US demands for money from anyone with a business, financial or other relationship to America have been delayed by one year after a global outpouring of protest to Washington.

The Foreign Account Tax Compliance Act (FATCA), widely perceived as an Internal Revenue Service (IRS) effort to raise money for a deeply troubled economy, has been put on hold until 2014, although certain reporting requirements continue to apply.

The delay was announced last month, but information is only now emerging as the costs of compliance become clear to fund managers, bankers, accountants, brokers, lawyers and governments. An April FATCA seminar at Cayman’s Marriott Beach Resort, terrified a packed ballroom, suggesting profound concern.

“The reason for the delay is that foreign banks and governments have been telling the US and the IRS and the Treasury that they just can’t do this, that they won’t have the systems to guide this, that they won’t have the time to reprogramme everything by that [30 June, 2013] deadline,” said one Washington tax attorney, advising Cayman Islands officials on FATCA’s implications.

He also said that the IRS was itself unprepared: “When this starts, tons of cash is likely to come in and completely disrupt the system. The IRS wants to avoid that kind of mess, and congress has not given an effective date for the law, although people will have to start reporting next year.”

He did not rule out further delays, saying the law was a “very bad idea”, an example of “arrogance and imperialism”.

FATCA law requires foreign financial institutions to report to the IRS all US-affiliated clients who have, at any time, held more than $50,000 in their accounts. They must create systems to withhold money from non-compliant investors.

FATCA does not affect only US citizens, but anyone with a business, a property, an investment or even a family member with a passport, a Green Card or other connection to the country.

Failure by either foreign financial institutions or US-affiliated individuals to report their holdings to the IRS will result in a series of penalties including fines and possible limitation of business links.

The Cayman Islands government has been helping mediate IRS demands among resident Americans and local financial institutions.

“This is novel territory. Rarely does one government help another enforce its tax laws, and we have always promoted compliance,” said Samuel Rose, Deputy Chief Officer for Financial Services.

“There has been significant feedback from the public, and we are not the only country that has shared its views with the IRS. We want to promote compliance, but the gravity of the situation is just emerging. A lot of banks, for example, are pulling back on their US-client business. FATCA is making things complicated,” he said.

One official close to the financial-services industry feared “unintended consequences” of FATCA.

“At the end of the day, American interests could be compromised by this. If a portfolio has a US-dollar component it could contaminate the whole thing. If someone has investments in a fund that has a US investment, he could be liable for tax. If an American is in a feeder fund, it could contaminate the entire master fund,” he said. “Does any government want to limit US investments around the world?”

HSBC Private Bank Bermuda in late July announced it “would no longer support” accounts owned by US citizens, Bermuda residents with dual-citizenship with the United States, and green card holders.

Meanwhile, the European Union, Australia and Japan have “pushed back”, the official said, fearing FATCA may set a precedent.

“This bypasses the usual government-to-government reporting, where, say, the US would come here and say ‘we believe there is an individual in violation’, and this government would go out and collect the information. FATCA means the IRS is bypassing the Cayman Islands and going straight to private institutions. Does this mean other governments could also bypass government-to-government?