International Data Exchange – Important Truth About Unreported Foreign Accounts You Need To Know
International Data Exchange
On January 12, 2015, the IRS announced the opening of the International Data Exchange Service (IDES) for enrollment. Financial institutions and host country tax authorities will use IDES to securely send their information reports on financial accounts held by U.S. persons to the IRS under the Foreign Account Tax Compliance Act (FATCA) or pursuant to the terms of an intergovernmental agreement (IGA), as applicable.
More than 145,000 financial institutions have registered through the IRS FATCA Registration System. The U.S. has more than 110 IGAs, either signed or agreed in substance. Financial institutions and host country tax authorities will use the international data exchange service to provide the IRS information reports on financial accounts held by U.S. persons.
The opening of the International Data Exchange Service is the start of a secure system of automated, standardized information exchanges among government tax authorities. This will enhance the ability of the IRS and other foreign countries to detect hidden accounts and help ensure fairness in the tax system (in other words full and complete reporting). At Tax Samaritan, we anticipate at some point in the future that the IRS will use this information in an automated fashion to identify under-reporting of income and non-disclosure of foreign accounts. We anticipate that the IRS approach will be similar to processes used today to match information reported on the Form 1040 to what has been reported on your W2 and other tax forms to the IRS.
Given the magnitude of the potential penalties to underreporting, even small errors or mistakes can result in a substantial cost to taxpayers and in turn revenue to the Federal government. Armed with information from the international data exchange, this task to identify and penalize negligent taxpayers will become much more easy.
FATCA was passed as part of the HIRE Act of 2010 and requires foreign financial institutions to report on the holdings of US taxpayers to the IRS or face steep penalties of up to 30 percent on the US source income. The international data exchange was created to support the requirements of FATCA. While there has been significant controversy, the US has been signing IGAs with the tax authorities in other countries.
Where a jurisdiction has a reciprocal IGA and the jurisdiction has the necessary safeguards and infrastructure in place, the IRS will also use IDES to provide similar information to the host country tax authority on accounts in U.S. financial institutions held by the jurisdiction’s residents.
International Data Exchange – What To Do If You Have Unreported Foreign Accounts
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If you haven’t disclosed your foreign financial accounts or have not made complete disclosures in the past, now is the time to get back in compliance and file your late FBAR and amended FBAR before the international data exchange catches you in its snare. Once the IRS is aware of underreporting, the potential penalties can skyrocket to more than 50 percent of the balance in the account.
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When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
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All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.