The Internal Revenue Service has rolled out its implementation plan for chasing down U.S. tax due on foreign bank accounts as executives in the banking sector brace for high compliance costs and big headaches.

The U.S. Treasury Department and the IRS issued guidance outlining a time frame for foreign financial institutions and U.S. withholding agents to implement various requirements under the Foreign Account Tax Compliance Act. FATCA became law in 2010 to require foreign banks to report information to the IRS on foreign accounts held by U.S. taxpayers or by foreign entities that are substantially owned by U.S. taxpayers. The IRS is looking for taxable earnings that are otherwise seemingly hidden in foreign accounts.

The recent implementation guidance gives foreign banks until June 30, 2013, to reach agreements with the IRS to comply with the information reporting in order to avoid punitive withholding consequences on certain types of payments beginning in 2014. The IRS has promised it will impose withholdings on U.S. source interest and dividends, gross proceeds from certain U.S. securities, and pass-through payments, beginning in 2014 for foreign banks that do not cooperate.

The IRS is most focused on high-risk accounts, those with balances greater than $500,000. Under the information reporting agreements, banks will be required to identify U.S. accounts and report certain information about those accounts to the IRS that will be helpful to the IRS is pursuing any U.S. tax due on those accounts.

IRS Commissioner Doug Shulman said in a statement that the law is an important component of the IRS strategy to combat offshore noncompliance with U.S. tax law. “At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions,” he said. “Today's notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."

A recent KPMG survey of banking executives suggests finance and tax executives in the banking sector are expecting significant costs and burdens in complying with FATCA, and they expect to need all the lead time the IRS is providing to prepare for it. They are most concerned about the challenges in identifying accounts, the survey found.

Laurie Hatten-Boyd, KPMG principal, said in a statement most banks have current documentation processes in place due to other rules, but they need time to refine current systems and processes, and in some cases develop new ones, for FATCA purposes. Operations and information technology staff will be hardest hit by the new requirements, the survey suggests; 57 percent of respondents said the company is currently working across several departments to prepare for FATCA compliance.