The IRS Delays Timelines for Some FATCA Requirements

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The IRS Delays Timelines for Some FATCA Requirements
bmpFATCA still seems a work in progress for the IRS.
The Foreign Account Tax Compliance Act (FATCA), which comes into effect on January 1, 2013, is intended to reduce the levels of tax avoidance by U.S. citizens and entities through foreign financial institutions (FFIs). Compliance requirements will begin at the start of 2013 and will continue to be phased in through to January 2017. While some components of the legislation have yet to be confirmed, Daszkal Bolton can offer sufficient guidance to help citizens and entities prepare for full compliance with FATCA.

The Internal Revenue Service has delayed the timelines for withholding agents and foreign banks to complete the due diligence requirements of the Foreign Account Tax Compliance Act, and said that institutions will have until January 1, 2017, to start withholding taxes from U.S. taxpayers’ investment gains and until January 1, 2014, to put in place the reporting requirements mandated by FATCA.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions, including hedge funds, to report on the holdings of U.S. taxpayers to the IRS or face stiff penalties. The law has attracted considerable controversy and criticism from foreign banks, dual citizens living abroad and expatriates. The IRS and the Treasury Department have needed to postpone some of the requirements and modify its proposed regulations in the past.

The announcement outlines certain timelines for withholding agents and foreign financial institutions to complete due diligence and other requirements, along with additional guidance concerning gross proceeds withholding and the status of certain instruments as grandfathered obligations. The Treasury Department and the IRS intend to incorporate the rules described in this announcement in final regulations.

In consideration of the many comments received, the Treasury Department and the IRS said they intend to issue regulations that modify the rules set forth in the proposed regulations. Withholding agents, including participating FFIs and registered-deemed compliant FFIs, generally will be required to implement new account opening procedures by Jan. 1, 2014.

Key Point: Any entity which makes a payment of U.S. source income must consider whether it is subject to FATCA. FATCA may apply to both financial and non-financial operating companies. FATCA impacts virtually all non-U.S. entities, directly or indirectly, receiving most types of U.S. source income, including gross proceeds from the sale or disposition of U.S. property which can produce interest or dividends.

Penalties for non-compliance are potentially severe. A non-compliant FFI or NFFE may be required to apply a 30 per cent withholding tax. The institution may also be held liable for any tax that it fails to withhold, plus interest and penalties.

Contact us: Mark Chaves, CPA, Partner in Charge of International Tax, has significant experience dealing with tax planning and compliance issues for Americans living abroad, non-resident foreign citizens with American financial interests, and dual citizens, as well as foreign firms that do business in the USA or American companies that do business abroad. If you feel you might be impacted by FATCA, please contact Mark at 561-367-1040 or [email protected]. After a brief consultation, he can advise you on the best way to proceed.

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