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Offshore accounts: how will the shutdown affect FATCA rollout?

The partial shutdown of the U.S. government has furloughed nearly 90 percent of IRS workers. And so, in the run-up to yesterday’s October 15 filing deadline for those who requested a six-month extension, the IRS had no one available to respond to taxpayers’ questions.

This was not a good time for the agency to be so unavailable. After all, about 12 million taxpayers were expected to file by yesterday’s deadline.

The shutdown has also caused complications in the government’s efforts to implement the Foreign Account Tax Compliance Act (FATCA), the ambitious new framework for regulating offshore accounts. In this post, we will focus on that aspect of the shutdown’s effects.

FATCA is intended to put in place a new, more transparent information-sharing structure for offshore accounts in which foreign financial institutions (FFIs) and other entities participate. Those banks and entities are supposed to begin reporting to the IRS about offshore accounts held by U.S. taxpayers.

The law also contains provisions that impose a withholding tax on FFIs if they do not register with the IRS and agree to report on offshore accounts held by U.S. taxpayers.

The first round of reporting is due to begin on July 1 of next year. And there is still a lot of work to do between now and then to put the framework in place for doing that.

The complexity of the new regulatory framework for FATCA has already made one six-month extension necessary, from January 1, 2014 to July 1. The furloughing of federal employees during the shutdown could potentially cause another delay if the necessary regulations and administrative systems aren’t ready in time.

There is also the question of negotiating agreements with other governments to make the FATCA requirements operative in those countries. The U.S. Treasury has negotiated nine of these intergovernmental agreements so far. But the longer the shutdown continues, the longer it will take to negotiate additional agreements.

Of course, there is also the fact that the complicated new regulatory framework FATCA seeks to impose has met with fierce resistance from around the world.

Source: Bloomberg, "Overseas Cash Complicated as Shutdown Seen Delaying Deals: Taxes," Alison Bennett, Oct. 10, 2013

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