Tax News Highlights

IRS Provides Transitional Relief in the Implementation of FATCA for 2014 and 2015

May 15, 2014

On May 2, 2014, the IRS released Notice 2014-33, announcing that for 2014 and 2015 enforcement actions under the Foreign Account Tax Compliance Act (FATCA) will take into consideration the good faith efforts of foreign financial institutions (FFIs) and withholding agents to comply with the regulations. The decision to treat 2014 and 2015 as a transition period is a result of ongoing delays in IRS guidance as well as comments received from FFIs and withholding agents attempting to comply with FATCA. While not the outright delay of FATCA that many hoped for, it is good news for those struggling to comply with the July 1, 2014, effective date.

The notice specifically states that entities that have not made a good faith effort to comply will not receive any enforcement relief. In addition, any requirements under Chapter 3 withholding rules and Chapter 61 reporting rules for foreign financial assets that were not modified by the temporary coordinating regulations are not subject to relief.

Certain additional changes provided by the notice include:

  • As a result of the delay in issuing the final Forms W-8 and the related instructions, withholding agents and FFIs may treat obligations and accounts held by an entity that are opened, issued, or executed on or after July 1, 2014, and before Jan. 1, 2015, as a pre-existing obligation. No extension is provided for accounts held by individuals.
  • A withholding agent that documents before July 1, 2014, a direct account holder with a U.S. phone number or place of birth as foreign will not be required to apply the new “reason to know standards” until the withholding agent has been notified of a change in circumstances.
  • The description of “reasonable explanation” to be used by individuals who are claiming foreign status but who might have certain U.S. factors conforms to the definition provided under Chapter 3 withholding rules.

The transitional relief provided in Notice 2014-33 is limited to those entities that have made good faith efforts to comply with the requirements under FATCA. It is worth noting that no definition of good faith effort has been provided. Accordingly, withholding agents and FFIs should continue to work toward timely implementation of FATCA during 2014 in order to avail themselves of the temporary limited enforcement.

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John M. Kelleher