financial firms breathed a brief sigh of relief this week on news that the U.S.
Treasury will temporarily relax enforcement on the Foreign Account Tax
Compliance Act (FATCA). The rule, which will take effect on July 1 of this
year, will require foreign financial firms to disclose information about U.S.-owned
accounts to the IRS. The purpose of the law, of course, is to limit the ability
of U.S. citizens to set up offshore tax shelters.
FATCA compliance has been a big concern for many
financial firms who’ve cited everything from a lack of clear IRS guidance to
the exceeding complexity of navigating different intergovernmental agreements
as obstacles to their ability to meet the July deadline. According to a recent Thomson Reuters survey
of 500 European and U.S. tax professionals, 74% cited a lack of clarity in the
IRS regulations as the key obstacle to FATCA compliance. Fifty-four
percent of respondents said they expect the IRS to delay FATCA implementation
for another six months.
Instead of an outright delay, they got no-action relief.
Specifically, the notice from the IRS states:
“Calendar years 2014 and 2015 will be regarded as a transition
period for purposes of IRS enforcement and administration of the due diligence,
reporting, and withholding provisions…
With respect to this transition period, the IRS will take into
account the extent to which a participating or deemed-compliant FFI, direct
reporting NFFE, sponsoring entity, sponsored FFI, sponsored direct reporting
NFFE, or withholding agent has made good faith efforts to comply with the
requirements of the chapter 4 regulations and the temporary coordination
For example, the IRS will take into account whether a withholding
agent has made reasonable efforts during the transition period to modify its
account opening practices and procedures to document the chapter 4 status of
payees, apply the standards of knowledge provided in chapter 4, and, in the
absence of reliable documentation, apply the presumption rules of
Translated for the non-IRS speaker, this means that, although the
law will still be in effect as of July 1, the IRS will go easy on enforcing
it. Instead of aggressively policing each bank’s FATCA reporting
accuracy, the IRS will instead be making sure foreign financial institutions
are making a good faith effort to file W-8 and W-9 forms and accurately
capturing data for their customers.
While that doesn’t remove the
enormous administrative headache financial firms are facing to accurately
capture and report this customer information by July 1, it does take some of
the sting out of making some initial mistakes. The IRS has said previously that FATCA non-compliance could result
in fines of up to $50,000 on individuals who fail to report foreign assets and
that it will withhold 30% of any payments of U.S. source income for individual
account holders for whom sufficient information has not been captured.
With this new guidance, it sounds like those fines may be on the table for a
couple of years, but the threat is still very much alive.
for the original post by Joe Harpaz in Forbes.