‘Justice Delayed Is Justice Denied’?

‘Justice Delayed Is Justice Denied’?

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Wighead English jurist William Gladstone, the author of this famous quote, was obviously not a criminal defense lawyer. In many, if not most, cases, delay is a fundamental element of a successful defense, or even the lynchpin of the entire schmear. Over time, memories fade, evidence is lost (or at least becomes more difficult to find and use in court), witnesses relocate, and prosecutors lose interest in the case. All of these developments weigh in favor of criminal defendants.

To paraphrase Gordon Gekko: Delay is good. Delay is right; delay works. So, there were champagne corks popping all along Wall Street and into the uttermost parts of the earth when the IRS announced that it would delay certain FATCA bank withholding requirements until 2019. However, it remains to be seen whether the delay is a legitimate reprieve or just a temporary stay of execution while someone makes a CVS run for more potassium chloride.

The Announcement

The IRS says it delayed certain portions of FATCA to “facilitate an orderly transition for withholding agents and FFIs regarding FATCA compliance and respond to comments regarding how the phase-out of transitional rules may affect information reporting and withholding systems.” In other words, no one really knew what to do, and the Service didn’t want to look heavy-handed, or at least more heavy-handed than it is now.

At its core, FATCA consists of two components: withholding requirements on certain foreign bank account assets and stool-pigeon “inter-governmental agreements” that require foreign governments to report any possibly noncompliant activity. The recently-announced delay addresses both these areas.

To date, 112 jurisdictions have signed FATCA agreements which obligate them to turn over financial information about U.S. accountholders in exchange for preferred status of the Foreign Financial Institutions operating within its borders. While that is a lot of countries, some notable heavy-hitters like Russia, as well as a few local tax havens like Cuba, are conspicuously absent. So, the delay is calculated to get more countries on board.

In terms of the dreaded withholding requirements, the Service will delay the withholding on foreign pass-thru payments, which was slated to begin in 2017, to at least January 1, 2019, or the date the rule is codified in the Federal Register. In a similar vein, the hammer will not fall on noncompliant FFIs until December 31, 2016. During the next calendar year, FFIs that are not covered by an intergovernmental agreement will be labeled “registration incomplete” until they toe the line.

The IRS will also exempt additional accounts by redefining the grandfather clause in Section 1.1471-2(b)(2)(i)(A), and confirms that the next two calendar years are a transitional period for FATCA compliance purposes.

What It Means

As mentioned earlier, it is too soon to tell whether the Service is merely circling the wagons in preparation for a fight or is willing to smoke the metaphorical peace pipe with expats. Much probably depends on the outcome of the 2018 elections.

That being said, there are some indications that the countries who signed FATCA agreements, or at least a portion of them, are starting to have second thoughts. If FATCA does start to unravel, the IRS will have a few options:

  • Call it quits and declare victory based on the amount of money already collected and the buzz already created,
  • Modify the FATCA agreements in a way that gives signatories a bit more authority over the funds inside their own borders, or
  • Damn the torpedoes and full speed ahead.

That first scenario is rather unlikely. As anyone who has ever been audited or investigated will attest, the IRS does not quit. However, there is the real possibility that the Service will back off at least somewhat. The Notice makes several references to the slew of negative comments that the IRS has received.

For now, it’s wait and see. My general advice in these situations is to hope for the best and plan for the worst.

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