IRS Opens FATCA International Data Exchange Gateway

This was reported today by Michael Cohn in Accounting Today published on the world wide web. The international highway is open and you are one of its first customers. Your financial information is now speeding its way back and forth across “international boundries” and soon, everything about your bank accounts worldwide will be known to all.

The Internal Revenue Service’s Large Business & International division has opened a gateway that financial institutions and the tax authorities abroad can use to send information on financial accounts held by U.S. taxpayers in accordance with the Foreign Account Tax Compliance Act.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions to share information with the IRS about the accounts of U.S. taxpayers abroad, or else face heavy withholding penalties of up to 30 percent on their U.S. source income. The law has provoked controversy abroad, but despite delays, the IRS and the Treasury Department have been moving ahead with its implementation.

The Treasury Department has been signing intergovernmental agreements, or IGAs, with a number of foreign governments to facilitate FATCA reporting. Under what is known as a “model 1 IGA,” the tax authorities in other countries act as intermediaries in sharing the information they receive from foreign financial institutions with the U.S. Under a model 2 IGA, the foreign banks transmit the information directly to the IRS.

The new International Data Exchange Service, or IDES, Gateway, will allow financial institutions and the tax authorities in foreign countries to securely send information reports on financial accounts held by U.S. persons. IDES will operate on all major browsers, including Google Chrome and Microsoft Internet Explorer, and will support application-to-application exchanges through secure communication protocols. The IRS said that data transmitted via IDES will be encrypted at both the file and transmission level to safeguard sensitive tax information.

The online address for IDES enrollment and a link to IDES Gateway can be found on the IDES enrollment site, and the IDES User Guide with instructions for enrolling and using IDES can be found on the IDES home page.  To complete IDES enrollment, financial institutions will need to have registered as a participating financial institution through the IRS FATCA Registration System and have a global intermediary identification number, or GIIN, that appears on the current IRS FATCA Foreign Financial Institution list.

The IRS is encouraging financial institutions and host country tax authorities to complete the enrollment process, which began in January, and initiate transmission before the Form 8966 reporting deadline. An automatic 90-day extension of time to file Form 8966 can be requested. For calendar year 2014, only an automatic 90-day extension of time to file Form 8966 will be provided to all filers (including those filing electronically), without the need to file any form or take any action. For more information, review the 2014 Instructions for Form 8966.

For help or questions about IDES enrollment, transmission or system alerts, users can contact IDES Customer Support at 1-800-613-IDES (4773) or by email at helpdesk@ides-support.com. IDES Customer Support is available 24 hours a day except on U.S. federal holidays. For additional information about data preparation or other aspects of FATCA reporting, visit the IRS FATCA website.

Susan Grbic, a partner at WeiserMazars LLP who has been closely following developments with FATCA reporting, noted that the Form 8966 deadline is approaching, although she said the 90-day extension is giving financial institutions more time to get ready.

“That should be a really interesting process,” she said in an interview last week. “The initial due date for the U.S. withholding agents and the model 2 IGA countries, as well as those that don’t have IGAs, are going to be due by March 31 normally. However this particular year, the filing that would have been required by March 31, 2015, has an automatic 90-day extension available upon request. I think most people are taking advantage of the additional time. I think that this particular year there’s no requirement to make the request. It’s just automatic. An additional 90 days will take you to June 30.”

She noted that the International Data Exchange Service is up and running. “It’s not doing much yet, but it’s there,” she added. “I think the IRS is trying to figure out how country-by-country reporting and automatic data exchange is going to mesh with its current filing requirements. I think there are still areas for more guidance.”

She sees a need for more guidance about the required forms. Most of her foreign financial institution clients are in model 1 countries, whose banks have until September 2015 to file with the tax authorities in their host countries.

“However, many of the countries are trying to get the data from their respective FFIs before that date,” Grbic added. “The issue with those model 1 jurisdictions is that for the most part, while the local tax authorities want the info earlier, very few of these countries have actually published any kind of guidance notes.”

While the United Kingdom, Ireland and the Cayman Islands have published guidance notes, many countries have not yet released it, or as in the case of the Netherlands, the guidance is only available in a foreign language.

For the most part, she has found that the banks have been doing their best to comply, despite the absence or limited availability of guidance.

Another issue she sees, particularly for mutual funds, hedge funds and private equity funds are document repositories. “The idea is that everybody has got to document their holdings, and with these document repositories, there’s confusion on the part of withholding agents about what the IRS’s view is on this issue, whether they can actually accept forms that are part of these document repositories or should they actually just wait for guidance to be issued,” said Grbic. “There’s a huge impact because there are probably hundreds of thousands of forms that are subject to that.”

Another thorny area pertains to the use of clearinghouses for derivatives contracts. “We certainly see that with our banking clients doing a lot of derivative contracts that have to clear now through clearinghouses after Dodd-Frank,” said Grbic. “There the idea is that you’re still going to need tax documentation if you’re going through a clearinghouse. Even though you can rely on documentation that’s collected by third parties, you still should have direct access to that documentation so that you can produce it when you’re audited.”

FATCA Fears Flame Anew

Once again, FATCA is in the local news here in Israel as reported in an article yesterday in Haaretz.com. They report that because banks have not been given any guidelines by the government, they have unilaterally started to demand that their clients make declarations of compliance with U.S. tax reporting commitments. Bank Leumi warned their customers that their Israeli accounts would be frozen at the beginning of May if they failed to make a declaration that they have reported their bank accounts to the IRS. Some Israeli banks have even asked customers for documentation that they are reporting properly to the U.S. authorities. They aren’t taking any chances because if these banks and, in fact, any financial company including those insurance institutions managing my meager retirement accounts, does not report me to the IRS by only eight and a half months from now, any income from investments that they have which are in any way remotely connected with the United States, will be attached and withheld. How, you ask, can the United States force a bank in Israel to comply? The answer is quite simple and clear. Banks invest money and as an example, if my bank invests in, let us say, an international bond fund which almost certainly has some of its money invested in bonds from the U.S., income to my bank will be grabbed by the IRS before that income leaves American shores. What with globalization of financial investing, all financial institutions in all countries have investments in all other countries. So it would behoove my bank here in Israel to cower when the IRS says that they are going to cut the flow of money to my bank. My bank will surely comply with the demand that I prove to them that I have reported my savings here by  completing and submitting the  Foreign Bank Account Report (FBAR) to the IRS. This is a huge administrative nightmare of my bank as they must first find out which of their customers are US persons and must then demand their compliance, and finally, report all of this to the United States Internal Revenue Service. It is a mass of paperwork over and above what they had to do previously. And it is likewise, an additional mass of paperwork for the IRS, not to mention, for me. Will this enable them to catch the tax evading criminals? Will they generate more money for the U.S. Treasury than it costs them to accomplish? Your guess is as good as mine. I have my doubts.

There seems no question that the IRS is focusing on some countries by increasing their auditing of the tax returns of expats in Singapore, Hong Kong, and Israel.