Tax Analysts Blog

Will FATCA Ever Go Into Effect?

Posted on Dec 9, 2013

The Foreign Account Tax Compliance Act seems to be revolutionizing the way governments share tax information. Other nations are using intergovernmental agreements to piggyback on FATCA information-gathering efforts. Virtually every practitioner and financial industry representative will readily admit that FATCA is changing the way banks and other institutions do business, keep customer records, and think about possible tax evasion. Despite all this, the very real question exists of whether FATCA will ever go into formal effect.

In July the government issued Notice 2013-43, which delayed FATCA withholding by six months -- from January 1, 2014 (the statutory date), to July 1, 2014. Treasury justified the postponement by saying it needed more time to work out IGAs with nations and provide more guidance on jurisdictions that have signed agreements but not yet bought them into force. It claimed authority for the delay under section 7805(a). Practitioners welcomed the notice, but said the extra time would not be enough unless the IRS finalized a lot of outstanding FATCA guidance.

Well, it hasn’t quite done that, at least according to the IRS Information Reporting Program Advisory Committee. In a report released last week, IRPAC called for another six-month delay. IRPAC approved the original delay, but says that there just isn’t time for withholding agents to finalize their systems by July 1, given that guidance is still outstanding on issues like chapter 3 and chapter 4 harmonization. IRPAC points out that the IRS has issued only draft revisions to forms W-8, 1042, and 1042-S. Without those final forms, financial institutions and withholding agents cannot make the necessary changes to their systems to be in compliance.

IRPAC and most of the practitioner community seem to have a well-reasoned case. The IRS and Treasury haven’t finished writing the rules, so how can banks and foreign financial institutions be expected to follow them? The financial sector can argue that another delay doesn’t just make sense, it’s absolutely necessary.

I’ve argued before that the original delay of FATCA was disturbing from a separation of powers perspective and that a second delay would only call into question whether Treasury and the IRS will ever start enforcing withholding. Practitioners and effected taxpayers will always be clamoring for more guidance, more clarity, more safe harbors, and more time to comply. They will never be satisfied, no matter how many thousands of pages of regulations Treasury releases on New Year’s Eve or how many sets of detailed instructions the government puts together for revised forms. The tax community is seldom completely satisfied with guidance. It always wants more or different answers.

And the reality is that the IRS will probably never be done issuing FATCA regulations or form revisions. The law is very broad, with many moving parts. It is evolving as Treasury (rightly or wrongly) changes its implementation by using IGAs. If IRPAC and the financial industry want Treasury to wait for all the significant guidance to be finalized before the withholding regime is put into force, FATCA will be waiting a very long time to become law.

FATCA is unpopular. Stakeholders view it as overly burdensome. Foreign governments thought it was too unilateral (although many are now eager to share in the bounty of tax information the law will force institutions to collect). But Congress passed it for a reason: Foreign institutions were blatantly assisting U.S. taxpayers in hiding assets from the IRS. Banks and the financial sector turned a blind eye to tax evasion for a long time. Treasury and the IRS shouldn’t be all that sympathetic to their repeated calls for delay and leniency. FATCA should be put into effect as soon as possible, and the administration should stop bending separation of powers rules by using delays to functionally repeal unpleasant parts of statutes.

Read Comments (3)

Lynne SwansonDec 9, 2013

Trust me, my Canadian bank where I have been a customer for 33 years and my
Canadian credit union where I have been a member for 14 years have not "turned
a blind eye" to tax evasion.

Instead, they have reported annually on income from my accounts to Canada
Revenue Agency. Tax has been paid in full. CRA is fully aware of my Registered
Retirement Saving Plans (RRSP).

I have been a Canadian citizen for 44 years. I "permanently and irrevovably"
relinquished US citizenship when I became a Canadian citizen 40 years ago.

Now, US is trying to seize my financial records just because I was born in US
63 years ago.

FATCA violates Canadian banking, privacy and human rights laws and Canada's
constitution. Change them, US Treasury arrogantly demands.

It's time for US to join the rest of the planet (except Eritrea) and move to
residence-based taxation instead of citizenship-based taxation.

Congress should also look at the damage FATCA is doing to millions of people
around the world who have bank accounts in the countries where they live, work,
earn income, own homes, pay taxes and plan to retire.

While the original intent of FATCA was to combat offshore tax evasion, it is
instead ensnaring honest people with some bizarre past connection to US and
their non-US families.

Charles M. BruceDec 10, 2013

FATCA should be put into effect as scheduled, without delay. With every big
piece of tax legislation or Treasury Department guidance, the time comes when
the train needs to pull out of the station. That time has come for FATCA. One
reason is delay encourages lobbyists who shovel smoke to say FATCA can be
repealed, give me money for a war chest, and I will make it disappear. They
can get a few Members to sign on, to show movement. The smart players,
however, do not buy this. In fact, many FFIs in top tier financial centers
want the new forms of bilateral and multilateral exchange of information to
come into place sooner rather than later. They are ready to make adjustments
and move on.

Michael KarlinDec 11, 2013

So much of FATCA is problematic that it hardly surprising that it has met with
resistance and delay. Let's think back to how FATCA came to pass. It is a
piece of legislation which imposes very broad burdens on financial institutions
worldwide and it was enacted with no hearings and very little Congressional or
public debate. Senator Levin and a couple of others had been pushing
legislation to combat some of the more egregious forms of offshore tax evasion
but they had met with little success until the UBS scandal came to light and
then FATCA passed with almost no thoughtful consideration. Hardly surprising
that, having been deprived of the ability to comment on and refine the
legislation, those affected have sought to use the regulatory process to get
the legislation to function in a reasonable way.
FATCA is, unfortunately, an extraordinary example of American exceptionalism
and overreach. As implemented by the regulations, hundreds of thousands if not
millions of organizations around the world with no connections whatsoever to
the United States – no U.S. owners, no U.S. assets, no U.S. activities – and
which bear no resemblance to what normal people would think of as a financial
institution will effectively be required to register with the Internal Revenue
Service FATCA portal so that they can continue to do business with their own
local financial institutions. And just wait. Other countries who sign up for
IGAs are soon going to find out how one-sided these agreements are – and you
can bet that if they press for the same excessive levels of compliance and
information reporting from our “financial institutions” with respect to their
own residents and if the Treasury actually tries to secure this for their IGA
partners, you will hear howls of protest accompanied by passive-aggressive
resistance from our banks to which the current pushback of which Jeremy Scott
and Charlie Bruce complain will seem like a whisper.
No one, certainly not I, would deny that American taxpayers have been less than
fully compliant in reporting and paying tax on their foreign assets and
activities. There have indeed been some bad guys, and the IRS and the
Department of Justice have had a field day publicizing, at strategically timed
intervals, the crimes and misdemeanors of these bad apples. All too often,
however, the problems have resulted from ignorance, poor advice and lamentable
service from the IRS, compounded by our being the only country in the world of
any relevance to this discussion that taxes its nonresident citizens as if they
were still here. FATCA represents a tremendous and very costly overreaction,
where so much could have been accomplished by IRS education and outreach and,
eventually, a multilateral international approach to this problem. I am
available for consultation (at my usual hourly rate) if anyone is interested in
a rational set of solutions.

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