International Data Exchange Service Bolsters FATCA
The International Data Exchange Service (IDES) is an electronic delivery system that allows both financial institutions and tax authorities in host countries to exchange FATCA data with the Internal Revenue Service. If predictions hold true, this new data exchange system, which went into effect in January of this year, will greatly enhance the effectiveness of the Foreign Account Tax Compliance Act (FATCA). According to IRS Commissioner John Koskinen, the International Data Exchange Service is a “milestone in the implementation of FATCA.” Koskinen maintains that increasing the ability of the IRS to detect hidden foreign assets will not only increase foreign tax revenue, but will also increase the fairness of the foreign tax collection system by ensuring that all foreign assets are taxed according to existing offshore tax compliance laws.
Unlike many foreign countries, the United States taxes its citizens on the total amount of their income, regardless of whether that income is earned on foreign soil. Although the requirement for filing an annual Report of Foreign Bank and Financial Accounts (FBAR) has been around since 1970, not much effort was put into enforcing it until fairly recently. In June of 2008, the IRS, together with the United States Department of Justice, issued a formal statement reminding United States taxpayers of their foreign tax reporting responsibilities and outlining the consequences for evading them. Since that time, increased efforts in this area have resulted in the identification and punishment of taxpayers who are guilty of concealing offshore assets in addition to the foreign banks who have participated in hiding them.
A further development in the area of offshore tax reporting came in 2010 when Congress passed the Foreign Account Tax Compliance Act (FATCA). This legislation requires taxpayers to report any foreign assets in excess of $50,000 and mandates that foreign banks disclose information about United States citizens who have assets in foreign accounts. Although the bill was passed five years ago, enforcement was postponed until July of 2014 when the IRS began imposing a 30% penalty tax on payments made to foreign financial institutions that have not registered to share client information. The initiation of the new International Data Exchange Service will most certainly help to make this information more transparent, thus increasing the effectiveness of the foreign asset reporting legislation that is already on the books.
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