The Internal Revenue Service and the Treasury Department recently released an eagerly anticipated set of proposed regulations for implementing the Foreign Account Tax Compliance Act.

The law, known as FATCA, requires foreign financial institutions to report to the U.S. government on the holdings of U.S. taxpayers. It has generated consternation abroad since it was enacted in 2010.

The proposal lays out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions, known as FFIs, along with other foreign entities and U.S. withholding agents. "FATCA strengthens U.S. efforts to combat offshore noncompliance," IRS Commissioner Doug Shulman stated.

The proposal implements FATCA's obligations in stages, in an effort by the IRS and the Treasury to minimize the burdens and costs. It requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to identify U.S. accounts; report certain information regarding U.S. accounts; verify its compliance with its obligations pursuant to the agreement; and ensure that a 30% tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required data.

Registration will take place through an online system that will become available by Jan. 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

The U.S., along with the United Kingdom, France, Germany, Italy and Spain issued a joint statement on an intergovernmental approach to implementing FATCA. That indicates to Michael Mundaca, a former Assistant Treasury Secretary for Tax Policy and currently the co-director of the Americas Tax Center at Ernst & Young, that the U.S. is getting more countries on board with the policy. "I imagine Treasury will push other governments to adopt this model," he said. "It will be interesting to see how Switzerland and some other financial centers react."

The Treasury and the IRS are asking for comments on the proposed regulations by April 30, 2012, with a public hearing scheduled for May 15.

Laurie Hatten-Boyd, a principal with KPMG's Washington National Tax Practice and a former IRS official, anticipates some resistance to the reporting requirements. "Although there are some transitional, phased-in requirements, at the end of the day they still want the full-blown reporting," she said. "If this is all about tax evasion, don't you really just need the name, address, TIN and income paid, and you can match that up to a tax return? Why do you need the account balances and transfers from the account, and that type of information?"

Michael Silva, a tax partner with DLA Piper's Miami office, believes the tax treaty represents a rare, generational change in how the U.S. treats the privacy of tax information for U.S. and foreign nationals. He noted that for the first time, there is an exemption for local banking secrecy laws, allowing banks to cooperate with revenue agencies. "One of the difficulties with FATCA is that the offshore banks said that we can't comply with it if you're asking us to divulge information that our laws say needs to be private," Silva said. "The solution to that is that the Treasury months ago took this concern seriously and started communicating with its tax treaty partners to say: 'How about you join up with us in a collaboration and have your banks report their private confidential information?'"

The focus of the joint statement is on Western Europe. Notable by their absence are Mexico, Switzerland and China, Silva said. "Some of the Latin American banks, especially in Brazil, are going to be concerned that they're subject to the same burdens. The ultimate goal of the IRS achieving more transparency in exchanging information with our treaty partners is not likely to be accomplished in Latin America simply because we don't have tax treaties that allow for that, so they're going to have to resort to the only option, which is to enter into an FFI agreement with the IRS."

While Canada is not part of the joint statement, Silva believes there are ongoing discussions. "Canada is unique because we already provide them certain automatic or spontaneous information exchanges on Canadians that have bank deposits in the United States. We already collect that information and share it with them in ways that we don't do with Mexico or other countries."