Stakeholders Seek Additional Clarifications From IRS In Wake Of Its Initial Guidance On FATCA

Nov 30, 2010   

As the Internal Revenue Service moves towards full implementation of the Foreign Account Tax Compliance Act (“FATCA”), businesses and financial institutions are seeking greater clarifications, and in some cases exemptions, from the laws broad new reporting and disclosure requirements. Numerous institutions from around the world have requested that the IRS scale back the impact of the new law. The requests come in response to the recent initial guidance published by the IRS in Notice 2010-60. A full copy of Notice 2010-60 can be read at: IRS releases initial guidance on FATCA.

The FATCA is a part of the larger arsenal of weapons the IRS is using to root out U.S. persons that are holding assets outside the U.S. and evading taxes. Generally the FATCA contains a broad set of tax penalty rules on foreign financial institutions that do not conduct due diligence on their account holders and disclose the identity of such persons to the IRS.

Beginning in 2013, “foreign financial institutions” (“FFI”), and “non-financial foreign entities”(“NFFE”) will be required to enter into agreements with the United States Department of the Treasury that will require them to report to the IRS information on U.S. accounts maintained by the FFI or face a 30% U.S. withholding tax on certain U.S. source income including interest and dividends, and gross proceeds from the disposition of any property of a type which produces interest or dividends from sources within the United States. The information required to be reported includes the name, address, and taxpayer identification number of each substantial U.S. owner of the account, and information as to the amount in the account even if such U.S. account holders only hold non-US assets within these accounts.

The potential impact of the FATCA and the regulations that will implement it will be widespread as a “business” for FATCA purposes is much broader than for general income tax purposes. In Notice 2010-60, the IRS announced that a wide variety of businesses will be considered FFIs for the purpose of the FATCA. This includes non-US entities that accept deposits in the ordinary course of business, such as savings banks and credit unions, non-US entities that hold financial assets for the account of others as a substantial portion of their business, such as broker-dealers and trust companies, entities acting as custodians of the assets of employee benefit plans, and entities that are primarily engaged in the business of investing or trading securities or commodities.

As a result of the breadth of the FATCA, numerous organizations are calling for further clarifications as to what an FFI is. Businesses from around the world are worried that without more detailed clarifications as to what an FFI is and bright-line safe harbors it may be impossible for a financial institution to comply. In response to IRS Notice 2010-60, financial institutions are calling for reforms that will allow an FFI to rely on a payees self-certification in making its determination whether to report information to the IRS and to allow for a one-year grace period for all reporting errors after the law takes effect. Additionally, several groups are asking that future rules provide for exemptions for those FFIs that pose a low risk of tax evasion.

If you have any questions regarding the potential impact the FATCA may have on your business or any other tax provision, please contact Fuerst Ittleman at contact@fidjlaw.com.