FATCA Update: Italy Signs Intergovernmental Agreement and District Court Upholds New Reporting Regulation

On Friday, Italy became the latest nation to sign an agreement pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), which requires U.S. financial institutions to withhold certain payments made to foreign financial institutions (“FFI”) that do not agree to report U.S. taxpayer account information to the IRS.

Italy signed a Model 1A agreement, where FFIs will provide account information to the Italian government, which will report that information to the IRS.  The U.S. has agreed to reciprocity with Italy such that the U.S. will provide similar account information about Italian individuals who have accounts in the U.S.  Nineteen countries have entered into FATCA compliance agreements, which can all be found here.

On the home front, Judge James E. Boasberg of the United States District Court for the District of Columbia rejected a challenge by the Florida and Texas Bankers Associations to new income-reporting regulations issued by the IRS.  The new regulations require U.S. banks to report the amount of interest earned by accountholders who reside in a foreign country where the U.S. has an exchange agreement.  Part of the impetus for the new reporting requirements was to ensure that the intergovernmental agreements entered into with foreign countries will be respected.  Indeed, FATCA’s success depends upon the exchange of information with foreign financial institutions.  And, since the IRS has obligations under some of the FATCA intergovernmental agreements, like the one with Italy discussed above, it must have the ability to gather the necessary information within the U.S. to disclose to the participating country.

Below is a portion of Judge Boasberg’s opinion where he sets forth (citations omitted) a portion of the IRS’s reasoning for the new expanded reporting regulation:

Expanded reporting was, [the IRS] claimed, “essential to the U.S. Government’s efforts to combat offshore tax evasion.”  Since exchange agreements require mutuality, the regulations “ensure that the IRS is in a position to exchange such information reciprocally with a treaty partner.” Such reciprocity also aids overseas compliance with the Foreign Account Tax Compliance Act, which “require[s] overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS.”   Finally, the IRS observed,              “[R]eporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation.”

The opinion can be found here.

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