Federal Court Rejects Bankers' Challenge to New Disclosure Requirements Triggered by FATCA

The passage of the Foreign Account Tax Compliant Act (FATCA) created a broad new system for 1099 tax form foreign institutions to report to the IRS about their American account holders. In order to secure the cooperation of those foreign financial institutions, however, the US also had to agree to make its institutions provide expanded disclosures to foreign tax authorities, as well. To this end, the Treasury Department passed new regulations mandating the reporting of interest earned by foreign accountholders to their countries' governments. Two US banking organizations sought to defeat these expanded new disclosure requirements by suing, but a federal district court recently rejected their claims.

Two years ago, the IRS issued a series of new regulations governing the reporting obligations of domestic banks with regard to accounts held by non-resident account holders. The new regulations were necessary to ensure the US remained in compliance with the treaties it signed as part of the FATCA initiative to root out the use of offshore accounts to evade US taxes. In exchange, the US agreed that its banks would make certain disclosures to foreign taxing authorities. The regulations require American institutions to report the amount of interest earned by account holders who are not US residents and apply to any account that earns more than $10 in interest in a year.

The Florida Bankers Association and the Texas Bankers Association challenged the new regulations, arguing that they were extremely onerous and economically harmful. The US District Court for the District of Columbia disagreed. The new regulations' benefits were many, including offering a strong deterrent against the use of offshore accounts to evade US taxes. The court stated a significant portion of the gap between what US taxpayers owed and what they paid stemmed from the current system's reliance on self-reporting and taxpayers' use of offshore accounts as tax evasion vehicles. In order to minimize the reliance on self-reporting and close the gap, the US government entered into several treaties governing the exchange of certain information about foreign account holders. "Reciprocity is the key to success in such treaties," the court stated. In other words, US institutions had to share accountholder information with foreign countries in order for the treaties to work, and the regulations were the technique for mandating that disclosure of information.