insurance.html

Back to the initial issue : it seems solved and the funds were reversed to my account !

Originally Posted by luisHK

Back to the initial issue : it seems solved and the funds were reversed to my account !

Oh i love a happy ending.

---------------

Viewpoint

Im looking into opening a US based trading account and was recently pointed in the direction of MB Trading, they seem cheap and legit, anyway they use Penson Financial services for there clearing...ill quote there site.

"Equities and Options transactions clearing are provided by Penson Financial Services (PFS)" also "Penson plays an important role as a clearing broker dealer"

Penson are listed and again it all seems legit, at least if not that mainstream.

Do you have an opinion of the above...or who would you recommend?

Thanks

I have been happy with zecco.com since it's free.