The Treasury Department and the governments of five European nations reached broad agreement Wednesday on a proposal to prevent U.S. taxpayers from dodging taxes through foreign accounts.
At the same time, the Treasury and the IRS also released proposed regulations to implement a 2010 U.S. law known as the Foreign Account Tax Compliance Act, which requires foreign financial institutions to report detailed information about U.S. account holders to the IRS and possibly withhold taxes on individual accounts.
If firms don't comply, they could face U.S. tax penalties. An agreement among the U.S. and the other countries could help streamline implementation of the law.
The Treasury aims to make the regulations final by this summer.
France, Germany, Italy, Spain and the U.K. expressed support for the Treasury Department's proposal, while other nations will be given a chance to evaluate the proposal and join in.
Washington for the past three years has been aggressively pursuing foreign accounts to make sure people aren't using them to dodge U.S. taxes.
In a landmark 2009 settlement, Swiss bank UBS AG agreed to turn over to the U.S. the names of more than 4,000 U.S. taxpayers with secret accounts.
The IRS has since rolled out two programs allowing U.S. taxpayers who step forward to, in many cases, pay large penalties but avoid prosecution. At least 33,000 have taken the deal.
The 2010 law, known as Fatca, targets foreign banks to make sure U.S. taxpayers are paying the IRS what they owe.
The Treasury said various provisions of the regulations would be phased in from 2013 to 2017, to allow banks to develop appropriate systems and ensure they don't violate local rules.
A Treasury official said several specifics of the new regulations would ease potential administrative burdens while still achieving the law's purposes. For example, the proposed regulations allow foreign banks to rely on data they already collect to comply with anti-money-laundering rules, the Treasury said.
The announcement also appeared to embrace a recommendation by U.K. financial institutions for reduced information-gathering requirements on investment accounts that aren't marketed to U.S. investors.
David Miller, a partner with Cadwalader Wickersham & Taft LLP, said the proposed regulations are less burdensome than they could have been and satisfy the objective of ensuring "that U.S. taxpayers with foreign accounts pay what they owe."
European banks for months had raised concerns that the U.S. law, as originally passed, might conflict with European privacy laws by requiring banks to enter into information-sharing agreements directly with the IRS. They initially reacted with favor to the new proposals.
Wednesday's announcement included a joint statement from the U.S., Germany, France, U.K., Italy and Spain expressing intent to adopt a "common approach" to implementing the new law. That could allow banks to report U.S. account-holder information to their own governments rather than the IRS, solving many of the potential legal problems, European financial institutions said.
"I think this is a very positive approach," said Peter De Proft, director general of the European Fund and Asset Management Association in Brussels. "We were very worried with the original approach and the burden it would bring."
Countries such as Canada, Japan, Australia and China will be able to evaluate the proposed regulations and join in the negotiations with the U.S., said Phil West, a former international-tax counsel for the Treasury who is now at Steptoe & Johnson LLP in Washington.
As the network of participating countries grows, "it may be that 'bank-secrecy' jurisdictions feel increasing pressure to move toward a growing international consensus on information exchange," Mr. West added.
U.S. financial institutions, which also had worried about the potential burden of the new rules, had mixed reactions to Wednesday's announcement. Some expressed relief U.S. officials appeared to accept a number of their suggestions for reducing the potential negative effects on them. But others warned the new system still could lead some foreign banks to reduce their investments in the U.S., to minimize their exposure to U.S. tax penalties.
"Implementation of [the new rules] will impose significant challenges and costs for many United States financial services firms and their customers," the Securities Industry and Financial Markets Association, a Wall Street trade group, said in a statement.
While the Treasury is still implementing the law for financial institutions, individuals already are feeling the impact. U.S. taxpayers holding foreign financial accounts above a threshold as low as $50,000 will have to file Form 8938 disclosing the accounts with their 2011 tax returns or risk financial penalties. These thresholds are different from those for the annual Foreign Bank Account Report form, which is due separately to the U.S. Treasury by June 30.
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