Escrow Account - Is Agent or Firm the Customer?

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Question:

Working in a coastal area where the sale of property is abounding, we have several clients who escrow funds, particularly, for 1031 exchanges. Those monies may be placed in an escrow account and held for a period of time (145 days). The account is usually opened by an attorney or title company with the signors/agents being authorized representatives of the respective firm. The principals, of course, are the individuals for whom the funds are being held and may live anywhere within the United States. Are we correct in assuming our customer is the agent and/or firm who deposits and withdraws the proceeds from the account; and as such, the agent is responsible for securing identity of the individual from whom they collect and disburse? (Please keep in mind the principal in whose behalf the funds are deposited may benefit from interest paid on the account.)

Answer:

1031 exchange accounts are glorified escrow accounts. Assuming your bank does not serve as the qualified intermediary (escrow agent), then the qualified intermediary is the customer. You will need the name and a certified TIN for any required information reporting on the exchangor, but this is one of many situations under the CIP rules where the "customer" is not the taxpayer.

If your bank serves as the qualified intermediary, then the exchangor is both the customer and the taxpayer.

From the Q & A:

10. Who is the “customer” for purposes of escrow accounts?
An escrow account is an account generally established for the deposit of funds that are to be paid to a specified party on the fulfillment of escrow conditions or returned. If a bank establishes an account in the name of a third party, such as a real estate agent, who is acting as escrow agent, then the bank’s customer will be the escrow agent. If the bank is the escrow agent, then the person who establishes the account is the bank’s “customer.” For example, if the purchaser of real estate directly opens an escrow account and deposits funds to be paid to the seller upon satisfaction of specified conditions, the bank’s customer will be the purchaser. Further, if a company in formation establishes an escrow account for investors to deposit their subscriptions pending receipt of a required minimum amount, the bank’s customer will be the company in formation (or if not yet a legal entity, the person opening the account on its behalf). “A bank will not be required to look through trust, escrow, or similar accounts to verify the identities of beneficiaries and instead will only be required to verify the identity of the named accountholder.” See 68 FR 25090, 25094 (May 9, 2003). However, the CIP rule also provides that, based on the bank’s risk assessment of a new account opened by a customer that is not an individual, the bank may need “to obtain information about” individuals with authority or control over such an account, including signatories, in order to verify the customer’s identity. See 31 C.F.R. Section 103.121(b)(2)(ii)(C). (April 2005)

First published on BankersOnline.com 1/9/06