IRS Begins Exchanging Tax Info with Other Countries under FATCA

The Internal Revenue Service said Friday it has met a key milestone relating to the Foreign Account Tax Compliance Act, or FATCA, having begun exchanging tax information with certain foreign governments in time to meet a Sept. 30, 2015 deadline.

The automatic exchange of account information with tax authorities abroad was part of the intergovernmental agreements that the Treasury Department negotiated with foreign governments in an effort to implement the law.

FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to send the IRS information on the accounts of U.S. taxpayers, or else face stiff penalties of up to 30 percent on their income from U.S. sources. The law has attracted controversy abroad, prompting the Treasury to negotiate agreements with other countries to allow for reciprocal exchange of tax information on both U.S. and foreign taxpayers from both U.S. and foreign banks, in accordance with existing tax treaties to prevent double taxation. In most cases, the agreements allow the banks to first turn over the information to their own countries’ tax authorities before it is handed over to the IRS or a tax authority in another country.

To meet the Sept. 30 milestone, the IRS said it developed an information system infrastructure, procedures, and data use and confidentiality safeguards to protect taxpayer data while facilitating reciprocal automatic exchange of tax information with certain foreign jurisdiction tax administrators as specified under the agreements implementing FATCA.

“Meeting the Sept. 30 deadline is a major milestone in IRS efforts to combat offshore tax evasion through FATCA and the intergovernmental agreements,” said IRS Commissioner John Koskinen in a statement. “FATCA is an important tool against offshore tax evasion, and this is a significant step in the process. The IRS appreciates the assistance of our counterparts in other jurisdictions who have helped to make this possible.”

The information exchange is part of the IRS’s overall efforts to implement FATCA, enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts or foreign entities. FATCA generally requires withholding agents to withhold on certain payments made to foreign financial institutions unless they agree 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 response to the enactment of FATCA and other jurisdictions’ interest in facilitating and participating in the exchange of financial account information, the U.S. government entered into a number of bilateral IGAs that set the groundwork for cooperation between the jurisdictions in this area. Certain IGAs not only enable the IRS to receive this information from FFIs, but also enable, according to the IRS, more efficient exchange by allowing a foreign jurisdiction tax administration to gather the specified information and provide it to the IRS. Some IGAs also require the IRS to reciprocally exchange certain information about accounts maintained by residents of foreign jurisdictions in U.S. financial institutions with their jurisdictions’ tax authorities.

Under these reciprocal IGAs, the first exchange had to take place by September 30, giving the IRS a deadline to put in place a process to facilitate this data exchange.

The IRS said the information now available provides the United States and its partner jurisdictions an improved means of verifying the tax compliance of taxpayers using offshore banking and investment facilities, and improves detection of those who may attempt to evade reporting the existence of offshore accounts and the income attributable to those accounts.

The IRS said it will only engage in reciprocal exchange with foreign jurisdictions that, among other requirements, meet the IRS’s stringent safeguard, privacy, and technical standards. Before exchanging with a particular jurisdiction, the U.S. conducted detailed reviews of that jurisdiction’s laws and infrastructure concerning the use and protection of taxpayer data, cyber-security capabilities, as well as security practices and procedures.

“This groundbreaking effort has fundamentally altered our relationship with tax authorities around the world, giving us all a much stronger hand in fighting illegal tax avoidance and leveling the playing field,” Koskinen said.

Meeting the Sept. 30 deadline reflects the agency’s collaboration and partnership with dozens of jurisdictions around the world. The capacity for reciprocal automatic exchange builds on a number of accomplishments, including the development of a consistent data reporting format, or schema, and the agreement to use this format by all jurisdictions; establishment of the details and procedures required to assure data confidentiality; creation of a data transmission system to meet high standards for encryption and security; and cooperation with foreign jurisdiction tax administrations to achieve the timely implementation of this exchange.

Koskinen pointed out that the risks of hiding money offshore are growing and the potential rewards are shrinking. Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program, which the IRS said is open until otherwise announced.