Action Needed to Comply with Foreign Account Tax Compliance Act Proposed Regulations

Florida taxpayers must take affirmative actions to comply with the Foreign Account Tax Compliance Act. Originally enacted in 2010, the Foreign Account Tax Compliance Act ("FATCA") targets non-compliance by U.S. taxpayers using foreign accounts. On February 8, 2012, the Treasury Department and the Internal Revenue Service issued proposed withholding and reporting regulations for the next major phase of FATCA.

Under the step-by-step process outlined in the proposed regulations, all foreign financial institutions (FFIs) are required to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest to the IRS.

Under the proposed regulations, a participating FFI will have to enter into an agreement with the IRS to:

(1) Identify U.S. accounts;

(2) Report certain information to the IRS regarding U.S. accounts;

(3) Verify the FFI's compliance with its obligations pursuant to the agreement; and

(4) Ensure that a 30 percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system, which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

The proposed regulations, which become effective January 1, 2013, will ultimately impact current account opening processes, transaction processing systems, and "know your customer" procedures used by both U.S. and foreign companies. It is important for companies to start their compliance risk assessment and make any modifications to their policies and procedures now and not wait until the rules become effective next year.