|Doeren Mayhew |
New FATCA regulations shine brighter spotlight on foreign accounts
The IRS has issued long-awaited comprehensive proposed regulations to implement the Foreign Account Tax Compliance Act (FATCA). Because FATCA is scheduled to take effect January 1, 2013, the government will move quickly to obtain comments from the public, hold a public hearing, and issue final regulations.
FATCA requires foreign financial institutions (FFIs) and other entities to report information to the IRS about foreign accounts and assets owned by U.S. taxpayers. If the accounts are not properly disclosed to the IRS, FATCA requires 30 percent withholding on payments made to the accounts.
FATCA is a complex statute that imposes new obligations on FFIs and other entities. These obligations directly impact the account holders, whether they are individuals, businesses, or trusts. To ease the transition to the new regime, the IRS will implement FATCA in phases. For example, only identifying information and account balance or value would need to be reported in 2014 (with respect to 2013 accounts).
To allow entities to make the systems adjustments needed to report income and gross proceeds, the IRS would not require the reporting of account income until 2016 (with respect to the 2015 calendar year), and would not require reporting of gross proceeds (from the sale of account assets) until 2017 (with respect to the 2016 calendar year). The proposed rules also grandfather obligations outstanding on January 1, 2013 from reporting and withholding requirements.
Stakeholders have hailed the IRS for being responsive to concerns. For example, in addition to the transition rules, the IRS eased up on the due diligence requirements for FFIs and other entities to review accounts and identify U.S. taxpayers with an interest in the account. The IRS stated that it sought to retain the goals and purposes of FATCA, while reducing the burden on implementing its requirements.
Treasury also announced that it had proposed an alternative system - an intergovernmental approach that would allow FFIs to report information to their own home governments. The governments in turn would report the information to Treasury. Five European governments have agreed to this approach; Treasury will continue to discuss the proposal with additional countries.
Irrespective of the reporting or withholding obligations of FFIs, account holders continue to have a current obligation to report their accounts and declare any U.S. income tax due on them. There are significant penalties imposed for ignoring those requirements.
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