The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States (U.S.) Congress in March 2010 to prevent U.S. persons/taxpayers from evading taxes by using foreign accounts. Under FATCA regulation individuals are required to provide full details of their foreign accounts/investments, but now even foreign financial institutions (FFIs) are required to provide details of certain financial accounts owned by U.S. citizens and residents to the U.S. Internal Revenue Service (IRS). If they fail to meet this filing obligation they will face a 30% withholding tax penalty on payments of U.S. income to the FFI.
Last year, the U.S. entered into agreements with several countries such as Canada, Singapore, and India to exchange data on taxpayers holding bank accounts or other investments in their country. For example, the Canada Revenue Agency (CRA) will disclose details of all U.S. persons’ holding accounts in Canada that meets the reporting requirements under FATCA, while the IRS provides details of Canadian resident taxpayers holding accounts/investments in the United States. (Click here for more details: FATCA’s Impact on Foreign Countries, FATCA Disclosure Agreement Between Canada & U.S.).
2014 was more about strategizing this data exchange service while in 2015 the U.S. has finally put the data exchange model into execution. How?
The U.S. government has established an electronic delivery point where Financial Institutions (FI) and Host Country Tax Authorities (HCTA) can transmit and exchange FATCA data with the United States. This system is also known as the ‘International Data Exchange Service’ (IDES).
Below is a brief summarization on the FATCA agreement model between the U.S. and other countries utilizing the IDES, prepared by the cross-border tax analysts at AG Tax. It should be very informative for taxpayers subject to filing requirements in both the U.S. and Canada.
Inter-Governmental Agreements (IGAs) between the U.S. and partner countries
The U.S. has entered one of two different kinds of agreement models, depending on the partnering country.
Model I is a framework wherein foreign financial institutions will report account information of U.S. persons to their relevant domestic tax authority, which will then forward this information to the IRS. FFIs under this model will need to register and obtain a global intermediary identification number (GIIN; required for IDES enrollment) and provide it to their withholding agents. Canada has entered into a Model I agreement with the IRS.
Model II is a framework for FFIs to directly report account information of U.S. persons to the U.S. IRS; including exchange of additional information between the U.S. and partner country, if required. FFIs under this framework must register with the IRS and agree to comply with the terms of an FFI agreement.
International Data Exchange Service (IDES)
As mentioned earlier in the article, IDES is an electronic data exchange/delivery point between U.S. and foreign FIs and/or tax authorities via a secure web application to transmit FATCA required data directly to the IRS.
As of January 2015, most FFIs and host country tax authorities have started enrolling in the IDES program. This IDES Gateway will allow the FFIs/tax authorities to securely send sensitive information reports on financial accounts held by U.S. persons as required under FATCA law.
Current Situation
All the participating FFIs and tax authorities have been asked to enroll before the ‘Form 8966, FATCA Report’ reporting deadline (which had been extended by 90 days for the 2014 tax year).
Form 8966 is an information disclosure form which needs to be filed by domestic financial institutions, participating FFIs, sponsoring entities, and other withholding agents to report the names and other necessary details of account holders who are considered to be U.S. persons.
One of the ways the IRS will be using this form is to verify the foreign asset disclosure form(s) (FBAR, Form 8938, etc.) filed by the U.S. person to see if there are any discrepancies. The IRS may send a notice to the taxpayer for explanation if required. If the taxpayer is found guilty of carrying out such measures in an attempt to avoid paying taxes, he/she could face severe penalties and punishment, which includes imprisonment.
Therefore, taxpayers are strongly advised to discuss their situation with qualified tax practitioners, and file all the necessary documents required to be tax compliant with the IRS, CRA, or any other tax authority that they are subject to, in order to avoid any civil or criminal penalties or punishments.
In fact, the IRS started the ‘Offshore Voluntary Disclosure Program’ (OVDP) in 2012 to encourage U.S. persons/taxpayers to come forward and disclose information required by the IRS. This program allowed taxpayers to explain their side of the story for missing out on prior year(s) foreign assets disclosure requirements. If the circumstances were considered legitimate, they could be considered for reduced penalties and no criminal punishment.
A modified and improved version of the OVDP was introduced in 2014, covering a large number of individuals. Taxpayers are highly encouraged to use this opportunity to comply with U.S. tax authorities (if they have yet to do so).
Tax situations can be complex, and if you are a U.S. person residing in another country for many years, it is likely that you may have genuinely missed out on certain reporting requirements. If you feel you may have missed some of these reporting requirements, fret not, and visit your tax consultant or advisor immediately for assistance.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
