FATCA Update: Confidentiality of Information Transmitted to IRS; Announcement of “More Favorable” IGA Terms; and More IGAs

The month of July has seen several significant developments regarding implementation of the Foreign Account Tax Compliance Act (FATCA), which has been fully effective since July 1, 2014.  First, the IRS Office of Chief Counsel issued an advice memorandum regarding the applicability of the tax returns and return information confidentiality provisions of IRC 6103 and 6105.  Second, Treasury announced that sent letters to 40 countries which executed early versions of Intergovernmental Agreements (IGAs) that, based upon the “more favorable terms” provision in their IGAs, they could take advantage of more favorable provisions contained in more recent IGAs.  Finally, Treasury announced several new IGAs with partner jurisdictions.

IDES and Confidentiality

The Internal Revenue Service maintains a computerized system for secure, encrypted transmission of taxpayer financial account information called the International Data Exchange Service (IDES).  IDES was designed by the IRS and developed and implemented by a third-party vendor in order to facilitate the required transmission of financial account information pursuant to FATCA.  IDES will be used by the IRS and foreign tax administrations to exchange financial account information, as well as by the IRS to receive submissions directly from foreign financial institutions.  The IDES web site may be accessed here.

Pursuant to section 6103(a) of the Internal Revenue Code, tax returns and return information must be maintained as confidential by the IRS and may only be disclosed as provided by the code.  Information provided to the IRS by a foreign government is also subject to confidentiality pursuant to IRC 6105.  In addition, each of the tax treaties, and IGAs, to which the United States is a party include confidentiality provisions that require all information exchanged to be kept confidential in accordance with the provisions of such treaty or agreement, as well as provisions generally limiting the use of the information only for purposes of tax administration.

The Office of Chief Counsel advice memorandum contains an extensive analysis of when, precisely, the confidentiality protections of IRC 6103 and 6105 apply to tax information transmitted through IDES.  In the case of outbound information (that is, tax information transmitted by the IRS to a foreign tax authority), the memorandum concludes that such information, which is necessarily in the possession of the IRS, is protected by confidentiality throughout the IDES process.  Once the foreign tax authority receives the information, it will be obligated to maintain confidentiality under the terms of the applicable tax treaty or IGA.

The confidentiality of inbound information is less clear, as the advice memorandum acknowledges.  The Office of Chief Counsel concludes, ultimately, that confidentiality protection arises the moment the information is successfully uploaded to IDES by the transmitting party (whether a foreign tax authority or a foreign financial information).  The memorandum notes that information transmitted through IDES will be provided on FATCA Form 8966, which would likely constitute an “information return” within the meaning of IRC 6103(b)(1).

In a related development, the IRS updated its Frequently Asked Questions regarding technical aspects of IDES at the end of July to address certain recurring questions by IDES uses.

Notification of “More Favorable Terms” to Certain IGA Jurisdictions

Article 7 of the Model 1 IGA provides that the United States shall notify partner jurisdictions of any more favorable terms under Article 4 or Annex I of the IGA afforded to another partner jurisdiction.  The purpose of such provision is to ensure that countries signing early IGAs may take advantage of later modifications to the Model 1 IGA that are more favorable.  Pursuant to this particular article, Treasury has announced that it sent a “more favorable terms” letter in July to the following countries:

  • Australia
  • Barbados
  • Belarus
  • Belgium
  • Brazil
  • Canada
  • Cayman Islands
  • Costa Rica
  • Czech Republic
  • Denmark
  • Estonia
  • Finland
  • France
  • Germany
  • Gibraltar
  • Guernsey
  • Honduras
  • Hungary
  • Ireland
  • Isle of Man
  • Italy
  • Jamaica
  • Jersey
  • Latvia
  • Liechtenstein
  • Lithuania
  • Luxembourg
  • Malta
  • Mauritius
  • Mexico
  • Netherlands
  • New Zealand
  • Norway
  • Poland
  • Qatar
  • Slovenia
  • Spain
  • South Africa
  • Sweden
  • United Kingdom

As described in the letter sent to each of these countries, the United States considers the following provisions, contained in the IGA entered into with the British Virgin Islands, to be “more favorable terms” and thereafter available to be utilized by the jurisdictions receiving such letter:

  • Paragraph G of Section VI of Annex I, which addresses alternative procedures for new accounts opened prior to entry into force of the IGA; and
  • Paragraph H of Section VI of Annex I, which addresses alternative procedures for new entity accounts opened on or after July 1, 2014, and before January 1, 2015.

Announcement of Additional IGAs

During the month of July, Treasury announced that it had formally executed IGAs with the following jurisdictions:  Georgia, India, Philippines, and Turkey.  All of these agreements are Model 1 IGAs.

