LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
Editor's Note: The following is an excerpt from 1-17 Tax Controversies: Audits, Investigations, Trials §17.04 (Matthew Bender)
The Foreign Account Tax Compliance Act, or FATCA, enacted in March 2010 and codified at IRC §§ 1471-74, is designed to prevent United States taxpayers from avoiding United States income tax requirements by investing in the United States through foreign bank accounts or foreign entities. It requires non-United States financial institutions to provide information about United States account holders to the United States government, or have 30% withheld at source on most United States-source, investment-related payments made to the institution. The Act will apply to payments made on or after January 1, 2013 to "foreign financial institutions."1 Thus, after that date, unless the foreign financial institution enters into an agreement with the Secretary of the Treasury, under which it will obtain and report information about United States account holders,2 "withholdable payments" to the institution3 for all of its customers (United States and non-United States) will be subject to 30% withholding at source.4
The agreement that will take a foreign financial institution out of the mandatory 30% withholding category requires the financial institution to "obtain such information regarding each holder of each account maintained by such institution as is necessary to determine which (if any) of such accounts are United States accounts";5 to "comply with such verification and due diligence procedures as the Secretary may require with respect to the identification of United States accounts"6; and to report on an annual basis "[t]he name, address and TIN of each account holder which is a United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address and TIN of each substantial United States owner7 of such entity," the account number, the account balance, and the gross receipts and withdrawals or payments from the account."8 The agreement also requires the foreign financial institution to itself withhold 30% on pass-through payments made to "a recalcitrant account holder," or to another foreign financial institution that does not meet the requirements of FATCA.9 A recalcitrant account holder is one who fails to comply with requests for information that would establish whether that account holder is a United States taxpayer, or fails to provide a waiver to allow the institution to supply the United States with information that otherwise would be forbidden by foreign law.10
In the alternative, the foreign financial institution may elect to provide full IRS Form 1099 reporting with respect to each account holder that is a United States person or United States owned foreign entity, treating the account holder as if it is a United States citizen for this purpose.11
 IRC § 1471. A "foreign financial institution" is any financial institution that is a foreign entity, and except as provided by the Secretary, does not include a financial institution organized under the laws of any possession of the United States. IRC §1471(d)(4).
 IRC § 1471(b)(1).
A "withholdable payment" is defined as (1) U.S. sourced interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income and (2) gross proceeds from the sale of property that could produce U.S. source interest or dividends. Any item of income effectively connected with the conduct of a trade or business within the United States that is taken into account under section 871(b)(1) or 882(a)(2), i.e., income connected with a U.S. business, is not treated as a withholdable payment. IRC § 1473.
 IRC § 1471(a). A "withholding agent" required to withhold the 30% is any person "in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment." IRC §1473(4).
 IRC § 1471(b)(1)(A). A United States account is a financial account held by one or more "specified United States persons" or "United States owned foreign entities." IRC § 1471(d)(1)(A). The definition does not include accounts held by individuals the aggregate value of whose accounts at a financial institution does not exceed $50,000. IRC § 1471(d)(1)(B).
 IRC § 1471(b)(1)(B).
 A "substantial United States owner" is a United States person who owns, directly or indirectly, more than 10% of the stock of a foreign corporation, or who owns, directly or indirectly, more than 10% of the profits interest or capital interest in the partnership. IRC § 1473(2)(A). The definition also includes certain United States persons with interests in foreign trusts. Id.
 IRC § 1471(b)(1)(C), IRC § 1471(c)(1). Certain entities that have been determined to present a low risk of tax avoidance are excluded from the requirement that the financial institution provide this information. These include corporations with stock regularly traded on an established securities market; organizations exempt from taxation under section 501(a) or individual retirement plans; the United States or any agency thereof; any State or possession of the United States; any banks. See IRC § 1473(2) for the complete list of excluded entities.
 IRC § 1471(b)(1)(D).
 IRC § 1471(d)(6); see also IRC § 1471(b)(1)(F).
 IRC § 1471(c)(2).