IRS: “good faith” compliance efforts by banks will avoid FATCA enforcement action until 2015

Financial institutions making “good faith” efforts to comply with new US tax reporting rules will not face full enforcement action for any lapses until the end of 2015, the country’s tax authorities have announced.07 May 2014

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In a notice published on its website (10-page / 68KB PDF), the Internal Revenue Service (IRS) said that the years 2014 and 2015 would be treated as a “transition period” for the purposes of enforcement action under the Foreign Account Tax Compliance Act (FATCA), which comes into force on 1 July. During this period, the authorities would “take into account the extent to which a participating or deemed compliant” foreign financial institution (FFI) had made “good faith efforts to comply with the requirements” of the new rules before taking any enforcement action, it said.

The transition relief period covers lapses in FATCA reporting requirements under Chapter 4 of the Internal Revenue Code, under which FFIs must provide the IRS with information on US taxpayers with money in accounts overseas. It will not apply to other requirements under the new regime, such as determinations of the character and source of payments for withholding and reporting purposes. Additionally, no transitional provisions will apply to FFIs that have not made good faith efforts to comply with the new rules.

Giving examples of when relief from enforcement action would apply, the IRS said that 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 chapter 4 status of payees, apply the standards of knowledge provided in chapter 4, and, in the absence of reliable documentation, apply the presumption rules”.

“Additionally, for example, the IRS will consider the good faith efforts of a participating FFI, registered deemed-compliant FFI, or limited FFI to identify and facilitate the registration of each other member of its expanded affiliated group as required for purposes of satisfying the expanded affiliated group requirement,” the IRS said in its notice.

FATCA is aimed at preventing tax evasion by US residents using foreign accounts. It introduces reporting requirements for FFIs with respect to accounts held by US residents, irrespective of national privacy laws. Institutions which do not collect and report this information can be subject to a 30% ‘withholding tax’ on US source income and sales proceeds. In the UK, an intergovernmental agreement (IGA) between the UK and US will allow UK-based financial institutions to meet their FATCA obligations by reporting information to HM Revenue and Customs (HMRC).

In the same notice, the IRS also announced a number of amendments to the FATCA regulations. These include a change that will allow a withholding agent or FFI to treat accounts and obligations opened, issued or executed on or after 1 July 2014 but before 1 January 2015 as a ‘pre-existing obligation’ for the purposes of the new regime, along with less onerous requirements for limited branches and limited FFIs.