The Internal Revenue Service said it would regard 2014 and 2015 as a transition period for purposes of IRS enforcement and administration of the Foreign Account Tax Compliance Act, or FATCA, for banks that have made a good-faith effort to comply.
FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to report on the holdings of U.S. citizens or else face stiff penalties. The controversial law has led to a record number of citizenship renunciations abroad, and protests that it would violate the banking secrecy and privacy laws in other countries. In response, the Treasury Department has been negotiating a series of intergovernmental agreements with the tax authorities of other countries. It and the IRS have also been delaying some of the provisions, but they are set to take effect this year.
The notice that the IRS issued Friday is not a postponement, but it indicates that if foreign banks and other entities have been making “good faith efforts” to comply, then they won’t be subject to onerous penalties.
In Notice 2014-33, the IRS announced that calendar years 2014 and 2015 would be regarded as a transition period for purposes of IRS enforcement and administration with respect to the implementation of FATCA by withholding agents, foreign financial institutions, and other entities, and with respect to certain related due diligence and withholding provisions.
During the transition period, the IRS said it would take into account whether a withholding agent has made “reasonable efforts” during the transition period to modify its account opening practices and procedures to document the status of payees, apply the appropriate standards of knowledge, and, in the absence of reliable documentation, apply the relevant presumption rules. In addition, the IRS will consider the good faith efforts of an FFI, but an entity that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period.
The notice also announces certain intended amendments to the regulations, including amendments providing that a withholding agent or FFI may treat an obligation (which includes an account) held by an entity that is opened, executed, or issued on or after July 1, 2014, and before January 1, 2015, as a preexisting obligation, subject to certain modifications.
In addition, on Monday Israel was added to the list of countries that will be treated as having an intergovernmental agreement, or IGA, “in substance” with the U.S., while Australia signed a “Model 1 IGA” with the U.S.
Last month, the Treasury and the IRS said they would treat countries that had reached an agreement in substance with the U.S. on FATCA as having those agreements in effect (see Treasury and U.S. Expand Jurisdictions Subject to FATCA Agreements). The countries that have agreements in effect have signed either Model 1 or Model 2 IGAs with the U.S. In a Model 1 IGA, the foreign financial institution reports the customer’s information to its government tax authority, which passes it along to the IRS. In a Model 2 IGA, the bank reports it directly to the IRS.
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