The Teeth of the Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA) is about disclosure and transparency, but in part is to catch Americans trying to stash money overseas. Controversially, FATCA orders every foreign bank to track down its U.S. account holders, and then share those account holders’ balances and receipts with the IRS.  Uncooperative foreign banks are subject to a punitive 30% withholding tax.

The U.S., along with the United Kingdom, France, Germany, Italy and Spain issued a joint statement on an intergovernmental approach to implementing FATCA and improving international tax compliance. That indicates that the U.S. is getting more countries on board with the policy.

Nonetheless, FATCA has generated consternation abroad, as it requires foreign financial institutions to report to the U.S. government on the holdings of U.S. taxpayers. The IRS was recently forced to offer some relief from the onerous requirements for expatriates and dual citizens. The IRS has issued new proposed regulations that lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions, known as FFIs, along with other foreign entities and U.S. withholding agents.

These regulations are only proposed and are not effective until they are finalized. However they contain important new details how this massive effort is likely to play out across the world. These regulations are the enforcement teeth of FATCA. The proposed regulations implement FATCA’s obligations in stages, in an effort by the IRS and the Treasury to minimize the burdens and costs consistent with achieving the statute’s compliance objectives. The rules and implementation schedule have also been adjusted to allow time for resolving local law limitations to which some FFIs may be subject.

Below are some FATCA highlights:

More Grandfathering. The proposed regulations would exclude from the definition of withholdable payment and passthru payment any payments under an obligation outstanding on January 1, 2013, and any gross proceeds from disposing of such an obligation. This gives many some breathing room.

Latitude for Legal Prohibitions. One of the major stumbling blocks to FATCA was the seemingly irreconcilable conflict if FATCA required you to disclose but your own country prohibited it. The proposed regulations provide a two-year transition until January 1, 2016, for the full implementation of this requirement.

“Deemed-Compliant” FFIs. FFIs are looking for ways to sidestep the massive compliance efforts FATCA entails. They are in luck, for the proposed regulations cut them some slack with deemed compliance rules.

For preexisting individual accounts:

• Manual review of paper records is limited to accounts over $1 million; and
• Accounts of $50,000 or less are excluded.

For preexisting entity accounts:

• Accounts of $250,000 or less are excluded; and
• Much of the due diligence for anti-money laundering and “know your customer” rules counts, plus simplified procedures to identify the FATCA status of preexisting entity accounts.

New Accounts. FFIs will be able to use their existing customer intake procedures, including the usual data collected at customer intake.

Verifying Compliance. It looks like the responsible officers of FFIs will be able to simply certify that they comply. That means verification through third-party audits would not be mandated. Plus, as long as the FFI complies with its obligations in an FFI agreement, it would not be held strictly liable for failure to identify a U.S. account.

Financial Account Defined. The proposed regulations would refine the definition of financial accounts to focus on traditional bank, brokerage, money market accounts, and interests in investment vehicles. Fortunately, most debt and equity securities issued by banks and brokerage firms, will be excluded

Information Reporting Transition. Reporting on income is to be phased in beginning in 2016. Reporting on gross proceeds is to begin in 2017.

Passthru Payments. The proposed regulations would provide that withholding is not required with respect to foreign passthru payments before January 1, 2017. Until withholding applies, to reduce incentives for nonparticipating FFIs to use participating FFIs to block the application of the FATCA rules, the proposed regulations would require participating FFIs to report annually to IRS the aggregate amount of certain payments made to each nonparticipating FFI.

Taxpayers with undisclosed foreign accounts should be a concerned about FATCA’s far reaching implications.  As a result, Taxpayers with undisclosed foreign accounts should consult a competent tax lawyer and consider participating in the 2012 OVDP program. Although the 2012 OVDP penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds. If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties. The risks may outweigh the benefits.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

Patel Law Offices offers a strategy session to discuss how to resolve your legal problem. Conveniently schedule online today with our online scheduler and questionnaire.