Treasury and IRS Issue Final FATCA Regulations

By Frank Byrt 

The US Department of the Treasury and the IRS jointly issued comprehensive final regulations under the Foreign Account Tax Compliance Act (FATCA) for reporting and withholding taxes on US taxpayers with financial accounts held abroad.
 
The final rules, which go into effect January 28, establish an intergovernmental approach for tracking down US residents who seek to avoid taxes through the use of offshore accounts.
 
Enacted by Congress in 2010, FATCA regulations require participating foreign financial institutions (FFIs), other foreign entities, and US withholding agents to report to the IRS information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest, according to a Department of the Treasury press release.
 
Seven countries have signed on to participate in FATCA: Norway, the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain. 
 

Talking Points from AICPA

Kristin Esposito, the AICPA's technical tax manager, told AccountingWEB that the greatest reporting burden stemming from FATCA will be on foreign banks, although US CPAs and accountants with clients with foreign holdings need also be aware of the reporting requirements, as should some US-based banks with foreign operations.

"A US bank that is dealing with a nonfinancial foreign entity, such as a foreign corporation, or a US bank doing business with a foreign financial institution, depending on their relationship, would also be required to gather information" on US account holders with assets exceeding certain thresholds, and CPAs are required to report on clients with foreign assets exceeding $50,000, Esposito said.
 
"An individual with an interest in a specified foreign financial asset during the taxable year must complete and attach Form 8938, Statement of Specified Foreign Financial Assets, to [his or her] tax return to report specific information if the aggregate value of all assets exceeds the applicable threshold ($50,000 as of January 2013)," according to an AICPA website posting by Esposito. "Failure to do so can result in steep civil penalties of $10,000, with additional penalties not to exceed $50,000, after receiving notice from the IRS." 
 
Esposito noted that implementation of some of the final regulations has been pushed back from initial dates so that FFIs have the time to build processes to comply with the regulations.
 
The AICPA'S overview and guidance report on FATCA is available at the AICPA website.
 
The Treasury also said it is in talks with more than fifty countries and jurisdictions regarding their participation and it expects more to sign on soon. 
 
The new rules are being phased in to provide time for financial institutions to develop their reporting systems. They also provide relief from withholding for certain grandfathered obligations and certain payments made by nonfinancial entities.
 
The final rules, TD 9610, Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities Final Regulations, include a step-by-step process for US account identification, information reporting, and withholding duties for FFIs. 
 
The IRS also has new reporting regulations. "Under FATCA, US taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS," the agency says in a posting on its website. "This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting this tax filing season (2012)."
 
The IRS said the motivation behind the regulations is to prevent "abuse of the US voluntary tax compliance system and address the use of offshore accounts to facilitate tax evasion. It is essential in today's global investment climate that reporting be available with respect to both the onshore and offshore accounts of US taxpayers." 
 
Participating FFIs will have to enter into an agreement with the IRS and then:
  • Identify US accounts.
  • Report certain information to the IRS regarding US accounts. 
  • Instead of reporting to the IRS directly, some FFIs can also report account data to their own government, which will then report that information to the IRS.
  • Withhold a 30 percent tax on certain US-connected payments to nonparticipating FFIs and account holders who are unwilling to provide the required information.
The regulations also provide registration and compliance procedures for groups of financial institutions that hold commonly managed investment funds with US participants. 
 
The final regulations make expansive changes to the rules in the proposed regulations in response to comments received from US and foreign entities as well as:
  • Delay withholding or reporting effective dates in several cases to provide temporary or transitional relief.
  • Coordinate the new rules set forth in the final regulations with the rules in FATCA-related agreements being negotiated with other jurisdictions ("intergovernmental agreements," or IGAs).
  • Provide certainty and clarity by superseding all of the previous FATCA guidance issued by the US Treasury Department.
  • Adopt changes in phrasing and structure intended to clarify the rules in the final regulations. 
  • Provide registration and compliance procedures for groups of financial institutions that hold commonly managed investment funds with US participants. 
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