Proposed Regs Revise FATCA's Due Diligence Procedures: Pre-existing Individual Accounts and Electronic Searches
The much-anticipated proposed regulations under the Foreign Account Tax Compliance Act (FATCA) have been issued by the Treasury, and among the lengthy provisions is significant guidance relating to the due diligence procedures under FATCA. The proposed regulations modify earlier guidance provided in Notice 2010-60 and Notice 2011-34 relating to the due diligence process. (See Preamble to the Proposed Regulations, REG-121647-10). As noted in the preamble to the regulations, under FATCA, FFIs are required to identify: (1) U.S. accounts held by either U.S. individuals or certain U.S. entities, and (2) accounts held by foreign entities with substantial U.S. owners. Following FATCA, the Service issued Notices 2010-60 and 2011-34, providing guidance on the due diligence procedures that FFIs must follow in order to identify their U.S. accounts. (See Preamble). The preamble explains that the regulations, for the purpose of outlining the due diligence required to be undertaken by FFIs, "distinguish between the diligence expected with respect to individual accounts and entity accounts and between preexisting accounts and new accounts". FFIs that follow the diligence guidelines will be viewed as complying with the requirement to identify U.S. accounts and "will not be held to a strict liability standard," as noted in the preamble.
Preexisting individual accounts and electronic searches. As to the due diligence required with respect to preexisting offshore individual accounts, significantly, the regulations permit FFIs to use electronic searches to identity their U.S. accounts among their preexisting individual accounts with a balance or value less than $1 million. (See Preamble). For such preexisting, offshore individual accounts, FFIs may review the accounts' electronically searchable information for indicia of U.S. status. (See Preamble). As explained in the preamble, "[n]o further search of records or contact with the account holder is required unless U.S. indicia are found through the electronic search ."
U.S. indicia, as summarized in the preamble, include:
" (1) identification of an account holder as a U.S. person; (2) a U.S. place of birth; (3) a U.S. address; (4) a U.S. telephone number; (5) standing instructions to transfer funds to an account maintained in the United States; (6) a power of attorney or signatory authority granted to a person with a U.S. address; or (7) a U.S. "in-care-of" or "hold mail" address that is the sole address the FFI has identified for the account holder."
The proposed regulations define a preexisting individual account as "a financial account held by one or more individuals that is a preexisting obligation". Prop. Treas. Reg. § 1.1471-1(b)(50). In addition, the proposed regulations define the term electronically searchable information as:
"information that an FFI maintains in its tax reporting files, customer master files, or similar files, that is stored in the form of an electronic database against which standard queries in programming languages, such as Structured Query Language, may be used. Information, data, or files are not electronically searchable merely because they are stored in an image retrieval system (such as portable document format (.pdf) or scanned documents)." [Prop. Tres. Reg. $ 1.1471-1(b)(16)].
Under the regulations, preexisting individual accounts with a balance or value of $50,000 or less (or $250,000 or less in the case of certain cash value insurance or annuity contracts) are not subject to the due diligence procedures. In addition, as noted in the preamble, the $1,000,000 threshold amount replaces the $500,000 threshold amount and the private banking test proposed in Notice 2010-60 and Notice 2011-34 and, "[a]ccordingly, FFIs will not be required to distinguish between private banking accounts and other accounts."
The changes in the due diligence procedures for preexisting individual accounts result from suggestions from commentators that the procedures be modified to lessen the administrative burden on FFIs. The proposed regulations also make changes to the due diligence procedures for new individual accounts, preexisting entity accounts, and new entity accounts in response to such suggestions. The guidance in the proposed regulations should assist FFIs as they prepare to fulfill their due diligence obligations and navigate through FATCA. However, it is likely that further questions will arise as practitioners analyze the detailed guidance and plan implementation.
RELATED LINKS: For further guidance on the requirements under FATCA, please see:
Lexis Tax Advisor -- Federal Code Explanations § 1471
Lexis Tax Advisor -- Federal Topical Ch. 4A:2.05 - U.S. Citizens Abroad - IRC Section 911
Notice 2011-34, 2011 IRB LEXIS 234
Notice 2010-60, 2010 IRB LEXIS 533
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