Foreign Account Tax Compliance Act Starts July 1

The Foreign Account Tax Compliance Act (FATCA) that was passed in 2010 will begin taking effect on July 1, 2014. (The original enforcement date was May 5, but it has been delayed.) Its intention is to make it mandatory for banks across the world to share depositor information with the United States government when it pertains to their American clients. This was done in an effort to deter those considering hiding their assets in offshore accounts or shell companies.

The rest of the world is already preparing for the difficulties FATCA could conceivably cause. Some financial institutions don’t even know how they’ll handle this. Why? Each circumstance is different, and they don’t all fall under the same umbrella. For example, some fall under “Model 1 Intergovernmental Agreements,” which means governments exchange information with each other. Others fall under “Model 2 Intergovernmental Agreements,” which means the foreign institutions report directly to the Internal Revenue Service.

The IRS isn’t doing the world any favors, either, as it is slow getting detailed rules out to affected FATCA institutions – and (surprise!) the paperwork they have released is a bit complicated. There are actually five different W-8 forms that can be used (the fifth was just released in mid-May). Forbes recently conducted a survey that showed nearly three-quarters of the 500 European and US tax professionals interviewed responded that they needed more clarity from the IRS; 54% said they expected additional delays.

According to the IRS, there can be fines of up to $50,000 levied against those who do not report foreign payments, and 30% of payouts can be withheld until sufficient information has been acquired.

The IRS appears to understand that this isn’t going to be easy, as they have deemed 2014 and 2015 to be a period of transition. They appear to be willing to give the benefit of the doubt, as long as reasonable efforts to adhere to FATCA guidelines have been exercised.