Money Laundering, Terrorism and Financial Institutions - USA Patriot Act Monitor

News Releases

03/22/2010 Hiring Incentives Act Contains New Witholding Requirements

The new law includes provisions that make it easier for the IRS to monitor accounts at foreign financial institutions.

On March 18, President Obama signed the Hiring Incentives to Restore Employment Act (PL 111-147), designed to encourage the hiring of unemployed workers, providing payroll tax forgiveness for hiring unemployed workers and a business tax credit for retention of newly hired individuals in 2010. The Act also carries tax and reporting provisions that have nothing to do with employment opportunities, but will matter considerably to persons with accounts at foreign financial institutions. This adds a new tool, in addition to FBAR reporting requirements, the IRS can use to monitor foreign accounts.

An entire new chapter of the Internal Revenue Code is entitled Taxes to Enforce Reporting of Certain Foreign Accounts. Under new IRC Section 1471, a 30% withholding tax is applied to a “withholdable payment” to a foreign financial institution that does not meet certain requirements. Those requirements, which allow an institution to avoid the new withholding requirement, are satisfied if a foreign financial institution:

  1. Obtains information from each accountholder as is necessary to determine which accounts are United States accounts.
  2. Has agreed with Treasury that it will comply with verification and due diligence procedures Treasury may require to avoid the withholding tax.
  3. Reports on an annual basis regarding a United States account.
  4. Withholds 30% on a pass-through basis where a payment is made to a “recalcitrant account holder” or another institution that does not have such an agreement with Treasury. If the financial institution has an agreement, but it also has recalcitrant account holders or is passing payments through to other institutions without such agreements, the withholding can be pro rata to the percentages attributable to such ultimate payees.
  5. If foreign law shields an account holder of a foreign financial institution, the institution must attempt to obtain a waiver from the account holder, or close the account. An account holder who refuses to provide a waiver is a recalcitrant account holder.

The agreement with Treasury must provide for supplying basic account holder information and for a U.S.-owned foreign entity, the name, address, and TIN of each substantial U.S. owner of such entity. For a foreign financial institution that is a qualified intermediary under IRC 1441, the requirements of the new section are in additional to any QI reporting requirements. The new withholding regime also applies to withholdable payments to non-financial foreign entities.

What is a United States Account? A “United States account” is generally any financial account held by one or more specified “United States persons” or “United States owned foreign entities.” An exception is made for an account whose holders are natural persons where no holder has more than $50,000 in the financial institution which maintains the account. As to the latter requirement, Treasury could provide that the threshold includes amounts in other members of an affiliated group.

A financial account is a depository or custodial account and “any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market). A “United States owned foreign entity” is any foreign entity which as one or more substantial United States owners. A “withholdable payment” is defined broadly as:

(i) any payment of 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, if such payment is from sources within the United States, and
(ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.

New IRC 6038D requires information reporting on certain foreign financial assets in excess of $50,000. The new rules will be discussed in the next issue of the Monitor.

USA PATRIOT ACT MONITOR is published by Civic Research Institute, Inc., 4478 U.S. Route 27, P.O. Box 585, Kingston, NJ 08528, 609-683-4450,, as an update service for Money Laundering, Terrorism and Financial Institutions: Law · Regulation · Compliance · USA PATRIOT Act Monitor © 2004 Civic Research Institute, Inc. All rights reserved. Unauthorized copying expressly prohibited. The information in this publication is not intended to replace the services of a trained legal professional. Neither the editors, nor the contributors, nor Civic Research Institute, Inc. are by this publication engaged in rendering legal, accounting, or other professional services. The editors, contributors, and Civic Research Institute, Inc., specifically disclaim any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use or application of the contents of this publication.

<< News Releases Main Page