IRS Delays Offshore Bank Reporting Rule Without Touching Policy
In guidance issued yesterday on the Foreign Account Tax Compliance Act, the IRS didn’t address some of the central questions that have caused financial institutions to fight the proposal. For instance, one of the rule’s most complex provisions -- a requirement to withhold 30 percent from payments that might have indirectly originated in the U.S. -- remains in the proposal.
The later timeline for implementing the rule is helpful, said Ellen McCarthy, a managing director of government affairs at the Securities Industry and Financial Markets Association, a Washington trade group of banks and securities firms. The industry is still anxious to resolve some of the proposal’s thorniest issues, she said.
“This gives us the sense that Treasury and the IRS have taken into account comments that the industry has given,” she said. “There are still things to work out.”
The IRS is expected to address policy specifics in additional guidance that will be released by the end of the year.
The agency is finalizing the rule to comply with a law Congress adopted last year. Yesterday’s delay reflects the difficult position the IRS finds itself in as it implements a law that Congress enacted to hunt down tax cheats while acknowledging opposition from overseas banks and governments.
The “notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected foreign financial institutions,” IRS Commissioner Doug Shulman said in a press release.
The new timeline gives offshore banks until June 30, 2013, to enter into an agreement with the IRS that would shield them from some withholding requirements. Institutions won’t have to report on their efforts to track down their U.S. clients until 2014.
Banks won’t be required to make 30 percent withholdings on non-compliant U.S. customers until Jan. 1, 2014. Other withholdings on gross proceeds and income that might be indirectly sourced to the U.S. won’t start until Jan. 1, 2015.
All of the requirements were initially slated to take effect at the beginning of 2013.
Financial institutions have balked at the proposal, telling the IRS it’s too difficult to siphon their U.S. customers from their other clients. Konrad Hummler, the managing partner of Wegelin & Co., Switzerland’s oldest bank, said in January the law would turn U.S. citizens into “pariahs” once the regulations take effect.
American Citizens Abroad, a coalition of U.S. citizens living overseas, issued a report yesterday calling on its members to lobby Congress to repeal the law.
“The way this new law is structured is totally disproportionate and unworkable, the equivalent of using a bulldozer to destroy an ant hill,” Jackie Bugnion, ACA’s director, said in an e-mailed statement.
The IRS responded to initial concerns with guidance in April that said the agency will spend less time focusing on accounts of U.S. citizens with less than $50,000. The agency said its actions would be targeted on citizens with more than $500,000 in offshore bank accounts and those with private banking relationships at overseas institutions.
Heather Lowe, the director of government affairs at Global Financial Integrity, a Washington-based group focused on ending bank secrecy, said the delay is unnecessary.
“That’s certainly going to open up the time period for lobbying,” she said.
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