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Foreign accounts: the role of intergovernmental agreements

For several years, fears about the impact of the Foreign Account Tax Compliance Act have extended well beyond the tax professional community. One concern is that FATCA will create unduly burdensome regulatory requirements for financial institutions.

Another is that historic account privacy protections for foreign bank accounts will be badly undercut. Indeed, for Swiss bankers, it may even seem that such protections are being eviscerated.

In broad terms, the goal of FATCA is simple enough. It seeks to stop tax evasion by U.S. taxpayers who owe tax on income from accounts held in offshore accounts. The legislation attempts to do this by requiring foreign banks and other institutions to provide information about these account holders to the IRS or face severe penalties.

But the IRS cannot impose penalties on foreign institutions by mere fiat. It takes more than that for these institutions to change longstanding account privacy protections. That is why the implementation of FATCA depends on intergovernmental agreements (IGA) between the U.S. and participating foreign governments.

Last summer, the U.S. Treasury Department released a model IGA. Then, in September, the U.S. and the United Kingdom signed an IGA intended to govern their cooperation on the implementation of FATCA and developing responses to international tax evasion.

From the U.S. perspective, perhaps this is a logical place to start. After all, the U.S. and Britain share the English language and many common cultural ties. Obviously, however, in a world in which there are nearly 200 countries, many more IGS would be needed for the IRS to have comprehensive coverage around the world.

That may be one reason why Treasury announced a few weeks ago that it was delaying until 2017 the date by which foreign banks have to actually being withholding tax from offshore accounts owned by Americans.

Source: ""Here They Come: FATCA Intergovernmental Agreements," Bloomberg BNA, Edward Tanenbaum, 11-14-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our Texas offshore account enforcement page.

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