The Foreign Account Tax Compliance Act seems to be revolutionizing the way governments share tax information. Other nations are using intergovernmental agreements to piggyback on FATCA information-gathering efforts. Virtually every practitioner and financial industry representative will readily admit that FATCA is changing the way banks and other institutions do business, keep customer records, and think about possible tax evasion. Despite all this, the very real question exists of whether FATCA will ever go into formal effect.
In July the government issued Notice 2013-43, which delayed FATCA withholding by six months -- from January 1, 2014 (the statutory date), to July 1, 2014. Treasury justified the postponement by saying it needed more time to work out IGAs with nations and provide more guidance on jurisdictions that have signed agreements but not yet bought them into force. It claimed authority for the delay under section 7805(a). Practitioners welcomed the notice, but said the extra time would not be enough unless the IRS finalized a lot of outstanding FATCA guidance.
Well, it hasn’t quite done that, at least according to the IRS Information Reporting Program Advisory Committee. In a report released last week, IRPAC called for another six-month delay. IRPAC approved the original delay, but says that there just isn’t time for withholding agents to finalize their systems by July 1, given that guidance is still outstanding on issues like chapter 3 and chapter 4 harmonization. IRPAC points out that the IRS has issued only draft revisions to forms W-8, 1042, and 1042-S. Without those final forms, financial institutions and withholding agents cannot make the necessary changes to their systems to be in compliance.
IRPAC and most of the practitioner community seem to have a well-reasoned case. The IRS and Treasury haven’t finished writing the rules, so how can banks and foreign financial institutions be expected to follow them? The financial sector can argue that another delay doesn’t just make sense, it’s absolutely necessary.
I’ve argued before that the original delay of FATCA was disturbing from a separation of powers perspective and that a second delay would only call into question whether Treasury and the IRS will ever start enforcing withholding. Practitioners and effected taxpayers will always be clamoring for more guidance, more clarity, more safe harbors, and more time to comply. They will never be satisfied, no matter how many thousands of pages of regulations Treasury releases on New Year’s Eve or how many sets of detailed instructions the government puts together for revised forms. The tax community is seldom completely satisfied with guidance. It always wants more or different answers.
And the reality is that the IRS will probably never be done issuing FATCA regulations or form revisions. The law is very broad, with many moving parts. It is evolving as Treasury (rightly or wrongly) changes its implementation by using IGAs. If IRPAC and the financial industry want Treasury to wait for all the significant guidance to be finalized before the withholding regime is put into force, FATCA will be waiting a very long time to become law.
FATCA is unpopular. Stakeholders view it as overly burdensome. Foreign governments thought it was too unilateral (although many are now eager to share in the bounty of tax information the law will force institutions to collect). But Congress passed it for a reason: Foreign institutions were blatantly assisting U.S. taxpayers in hiding assets from the IRS. Banks and the financial sector turned a blind eye to tax evasion for a long time. Treasury and the IRS shouldn’t be all that sympathetic to their repeated calls for delay and leniency. FATCA should be put into effect as soon as possible, and the administration should stop bending separation of powers rules by using delays to functionally repeal unpleasant parts of statutes.
