The Internal Revenue Service’s Information Reporting Progam Advisory Committee (IRPAC) has issued its annual report for 2013 (available here). IRPAC is a federal advisory committee that provides an organized public forum for discussion of information reporting issues. It is comprised of a cross-section of individuals drawn from the tax professional community, financial institutions, small and large businesses, universities and colleges, and securities and payroll firms. IRPAC’s charter provides that its purpose “is to provide an organized public forum of relevant information reporting issues of mutual concern as between Internal Revenue Service (IRS) officials and representatives of the public.” IRPAC is currently comprised of four subgroups: (1) Burden Reduction; (2) Emerging Compliance Issues; (3) Employee Benefits & Payroll; and (4) International Reporting and Withholding.
IRPAC’s annual report for 2013 is 125 pages in length and addresses a host of issues. In this post, we focus on one particular recommendation, which relates to implementation of the Foreign Account Tax Compliance Act (FATCA), a topic we have covered extensively in this blog.
IRPAC’s IR&W subgroup has been focused primarily on FATCA. The subgroup has engaged in an ongoing dialogue with the IRS and Treasury regarding the final Chapter 4 regulations that were issued on January 17, 2013, as well as the draft Forms W-9, 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, and 8957, Foreign Account Tax Compliance Act (FATCA) Registration. IRPAC applauded the IRS for recognizing that additional time was needed for FATCA implementation, which resulted in issuance of Notice 2013-43 (see prior coverage here) delaying the initial effective date until July 1, 2014:
IRPAC is pleased that the IRS listened to the requests for additional time and issued Notice 2013-43 that delayed the initial effective date until July 1, 2014, and provided a similar 6-month delay to many other provisions. The decision by the IRS to issue that notice in July so that U.S. withholding agents and foreign financial institutions could take a more orderly approach to implementing the requirements that would have started on January 1, 2014 was well received by the information reporting community.
Notwithstanding the decision of Treasury and IRS to delay FATCA by six months, IRPAC believes that more time is needed to allow the effective implementation of FATCA by financial institutions, withholding agents, and other affected stakeholders. Specifically, IRPAC states in its report:
IRPAC recommends that the IRS continue to take into account the time needed by withholding agents and their customers to implement FATCA in an orderly manner. Notice 2013-43 provides for a postponement in the imposition of FATCA withholding until July 1, 2014. Due to the delay in the issuance of final guidance, IRPAC recommends that the IRS provide for an additional postponement until January 1, 2015 in order for withholding agents to complete the steps necessary to fulfill their obligations under FATCA.
In support of its recommendation for further delay, IRPAC cites the fact that Treasury has yet to issue final FATCA regulations, as well as the substantial work required to be undertaken by withholding agents and FFIs in order to ensure their systems are FATCA-compliant:
The implementation of FATCA is an enormous task. Notice 2013-43 acknowledges the practical problems faced by both U.S. withholding agents and foreign financial institutions (FFIs) in complying with FATCA. IRPAC applauds the IRS for its decision to release Notice 2013-43 to announce the delay of the effective date for the implementation of FATCA until July 1, 2014.
Withholding agents have devoted substantial resources to the design of systems based on the final regulations and the associated draft forms. It is important to note that substantial work remains to be done and can only be undertaken after final and comprehensive guidance is issued. The systems development process involves a series of steps. The remaining steps include refining the scope of the project, development and documentation of technical requirements, design and coding of program changes, testing to ensure compliance with technical requirements, finalization of programming changes, and scheduling the release of systems changes. Each of these steps requires a substantial commitment of time and resources and must be undertaken sequentially. Although preliminary scoping and initial design work has been largely completed based on guidance issued to date, the completion of design, programming and testing can only be accomplished after the IRS has released comprehensive final guidance.
IRPAC understand that the IRS intends to issue additional regulations that will provide guidance under Chapter 4, and make changes to the regulations under Chapter 3 and Chapter 61. The IRS has also issued substantially revised draft versions of Forms W-8, 1042 and 1042-S. Withholding agents cannot make the necessary changes to onboarding procedures or their reporting and withholding systems until the final versions of these forms and their instructions are released.
As a further ground for delay, IRPAC cites the slow process of negotiating Intergovernmental Agreements (IGAs):
The implementation of FATCA is further complicated by the negotiation of intergovernmental Agreements (IGAs) between Treasury and foreign governments. The IGAs are meant to address local privacy concerns by providing a separate set of rules for financial institutions located in an IGA country. Financial institutions with branches and subsidiaries located in multiple countries will have to implement varying IGA requirements in the many jurisdictions expected to enter into IGAs. Thus, financial institutions are faced with the prospect of programming systems to comply with the FATCA regulations and then reprogramming systems and revising procedures for individual countries when an IGA becomes effective.
Due to the delay in the issuance of final guidance, IRPAC recommends that the IRS provide a postponement of the requirement to impose Chapter 4 withholding until January 1, 2015 (with corresponding changes to other effective dates under the Chapter 4 regulations).
As we have noted, the U.S. recently signed IGAs with the Cayman Islands and Costa Rica, which join 12 countries in having executed IGAs with the United States.
With the issuance of the IRPAC report today, a growing group of interested parties is calling upon Treasury and the IRS to further delay the roll-out of FATCA. We previously reported that an influential group of banking and securities associations, including the American Bankers Association, called for further delays in FATCA’s implementation. In a recent audit report, TIGTA criticized the IRS online portal for FFI registration and suggesting that delays were necessary to ensure that the FATCA website was working properly. Finally, in a recent Tax Analysts report, Jeremy Scott asks, “Will FATCA ever go into effect?” Over the course of the next few weeks, we should see whether the government will continue to press forward with FATCA implementation on its current timetable, or bow to pressure from interested parties and grant a further extension.