IRS’s Second Guidance on the Foreign Account Tax Compliance Act (FATCA) Leaves Many Questions Unanswered

May 26, 2011   

As we previously discussed here, the Foreign Account Tax Compliance Act (FATCA) enacted in March 2010 imposes a 30 percent withholding tax on foreign banks who do not properly disclose accounts held by U.S. taxpayers. In its implementation of FATCA, the Internal Revenue Service (IRS) has issued two Notices providing guidance to those that are affected. As previously discussed in our blog, the IRS issued its first guidance regarding its implementation of FATCA in late 2010. In this original guidance, the IRS required foreign institutions to document every account regardless of whether it had documentation on file.
In response to numerous complaints to the first notice, the IRS provided additional guidance in Notice 2011-34 on April 8, 2011. According to this notice, financial institutions will have to review paper and electronic account files to identify U.S. accounts. Although this has reduced the requirements imposed by the first notice, it is still extremely burdensome.
According to Danielle Nishida, attorney advisor in the Office of Associate Chief Counsel, the IRS has narrowly tailored its guidance regarding the FATCA, hoping to provide more broad advice in the future. Notably, however, the IRS is looking to the community for comments in assessing the effect of FATCA on retirement plans, employee benefit plans, trusts, and numerous other areas. Ultimately, these comments will guide the IRS in its implementation of FATCA.
According to Nishida, the IRSs goal is to “get U.S. reporting” and “not to tax anyone besides U.S. taxpayers.” Notably, however, the foreign institutions involved are either subject to the task assigned to them by the IRS or pay a 30 percent withholding tax. While discussing the withholding tax, Michael Plowgian, attorney advisor in the Treasurys Office of Tax Policy, explained the 30 percent withholding tax “gives foreign financial institutions a way to incentivize recalcitrant account holds to provide information about their accounts” and “prevents a ring of Ëœblockers from forming around the United States to act on behalf of noncompliant entities.”
The IRS is also struggling with how to best address partnerships and other pass-through entities under the disclosure regime established by FATCA. During a forum sponsored by the D.C. Bar Taxation Sections Passthroughs and Real Estate Committee on May 25, 2011, Plowgian expressed that “because of the way partnerships are structured, these entities represent a significant challenge as the government works to implement the statute.”
According to Plowgian, the IRS is working to create exceptions for those entities that do not represent a risk of tax evasion. Specifically mentioned were pension and retirement plans and tax exempt charities. The Department of Treasury is also working to narrow the scope of entities subject to the FATCA by working on determining “when a foreign entity is primarily engaged in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such instruments,” which would put that institution within the requirements of the FATCA.
The two guidance documents issued by the IRS are clearly only a starting point in the implementation of FATCA. Before the provisions become effective in 2013, the IRS must undertake the responsibility of explaining the mechanics of FATCA to the endless list of potential taxpayers.
The attorneys at Fuerst Ittleman have extensive experience in the areas of tax law and tax law litigation and will continue to monitor the changes made or considered by the Internal Revenue Service. If you have any questions regarding the FATCA or any other Internal Revenue Code section, do not hesitate to contact us as