This article applies to U.S. citizens and residents that are holders of foreign accounts from participating foreign financial institutions (PFFIs). The IRS may still request foreign account information even absent a tax treaty.
Abstract: The IRS recently clarified an important point about its ability to obtain information regarding foreign accounts held by U.S. citizens and residents from participating foreign financial institutions under the Foreign Account Tax Compliance Act. This article offers pertinent background on this process and reveals key details about the clarification.
The IRS recently clarified an important point about its ability to obtain information regarding foreign accounts held by U.S. citizens and residents from participating foreign financial institutions (PFFIs) under the Foreign Account Tax Compliance Act (FATCA). Read on for pertinent background and details about the clarification.
FATCA Info Requests
FATCA generally requires withholding agents to withhold tax on certain payments to a foreign financial institution (FFI) unless the FFI has entered into an FFI agreement with the United States to, among other things, report certain information regarding U.S. accounts.
Under Internal Revenue Code Section 1471(a), an FFI that doesn’t meet the requirements of Sec. 1471(b) is subject to withholding. The requirements of Code Sec. 1471(b) are met when an FFI has an agreement in effect between itself and the IRS under which the FFI agrees to, among other things, obtain information regarding each account holder of each account maintained by the institution as is necessary to determine which (if any) of the accounts are U.S. accounts. Under Code Sec. 1471(b)(1)(E), the FFI must also agree to comply with IRS requests for additional information regarding any U.S. account it maintains.
An FFI may comply with Code Sec. 1471(b) by registering with the IRS to enter into an FFI agreement to become a PFFI. A PFFI includes both an FFI in a jurisdiction with a Model 2 intergovernmental agreement (IGA) in effect (referred to as a “reporting Model 2 FFI”) and an FFI in a jurisdiction with no IGA in effect.
The FFI agreement requires a PFFI to report certain information for each calendar year to the IRS on Form 8966, “FATCA Report,” regarding its U.S. accounts. This includes accounts held by individuals who are U.S. citizens or residents.
Also, the FFI agreement provides that the IRS may request from the PFFI any additional information to determine a PFFI’s compliance with its FFI agreement and to assist the IRS with its review of account holder compliance with tax reporting requirements.
Info Exchange Under a Treaty
The United States has entered into income tax treaties with other countries. The treaties often have an article addressing information exchanges. In a recent IRS Program Manager Technical Advice (PMTA), the following question was addressed:
May the IRS, consistent with the terms of the FFI agreement, request from PFFIs information about certain U.S. citizens or residents ― even if the U.S. doesn’t have a tax treaty or other agreement to exchange tax information with the jurisdiction of the PFFI’s residence or any jurisdiction in which the PFFI operates?
The answer provided in the PMTA: Yes, the IRS may make such a request. None of the provisions in the FFI agreement relating to an IRS request for information from a PFFI is dependent on the United States having any treaty or other agreement to exchange tax information with the jurisdiction of the PFFI’s residence or any jurisdiction in which the PFFI operates.
Can and Will
Holders of foreign accounts should be aware that the IRS can and will request information from PFFIs about those accounts. For further details, contact your CPA.
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