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Expats Beware: FATCA Tax Data Exchange Is Up and Running

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The Internal Revenue Service has wrapped up its first international exchange of taxpayer information as part of the Foreign Account Tax Compliance Act.

The IRS said information now available through the exchange provides the United States and partner jurisdictions with an improved means of verifying the compliance of taxpayers using offshore banking and investment facilities, while improving detection of those who may attempt to hide offshore accounts and income.

IRS Commissioner John Koskinen said the agreement “is a major milestone in IRS efforts to combat offshore tax evasion through FATCA and the intergovernmental agreements.” FATCA is an “important tool against offshore tax evasion, and this is a significant step in the process.”

Jonathan Horn, lead technical manager on the AICPA tax staff who handles international tax issues, told ThinkAdvisor in an interview that the IRS performed the exchange of information “with a limited number of countries,” including Australia and Canada, at the end of September. While Horn said that it was unclear how many countries were involved in the Sept. 30 exchange, “sometime next year the exchange of information will expand to 140 countries.”

Kosikinen says the “groundbreaking effort has fundamentally altered [the U.S.'s] relationship with tax authorities around the world, giving us all a much stronger hand in fighting illegal tax avoidance and leveling the playing field.”

The “biggest part of the milestone,” according to Horn, is that the IRS got the exchange of information ”done and the back-office computer systems work properly.”

The information exchange is part of the IRS’ overall efforts to implement FATCA, enacted in 2010 by Congress to target tax dodging by Americans using foreign accounts or foreign entities.

As the IRS explains, certain intergovernmental agreements (IGAs) not only enable the IRS to receive information from foreign financial institutions (FFIs), but enable more efficient exchange by allowing a foreign tax administration to gather information and provide it to the IRS. Some countries have reciprocal agreements, requiring the IRS to in turn provide their tax authorities with information on their residents’ U.S. accounts.

Under these reciprocal IGAs, the first exchange had to take place by Sept. 30.

But Nigel Green, founder and CEO of London-based deVere Group, a financial consultancy that serves expat clients, told ThinkAdvisor in an email message that while FATCA’s noble effort is designed to catch tax evaders who illegally shelter money offshore, “because of its plethora of serious unintended adverse consequences,” FATCA brands “Americans who choose to live and/or work overseas as financial pariahs.”

He said the recent data sharing initative ushered in a “dark day” for the estimated 8 million Americans living overseas and for U.S. firms that operate globally.

U.S. expats, Green said, “are now routinely rejected from foreign financial institutions, such as banks in their country of residence, because FATCA’s costly and onerous regulations mean Americans are now typically deemed more trouble than they are worth.”

As the IRS explains, FATCA generally requires withholding agents to withhold 30% on certain payments — say, of U.S.-sourced income — made to foreign financial institutions unless such FFIs agree to report to the IRS information about accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Green argues that the “beginning of automatic exchange is also a step in the wrong direction as FATCA is paving the way for GATCA, the Global Account Tax Compliance Act.”

GATCA, “which for Americans would violate the Fourth Amendment,” Green says, “is FATCA on steroids.”

Indeed, Keith Diamond, a director and AML compliance officer at Kaufman Rossin Fund Services, said in a recent ThinkAdvisor blog that, “GATCA, aka Global FATCA, is poised to complicate compliance” for hedge funds even further.

The Organization for Economic Cooperation and Development (OECD), which is based in France and is the de facto world tax authority, Green continues, “is proposing that accounts opened by foreign nationals be routinely reported to that individual’s homeland tax authorities. It is thought approximately 65 countries could ultimately be involved.”