Investors in certain funds in Ireland would be spared a 30 percent withholding tax and onerous reporting requirements, under a reworked offshore account-reporting agreement with the U.S.

The agreement addresses a major question for investors and fund managers that the Internal Revenue Service left unanswered in final Foreign Account Tax Compliance Act rules (T.D. 9852). The rules, released March 21, tell investors how to prove that they have been following the rules of the sweeping account-reporting regime, but Ireland was among nine countries that lacked the necessary reporting instructions for alternative funds structured as partnerships.

The Ireland document—posted online without officials’ signatures or dates—shows it is trying to renegotiate the reporting terms of its FATCA agreement with the U.S. to allow one person to confirm compliance for an entire partnership. That change is critical because the entities may have many layers.

If completed, Ireland would be the first of the nine countries to update its FATCA agreement following release of the final regulations.

The IRS and Treasury Department didn’t return requests for comment.

Funds in the eight other countries—Denmark, France, Germany, Italy, Mexico, Netherlands, Norway, and Spain—now must find a way to show compliance by the IRS’s March 31 reporting deadline for the period of July 2014 through December 2017.

“If these entities don’t certify in a few days and miss the deadline, they can lose their FATCA compliant status, so it’s big stakes,” said Tara Ferris, principal for financial services at EY in New York. She was formerly senior counsel with the IRS Office of Associate Chief Counsel (International), where she led the drafting of FATCA regulations.

Tough Choice

Failing to prove FATCA compliance would mean major reputational damage for the funds, on top of the whopping withholding tax for investors. Funds now must either wait to see if their governments will take a step like Ireland, or force investors to certify directly with the IRS.

Passing the reporting requirement to investors would mean the funds risk losing hundreds or thousands of investors who don’t want to deal with the hassle going forward. Practitioners say funds should encourage their investors to meet the deadline, because the risk of being found noncompliant is substantial.

“The risk to the larger foreign financial institutions is losing customers by passing them the compliance burden, which is very complicated,” said Dianne Mehany, a member at Caplin & Drysdale in Washington.

The IRS final rules did allow banks and mutual funds to choose a person who could complete the due diligence, withholding, reporting, and other compliance requirements on behalf of the entire institution and its investors. The agency said in the final regulations that it is open to discussing the missing sponsorship entity provision with the relevant countries on a case-by-case basis.

That gives a potential opening to governments to renegotiate the terms of the agreements, which would ease pressure on the funds and investors, practitioners said. But it will be nearly impossible for the countries to rework the deals in time to meet the March 31 deadline.

“That’s what we’re hoping for but we haven’t seen anything on the ground yet,” Ferris said.

Renegotiating isn’t unprecedented. The U.K. entered into an updated agreement with the U.S. in February.

“The issue has been lurking around for a while and the IRS has gotten a lot of comments, but people probably thought it would have been resolved in the regulations by now,” Ferris said.