An advisory committee cautioned the Internal Revenue Service that implementation of the Foreign Account Tax Compliance Act could run afoul of foreign laws.

The warning came in a report by the Information Reporting Program Advisory Committee, or IRPAC, which released its annual report on Wednesday. Among the many issues covered in the 2011 report were the FATCA provisions, which were included in the HIRE Act of 2010. FATCA required foreign financial institutions to report information to the IRS on the financial accounts held by U.S. taxpayers, and the foreign entities in which U.S. taxpayers hold a substantial ownership interest. Those provisions have stirred controversy abroad and the IRS has opted to phase in some of the requirements (see FATCA Isn’t Just for Fat Cats and Canadian Finance Minister Criticizes U.S. Tax Crackdown).

In the new IRPAC report, the advisory committee warned of repercussions from the new requirements. “The obligations that FATCA imposes on foreign financial institutions (FFIs) potentially conflict with legal constraints imposed on such FFIs under foreign law in a number of respects,” said the report. “IRPAC recommends that the IRS take into account the existence of such restrictions in formulating guidance under FATCA.”

For example, FATCA's reporting requirements could potentially violate privacy or data protection laws in foreign countries. Foreign banks may also be precluded from collecting withholding tax, particularly on pass-through payments.

The report noted that the IRS has provided transitional relief with its phased implementation of FATCA in Notice 2011-53, but it said the IRS notice may still leave too little time for financial institutions to build the required systems and to perform required account due diligence.
IRPAC recommended that the IRS issue further guidance that provides additional time for withholding agents to develop the required systems and provide rules for the identification of foreign financial institutions and procedures that withholding agents will be required to follow to verify an account holder is an FFI and its status as a participating FFI. IRPAC also recommended revising the forms to make them less confusing.

Other items covered in the report included recommendations on cost basis reporting by financial institutions of customer cost basis in securities transactions, information reporting for tax credit bonds, merchant card and third party payments, and employer and insurer reporting under the health care reform law.

“IRPAC performs a valuable service for the IRS,” said IRS Commissioner Doug Shulman in a statement. “The group provides helpful advice from the private sector that identifies taxpayer burden while also providing recommendations to improve tax administration.”

 

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