The Tax Times: IRS Can Request US Taxpayer's Foreign Account Info Without a Tax Treaty or Other Exchange of Tax Information Agreement

Tuesday, February 9, 2021

IRS Can Request US Taxpayer's Foreign Account Info Without a Tax Treaty or Other Exchange of Tax Information Agreement

In a Program Manager Technical Advice (PMTA) 2021-1, the IRS said that it may request information regarding foreign accounts held by US citizens and residents from a participating foreign financial institution (PFFI) in accordance with FATCA even if the US does not have a tax treaty or other agreement to exchange tax information with the jurisdiction of the PFFI's residence or any jurisdiction in which the PFFI operates.

Chapter 4 of the Code, i.e., Code Sec. 1471 through Code Sec. 1474, also known as the Foreign Account Tax Compliance Act or FATCA, generally requires withholding agents to withhold tax on certain payments to a foreign financial institution (FFI) unless the FFI has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts.

Under Code Sec. 1471(a), an FFI that does not meet the requirements of Code Sec. 1471(b) is subject to withholding. The requirements of Code Sec. 1471(b) are met with respect to any FFI that has an agreement in effect between such institution and the IRS under which such institution agrees to (among other things) obtain such information regarding each account holder of each account maintained by such institution as is necessary to determine which (if any) of such accounts are U.S. accounts. (Code Sec. 1471(b)(1)(A))

Under Code Sec. 1471(B)(1)(E), The FFI Must Also Agree To Comply With Requests By The IRS For Additional Information With Respect To Any United States Account
Maintained By Such Institution.

An FFI may comply with Code Sec. 1471(b) by registering with the IRS to enter into an FFI Agreement to become a participating FFI (PFFI). (Reg. §1.1471-4(a)) The FFI Agreement language can be found at Rev Proc 2017-16, 2017-3 IRB.

A PFFI includes both an FFI in a jurisdiction with a Model 2 intergovernmental agreement (IGA) in effect (a reporting Model 2 FFI) and an FFI in a jurisdiction with no IGA in effect. (Reg. §1.1471-1(b)(91))

The FFI Agreement requires a PFFI to report certain information for each calendar year to the IRS on Form 8966, FATCA Report, with respect to its U.S. accounts, which includes accounts held by individuals who are U.S. citizens or residents.

The FFI Agreement also provides that the IRS may request from the PFFI any additional information to determine a PFFI's compliance with its FFI Agreement and to assist the IRS with its review of account holder compliance with tax reporting requirements.

The U.S. has entered into income tax treaties with other countries. The treaties often have an article addressing information exchanges.

The issue addressed in this PMTA 2021-1 is whether the IRS, consistent with the terms of the FFI Agreement, request from PFFIs information about certain U.S. citizens or residents, even if the U.S. does't have a tax treaty or other agreement to exchange tax information with the jurisdiction of the PFFI's residence or any jurisdiction in which the PFFI operates?

This PMTA 2021-1 concluded that yes, the IRS may. None of the provisions in the FFI Agreement relating to an IRS request for information from a PFFI is dependent on the U.S. having any treaty or other agreement to exchange tax information with the jurisdiction of the PFFI's residence or any jurisdiction in which the PFFI operates.

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