IRS Fixes Glitch in FATCA Coordination Regulations for Accounts Opened by Entities between July 1, 2014 and December 31, 2014

The IRS issued Notice 2014-59 to make clear that the transition relief it provided from new FATCA due diligence rules for accounts opened by entities between July 1, 2014 and December 31, 2014 (the "Transition Window") also applies to due diligence and reporting rules under Sections 1441, 1442 and 6049 of the Internal Revenue Code.

IRS issued Notice 2014-59 to announce its intention to amend the Temporary Regulations published on March 6, 2014. The Temporary Regulations modified the existing due diligence rules, which have been applicable with respect to normal income tax withholding and reporting, to match the enhanced due diligence rules under FATCA. Both sets of rules were scheduled to apply to new accounts opened on or after July 1, 2014. However, on May 19, 2014, the Treasury and the IRS issued Notice 2014-33, which among other things permitted withholding agents and Foreign Financial Institutions to treat an account opened by an entity during the Transition Window as a "pre-existing account" for purposes of FATCA, providing significant transition relief. However, Notice 2014-33 did not provide similar relief under the income tax withholding and reporting rules. This meant that withholding agents were technically required to treat an account opened during this Transition Window as a "pre-existing account" for FATCA purposes, but as a "new account" for income tax purposes, thereby as a practical matter requiring withholding agents to apply the enhanced due diligence rules to any account opened during the Transition Window. Notice 2104-59 extends the transition relief in Notice 2014-33 to income tax withholding and reporting rules, fixing an unintended glitch in the transition relief provided in May. Neither Notice 2014-59 nor Notice 2014-33 applies to new accounts opened by individuals on or after July 1, 2014. The enhanced due diligence rules must be applied by withholding agents for both FATCA and income tax withholding purposes upon the opening of such accounts by individuals on or after such date.

See: Notice 2014-59; Notice 2014-33. See also: FATCA Specialty Page (available to Cabinet subscribers only). For more information, please contact Dan Mulcahy or Mark Howe.