FATCA Update: Treasury Clarifies Obligations of Participating FFIs to Report Pre-Existing Accounts

Earlier today, Treasury and the IRS issued yet another correcting amendment to the previously-issued regulations implementing the Foreign Account Tax Compliance Act (FATCA).  FATCA become effective on July 1, 2014, and generally requires participating foreign financial institutions (FFIs) to begin reporting information regarding their U.S. account holders to the U.S. by March 31, 2015.  Since FATCA was passed by Congress and signed by the President in 2010, Treasury and the IRS have issued a massive amount of proposed, temporary, and final regulations to implement FATCA’s mandate.

According to the preamble to today’s correcting amendment, the change “affects FFIs that have entered into an agreement with the IRS to obtain status as a participating FFI and to, among other things, report certain information with respect to U.S. accounts that they maintain.”  The preamble further sets forth why the correction was needed:

As published, the temporary regulations contain an error that is misleading with respect to the reporting requirements of participating FFIs (as defined in §1.1471-1(b)(91)) maintaining U.S. accounts during the 2014 calendar year. This correcting amendment modifies the last date in the first sentence in §1.1471-4T(d)(7)(iv)(B) to correct the relevant provision to meet its intended purpose.

Specifically, the amendment corrects Treas. Reg. 1.1471-4T(d)(7)(iv)(B), as follows:

(B) Special determination date and timing for reporting with respect to the 2014 calendar year.  With respect to the 2014 calendar year, a participating FFI must report under paragraph (d)(3) or (5) of this section on all accounts that are identified and documented under paragraph (c) of this section as U.S. accounts or accounts held by owner-documented FFIs as of December 31, 2014, (or as of the date an account is closed if the account is closed prior to December 31, 2014) if such account was outstanding on or after the effective date of the participating FFI’s FFI agreement. * * *

Prior to today’s correcting amendment, participating FFIs were only permitted to treat accounts as “pre-existing” if they were opened prior to July 1, 2014.  The amendment now allows participating FFIs to treat accounts as pre-existing if they were opened before the institution signed its FFI Agreement with the IRS.  The change allows FFIs to have greater leeway in characterizing accounts as “pre-existing,” particularly for those institutions which registered as participating FFIs and entered into FFI Agreements after July 1, 2014.

Wegelin & Co. Account Holder Sentenced to Prison Term

Kordash received cash distributions from his undeclared account at Wegelin and used the account for his antiques business in New York.  Kordash opened the account decades ago, when he was a Russian citizen living in Russia.  He came to the U.S. in 1984, and later became a U.S. citizen.
Wegelin & Co. was the oldest private bank in Switzerland.  In January 2013, the bank pleaded guilty to felony tax charges, thus becoming the first foreign bank to do so.  The bank admitted to conspiring to defraud the United States by helping U.S. account holders hide assets from the IRS in undeclared accounts.  A federal district court also authorized the IRS to issue a “John Doe” summons that allowed the United States to determine the identity of U.S. taxpayers who held accounts at Wegelin and other banks based in Switzerland to evade federal income taxes.

IRS Clarifies Requirements for Streamlined Filing Procedures

On October 9, 2014, the Internal Revenue Service published additional guidance clarifying the requirements for participation in the Streamlined Filing Compliance Procedures.  (See prior coverage of the new procedures announced in June 2014 here.)  Here are links to the new guidance published on the IRS website:

  • Updated general description of Streamlined Filing Compliance Procedures here;
  • Updated instructions for taxpayers residing in the United States here;
  • Frequently asked questions for domestic taxpayers here;
  • Updated instructions for taxpayers residing outside the United States here;
  • Frequently asked questions for taxpayers residing outside the United States here.

The IRS also released frequently asked questions for the Delinquent International Information Return Submission Procedures (available here).  In a notable change, the IRS now states that these procedures are available to taxpayers even if they have unreported income:

The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

We will analyze this guidance and provide further analysis in future posts.

FATCA Notebook: Former IRS Chief, Taxpayer Advocate Criticize FATCA; Switzerland Moves Toward Greater Transparency

This week brings a wealth of news in the FATCA arena, which we summarize in today’s post.

First, former acting IRS Commissioner Steven Miller speaks out against FATCA and suggests that the benefits of the new information reporting regime imposed by FATCA may not outweigh its costs. An article published by TaxAnalysts on October 7 quotes Miller as follows:

“I can’t even say with conviction that I’m sure, looking strictly on a cost-benefit basis, that FATCA’s . . . benefits are going to outweigh the cost,” Miller told a lunch crowd at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington. “It’s not clear to me that when you look solely at the burden placed on financial institutions and others, versus the amount of revenue that may come into the treasury, that this is going to be a revenue-positive event for the United States.”

