IRS Postpones Tax Evader Action

July 23rd, 2011
in econ_news

tax-evasion Econintersect:  U.S. laws require that domestic investors disclose any accounts in foreign assets and report any income to the IRS.  But the IRS couldn't really enforce the rules because it didn't have the necessary information.  That was changed with FATCA 2010 (Foreign Account Tax Compliance Act).  The law requires that FFI (foreign financial institutions) identify the holdings of U.S. resident accounts and fulfill certain statutory requirements or face an automatic 30% withholding on payments.  But the changes will not be quick.  A press release from the IRS has detailed the implementation of the law which will not start until nearly three years after enactment.

Follow up:

From the IRS press release of July 14:

Notice 2011-53, issued today by Treasury and the IRS, provides a workable timeline for FFIs and U.S. withholding agents to implement the various requirements of FATCA. Specifically, the notice phases in the implementation of FATCA in the following manner:

  • An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
  • Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.
  • Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013. Reporting requirements will begin in 2014.
  • For purposes of the Notice, high risk accounts include private banking accounts with a balance that is equal to or greater than $500,000.

Prior to this month the provisional schedule had been approximately one year sooner.

More details are provided by Securities technology Monitor:

Under FATCA, financial firms – those defined as a bank, custodian or just about any entity in the business of making investments – must sign an agreement with the IRS to be designated as a “participating foreign financial institution" or PFFI. If they don't their U.S. withholding agent will have to withhold 30 percent of any U.S. sourced payment of dividends, interest or gross proceeds made to the fund. If the foreign fund is a PFFI, the U.S withholding agent – typically a prime broker or custodian – will not have to withhold the payment but the PFFI would have to apply the withholding to its investors – both U.S. and non U.S. persons – if it does not have the proper documentation.

Prime brokers, U.S. mutual fund families and fund of hedge funds that have foreign investors or enter into certain derivative contracts with non-U.S. persons will have to collect an FFI number assigned by the IRS to that foreign investor or derivative counterparty and verify that number on the IRS’ database. Without that verification, a withholding tax of 30 percent of U.S. sourced payments would apply.

Matthews cited customer onboarding and classification as the two most difficult challenges in meeting FATCA. “Financial firms which agree to become PFFI’s will likely need to beef up the documentation and procedures they use to identify U.S. investors and prove they don’t have any U.S. investors,” he said. That will require changes in account opening documentation and training of customer-interfacing personnel.

The quote above is from Nick Matthews, a partner in London at Kinetic Partners, a financial advisory firm.

Source:  IRS Press Release and Securities Technology Monitor

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