The Internal Revenue Service (IRS) announced May 2nd, 2014 that the years 2014 and 2015 will be “transitional periods” in regards to enforcing the Foreign Account Tax Compliance Act (FATCA) regarding withholding funds. This applies to foreign financial institutions, withholding agents, and other entities that are required to withhold 30% of U.S. citizen’s funds being held in foreign accounts, which are not revealed to the IRS. During these two years, as long as these entities are showing the IRS a good faith effort to comply with the law, automatic 30% withholding of U.S. taxpayers funds will not be required.
During this period, the IRS will look at whether a withholding agent has made “reasonable efforts” to comply with this law. This includes setting up a system to document payees, show knowledge of the law, and apply the required presumption rules if lacking adequate documentation. If the IRS deems that a withholding agent or entity is not making a good faith effort to comply with the law, this two year transition period will not apply.
FATCA is a controversial U.S. law enacted in 2010 to crack down on secret financial accounts of U.S. citizens located outside of the U.S. Said accounts, including retirement funds, must comply with U.S. reporting requirements or have a 30% withholding tax imposed on most investment funds who fail to comply. All foreign banks and financial institutions must comply with this law. They must identify every U.S. citizen account totaling more than $50,000 USD. If the U.S. citizen fails to provide adequate documentation, the foreign bank and financial institution must withhold 30% of the account’s funds for the IRS.
FATCA does not affect non-U.S. retirement plans or bank accounts. This law is only for U.S. citizens.
Contact Us for all your questions about the FATCA law.