Miller, former deputy commissioner of services and enforcement and a 25-year veteran of the IRS, acknowledged both problems and progress in the implementation of FATCA and said that he believes “offshore evasion is an area in which noncompliance will never be completely eradicated.”

“While I have high hopes that the implementation of FATCA will be successful and of great assistance in this regard, I fear that it’s not going to be a panacea,” Miller said. “I also believe that we have yet to see the full breadth of creativity in terms of the types of assets that will be used into the future to store wealth overseas.”

Second, joining Miller in criticizing FATCA is National Taxpayer Advocate Nina Olson, who also spoke at the Securities Industry and Financial Markets Association FATCA Policy Symposium. According to an article published by TaxAnalysts on October 8, Olson made the following points in her remarks:

“This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won’t be able to know what its consequences are, intended or otherwise,’ Olson said. “I don’t think we’ll know that for years. And by that point we’ll actually be a little too late to go, “Oops, my bad, we shouldn’t have done this,’ and then try to unwind it.”

. . .

The raw numbers so far tell a confusing tale, Olson said. In 2011, 170,000 taxpayers filed Form 8938, “Statement of Specified Foreign Financial Assets”; 187,000 filed Form 8938 in 2012, she said. Forty-one percent of 2011 filers also filed a foreign bank account report, she added. However, in 2012 only 21 percent of Form 8938 filers had a foreign address, Olson noted.

“I really don’t know what people’s assumptions were when they enacted this requirement,” Olson said. “Did we expect to get 7 million? Did we expect to get 10 million? Did we expect to get 500,000? Is this a good result? Is this a bad result?” Just one-half of 1 percent of Form 8938 filers had a balance due account after getting notices, compared with 4 percent for the general taxpayer population, she noted.

Olson further noted in her remarks that a new cottage industry has sprouted as a result of FATCA: after foreign banks expressed reluctance to open accounts for some U.S. taxpayers overseas, some businesses began offering insurance to protect against incomplete FATCA disclosures. “So here we now have created a whole new industry for a risk we have manufactured ourselves,” Olson said.

Finally, Switzerland announced on October 8 that it would move toward automatic exchange of bank account information with other countries, including the EU and the United States. (See articles here and here.) If adopted, the earliest date for automatic exchange of data would be 2018 and the new reporting regime would require Switzerland to notify an account holder’s country of origin if a Swiss bank account is opened. Switzerland also announced that it would seek to negotiate a Model 1 Intergovernmental Agreement (IGA) with the United States to implement FATCA, to replace the Swiss-U.S. Model 2 IGA that was reached in February 2013.  In a press release, the Swiss Federal Council made the following statements regarding its decision to implement greater transparency in its tax dealings: 

The cornerstones of the mandates definitively adopted by the Federal Council today are as follows:

– The introduction of the automatic exchange of information is to be negotiated with the EU.

– Regarding implementation of the Foreign Account Tax Compliance Act (FATCA), a Model 1 FATCA agreement should be with negotiated with the United States. With the new agreement, data would be exchanged automatically between the competent authorities on a reciprocal basis.

– Negotiations on the automatic exchange of information will be initiated with further selected countries. In an initial phase, consideration will be given to countries with which there are close economic and political ties and which, if appropriate, provide their taxpayers with sufficient scope for regularisation.

– The introduction of the automatic exchange of information with foreign countries will be conducted by means of agreements with partner countries. Moreover, implementing legislation will be required in national law. This is currently being prepared by the Federal Department of Finance and will be submitted to parliament together with the negotiated agreements. The existing legislative framework excludes the automatic exchange of information.

Switzerland welcomes the new international standard, to which it contributed actively. It allows for a level playing field in the competition between financial centres, as these regulations apply to all, and is an important instrument in international efforts to combat tax evasion. Domestic bank client confidentiality will not be affected by the implementation of the new global standard.

It is important for the Federal Council that the requirements which it adopted in June 2013 are contained in the new standard. There is to be only one global standard, the exchanged information should be used solely for the agreed purpose (principle of speciality), the information should be reciprocal, i.e. should flow in both directions, data protection must be ensured and the beneficial owners of trusts and other financial constructs should also be identified. Moreover, the Federal Council has stated that the issues of regularisation of the past and market access are to be addressed and solutions sought in negotiations on the automatic exchange of information with the EU and EU member states.


