Tax Information Exchange – A Critical Guide for Expats

Tax information exchange involves sharing financial data between countries under treaties or bilateral agreements.  It plays a critical role in the global effort to enhance tax transparency and combat tax evasion. Through various bilateral agreements and the implementation of systems like the International Data Exchange Service (IDES), tax authorities worldwide, including the IRS, now exchange financial information to ensure taxpayers meet their obligations.

For U.S. taxpayers, this means that their overseas income, including bank deposit interests, may be reported to the IRS, helping shrink the tax gap caused by unreported income. The U.S. has active agreements with numerous countries, facilitating tax information exchange to ensure compliance.

Background on FATCA

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, aims to prevent tax evasion by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report information on accounts held by U.S. taxpayers to the Internal Revenue Service (IRS). Failure to comply can result in a 30% withholding tax on certain U.S. source payments​.

TIP: Even if you close a foreign account during the year, you still need to report it under FATCA if it exceeded the reporting thresholds at any time. Reporting these accounts can help you avoid penalties for non-compliance, even if the account is no longer active by year-end.

Purpose of FATCA Registration

FATCA registration enables financial institutions to comply with U.S. tax reporting requirements, allowing them to identify themselves as compliant entities to withholding agents. Registration is necessary to obtain a Global Intermediary Identification Number (GIIN), which is essential for demonstrating FATCA compliance. Through registration, FFIs can either become Participating Foreign Financial Institutions (PFFIs) or qualify under other FATCA classifications to avoid severe penalties​.

Who Can Register?

Eligible entities for FATCA registration include:

• Foreign Financial Institutions (FFIs) include banks, investment entities, and insurance companies with cash-value products.
• Certain Non-Financial Foreign Entities (NFFEs) that engage in specified financial transactions.
• Sponsoring entities, sponsored FFIs, and branches that handle reportable accounts held by U.S. persons.

Each entity type has distinct requirements, but the common goal is ensuring accurate financial account reporting to the IRS.

How to Register for FATCA

Eligible entities can register through the IRS FATCA Registration System, a secure, web-based platform. The process involves the following steps:

1. Create an Account: Entities must create an account on the FATCA Registration System using their business or individual details. The registration system supports secure sign-in options like Login.gov or ID.me, which must be used to access the platform.
2. Select Classification:  Entities must determine their correct classification within the FATCA system, such as a Participating Foreign Financial Institution (PFFI), Registered Deemed-Compliant FFI, or Non-Reporting IGA FFI.
3. Submit Form 8957: Complete and submit Form 8957, which details the FFI’s compliance status and other pertinent information.
4. Obtain GIIN: After approval, the entity will receive a GIIN, which must be used in reporting and to demonstrate FATCA compliance to withholding agents.

The IRS continually updates its registered institutions’ list and compliance statuses, reinforcing the importance of staying current with registration requirements​.

International Data Exchange Service and Its Role in Global Compliance 

The IDES is a secure, web-based platform financial institutions and foreign tax authorities use to report information about financial accounts held by U.S. persons. Established by the IRS as part of its efforts to enforce the Foreign Account Tax Compliance Act (FATCA), IDES facilitates the global automated and standardized exchange of tax information.

The IDES supports FATCA’s mission by ensuring that foreign financial institutions comply with reporting obligations or face penalties of up to 30% on U.S. source income. It plays a crucial role in the fight against tax evasion, allowing the IRS to efficiently receive and analyze data from over 145,000 financial institutions worldwide.

With IDES, the IRS can cross-check reported data against taxpayer filings, helping to detect under-reporting of income and undisclosed foreign accounts more effectively. It helps streamline the IRS’s ability to enforce compliance and ensures taxpayers are held accountable, regardless of where they keep their financial assets.

TIP: The IDES not only assists the IRS in identifying non-compliance but also monitors discrepancies between what foreign institutions report and what taxpayers declare. Make sure your tax filings align with the information your foreign bank provides to minimize the risk of triggering an audit or investigation.

How IDES Impacts U.S. Taxpayers with Foreign Accounts

The implementation of IDES has increased the IRS’s ability to monitor foreign financial accounts, making it increasingly difficult for taxpayers to hide assets overseas. Even minor discrepancies in reported income can trigger investigations and lead to hefty penalties exceeding 50% of the undisclosed account balance. This highlights the critical need for U.S. taxpayers to report all foreign accounts and income sources accurately and on time.

IDES represents a significant step toward greater transparency in international finance, aligning with global efforts to close the tax gap and promote fairness in the tax system. As these information-sharing networks expand, compliance is no longer optional—it’s a critical component of managing international finances responsibly.

