The IRS has issued additional guidance under the Foreign Account Tax Compliance Act (FATCA) provisions in the Hiring Incentives To Restore Employment (HIRE) Act of 2010, which impose reporting requirements on foreign financial institutions (FFIs) that hold accounts on behalf of U.S. persons worth more than $50,000. The guidance focuses on reporting of “preexisting” individual accounts and withholding on “passthru payments.”
Comment: The FATCA reporting requirements, imposed on financial institutions starting in 2013, should not be confused with the related FBAR (foreign bank account reporting) requirement, imposed on the U.S. person (individual or entity) that owns the foreign account. The FBAR requirements are already in force and impose up to a 50 percent penalty for noncompliance. Also in play is the Offshore Voluntary Disclosure Initiative (OVDI), announced earlier this year and ending in August 2011. The OVDI offers individuals reduced penalties if they come forward with disclosures about their unreported foreign holdings before the deadline.
The new guidance revises the procedures that FFIs should follow to identify U.S. accounts among their preexisting accounts. A preexisting individual account for this purpose is an account held by an individual on the date that an FFI agreement takes effect. A participating FFI is required to determine whether its preexisting accounts are U.S. accounts, recalcitrant accounts, or non-U.S. accounts.
The latest guidance details the steps that FFIs must take to make this determination, including the sifting of documentary evidence and electronically searchable information that it collects or maintains in an account holder’s file and that may establish a person’s identity and status as a non-U.S. person.
The new guidance also clarifies the requirement that FFIs deduct and withhold a 30 percent tax on any passthru payment to a recalcitrant account holder or nonparticipating FFI. It defines passthru payments as a withholdable payment (certain U.S. payments) plus the passthru payment percentage of a non-withholdable payment.