FATCA Update: Brazil Signs IGA with U.S. and Treasury Releases More Guidance

Treasury logoOn September 24, 2014, the government of Brazil announced it had signed an intergovernmental agreement with the United States as part of its adoption of the requirements of the Foreign Account Tax Compliance Act (FATCA). The agreement was signed on September 23 by Finance Minister Guido Mantega and U.S. Ambassador Liliana Ayalde. The Brazil-U.S. IGA is reciprocal, meaning that information on U.S. taxpayers residing in Brazil will be sent by Brazilian financial institutions to Brazil’s federal tax department, which will then pass on the information to the U.S. Internal Revenue Service, and the IRS will provide Brazilian tax authorities with financial information on Brazilian taxpayers living in the U.S. This brings the total number of IGAs reached – either signed agreements or in substance – to over 100. (A list of all IGAs is available on Treasury’s website here.)

In related developments, the IRS updated its FATCA FAQs to address whether a nonreporting FFI under a Model 1 IGA is required to register and obtain a GIIN, and under what circumstances FFIs in IGA countries may use substitute Forms W-8. (The updated FAQs are available on the IRS website here.)

Finally, the IRS is updating Form 1099 to address FATCA reporting.  Newly issued Form 1099 instructions provide as follows:  “Beginning in 2014, an FFI with a chapter 4 requirement to report a U.S. account maintained by the FFI that is held by a specified U.S. person may satisfy this requirement by reporting on Form(s)1099 under the election described in Regulations section 1.1471-4(d)(5)(i) (A). Additionally, a U.S. payor may satisfy its chapter 4 requirement to report such a U.S. account by reporting on Form(s) 1099. See Regulations section 1.1471-4(d)(2)(iii)(A). Form 1099-MISC is among the Forms 1099 used for such purpose. A new check box was added to Form 1099-MISC to identify an FFI filing this form to satisfy its chapter 4 reporting requirement.”  (The new instructions can be found here, here, and here.)

FATCA became effective on July 1, 2014.

FATCA Update: Latest Intergovernmental Agreements: Finland, Chile, and (Coming Soon) Luxembourg

Finland and Chile became the latest nations to sign agreements pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), bringing the total of such intergovernmental agreements to 24.   According to Law360, an agreement with Luxembourg will be announced soon, once a French translation of the agreement can be validated.  (Drew Singer, Chile, Finland Sign FATCA Agreements, Luxembourg Next, Law360 (March 7, 2014)).  Luxembourg has announced that its anticipated FATCA agreement will be a Model 1 agreement.

FATCA requires U.S. financial institutions to withhold 30% of certain payments made to foreign financial institutions (“FFI”) unless that FFI agrees to report U.S. taxpayer account information to the IRS.  FATCA currently goes into effect on July 1, 2014.

Finland has agreed to a Model 1A agreement where FFIs in Finland will report information to the Finnish Ministry of Finance, which will subsequently exchange information with the IRS.  This agreement is reciprocal, meaning that the U.S. will also report account information about Finnish individuals and entities in the U.S. to Finland.

Chile has agreed to a Model 2 agreement where FFIs in Chile will report information about consenting U.S. accounts directly to the IRS.  Information on non-consenting U.S. accounts can be reported government-to-government through a treaty request.

All FATCA intergovernmental agreements can be found here.

FATCA Update: Canada and Hungary Sign Intergovernmental Agreements

This week, Canada and Hungary became the latest nations to sign agreements pledging tax transparency sought by the Foreign Account Tax Compliance Act (FATCA), bringing the total nations to have signed such agreements to 22.  Another 12 nations have committed in substance to agreements to date.  In the U.S. Treasury Department’s press release issued yesterday on the matter, Deputy Assistant Secretary for International Tax Affairs Robert B. Stack stated, “The agreements announced today clearly demonstrate the considerable international support behind FATCA and we are proud to lead the global charge on this pressing issue” of combating international tax evasion.

FATCA requires U.S. financial institutions to withhold 30% of certain payments made to foreign financial institutions (“FFI”) unless that FFI agrees to report U.S. taxpayer account information to the IRS.  FATCA currently does into effect on July 1, 2014.

Canada has agreed to a Model 1A agreement where FFIs in Canada will report information to the Canada Revenue Agency, which will subsequently exchange information with the IRS pursuant to the present U.S.-Canada tax treaty.  This agreement is reciprocal, meaning that the U.S. will also report account information about Canadian individuals and entities in the U.S. to Canada.

Hungary had previously indicated that it reached an agreement with the U.S., but the agreement was only finalized and announced on Tuesday.  Hungary signed a reciprocal Model 1A agreement, similar to Canada’s described above.

All FATCA compliance agreements can all be found here.