Exchange of Bank Deposit Interest Information 

The IRS has made it clear that tax information exchange is a top priority, as seen in the release of Revenue Procedure 2023-36. This procedure provides an updated list of countries with which the United States has an income tax or other convention or bilateral agreement related to the exchange of information. These agreements ensure that information on bank deposit interest is shared between countries, which allows the U.S. to monitor and enforce tax compliance for its citizens with accounts abroad.

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Countries Participating in Tax Information Exchange

•  Antigua & Barbuda
• Aruba
• Australia
• Austria
• Azerbaijan
• Bangladesh
• Barbados
• Belgium
• Bermuda
• Brazil
• British Virgin Islands
• Bulgaria
• Canada
• Cayman Islands
• China
• Colombia
• Costa Rica
• Croatia
• Curacao
• Cyprus
• Czech Republic
• Denmark
• Dominica
• Dominican Republic
• Egypt
• Estonia
• Finland
• France
• Germany
• Gibraltar
• Greece
• Grenada
• Guernsey
• Guyana
• Honduras
• Hong Kong
• Hungary
• Iceland
• India
• Indonesia
• Ireland
• Isle of Man
• Israel
• Italy
• Jamaica
• Japan
• Jersey
• Kazakhstan
• Korea (South)
• Latvia
• Liechtenstein
• Lithuania
• Luxembourg
• Malta
• Marshall Islands
• Mauritius
• Mexico
• Monaco
• Morocco
• Netherlands
• Netherlands island territories: Bonaire, Saba, and St. Eustatius
• New Zealand
• Norway
• Pakistan
• Panama
• Peru
• Philippines
• Poland
• Portugal
• Romania
• Russian Federation
• Slovak Republic
• Slovenia
• South Africa
• Spain
• Sri Lanka
• St. Maarten (Dutch part)
• Sweden
• Switzerland
• Thailand
• Trinidad and Tobago
• Tunisia
• Turkey
• Ukraine
• United Kingdom
• Venezuela

Countries Participating in Automatic Deposit Interest Information Exchange

The following list identifies the countries with which the automatic exchange of the information collected under §§ 1.6049-4(b)(5) and 1.6049-8 has been determined by the Treasury Department and the IRS to be appropriate:

• Argentina
• Australia
• Azerbaijan
• Belgium
• Brazil
• Canada
• Colombia
• Croatia
• Curaçao
• Cyprus
• Czech Republic
• Denmark
• Dominican Republic
• Estonia
• Finland
• France
• Germany
• Gibraltar
• Greece
• Guernsey
• Hungary
• Iceland
• India
• Ireland
• Isle of Man
• Israel
• Italy
• Jamaica
• Jersey
• Kazakhstan
• Korea, Republic of
• Latvia
• Liechtenstein
• Lithuania
• Luxembourg
• Malta
• Mauritius
• Mexico
• Netherlands
• New Zealand
• Norway
• Panama
• Poland
• Portugal
• Saint Lucia
• Singapore
• Slovak Republic
• Slovenia
• South Africa
• Spain
• Sweden
• Turkey
• United Kingdom

Data Exchange in U.S. Tax Treaties

Tax data exchange is a standard provision in most U.S. tax treaties. It’s typically governed by Article 26, which allows for the exchange of information between tax authorities of the contracting states. These treaties aim to prevent double taxation and combat tax evasion by enabling the sharing of information necessary to enforce tax laws.

Under Article 26, the scope of information exchange is broad, covering matters related to the assessment, collection, and enforcement of taxes, including VAT and other indirect taxes where applicable. This system allows tax authorities to obtain and share relevant financial data, such as income and asset information, to ensure compliance with tax obligations.

In addition to these tax treaties, the U.S. also participates in intergovernmental agreements (IGAs) as part of the Foreign Account Tax Compliance Act (FATCA). These agreements further facilitate the automatic exchange of financial account information between the U.S. and partner countries.

Common Reporting Standard

The Common Reporting Standard (CRS) was developed by the Organisation for Economic Co-operation and Development (OECD) to combat offshore tax evasion and promote global tax transparency. It requires financial institutions in participating countries to report account information about non-residents to their local tax authorities. These authorities then exchange the information with the taxpayer’s country of residence annually.

While CRS is similar to FATCA, it operates on a multilateral basis with over 100 participating countries, unlike FATCA’s bilateral agreements. CRS focuses on tax residency rather than citizenship, meaning that account holders are identified based on where they are tax residents. Financial institutions must report account balances, income, and other financial data, significantly broadening the scope of tax compliance globally.

Although the U.S. does not participate directly in CRS, American citizens abroad may still be affected by both FATCA and CRS reporting if they have accounts in CRS-compliant countries.

What To Do If You Have Unreported Foreign Accounts 

Our goal at Tax Samaritan is to provide our clients with the best counsel, advocacy, and personal service. We are not only tax preparation and representation experts but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach to providing realistic and effective solutions.

If you haven’t disclosed your foreign financial accounts or 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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