Why would India, U.S. agree to share tax and other financial information? Taxes are one of a handful of issues that drive some groups of Americans apart, politically speaking. But the issue of domestic taxation and information sharing seem to be doing the exact opposite when it comes to the relationship between the United States and other countries. India is the latest country that has come together with the U.S. to enter an agreement that will allow the sharing of tax and other financial information between the nations. The newly formed agreement evidences the need for any taxpayer with a foreign bank account that has gone undeclared to contact an experienced tax attorney as soon as possible to discuss your options.
What is FATCA and why is it so important?
Over the past ten years, the Internal Revenue Service and the Department of Justice have put foreign bank accounts and the legal requirements surrounding them at the forefront of their attention. The Obama administration made sure that one of their first tax-related actions was the proposal and endorsement of the Foreign Account Tax Compliance Act (FATCA) legislation that made its way through Congress and was signed by the President in 2010. Under the terms of FATCA, foreign financial institutions are required to turn over pertinent account information of those U.S. residents who have an ownership interest or signature authority over an account that is kept by the overseas institution. Banks that refuse to turn over such information are subject to a 30% withholding; an amount that nearly every bank is not willing to part ways with.
Although most banks would likely acquiesce to the demands of the U.S., many don’t have a choice. The U.S. State Department has been quite busy in their efforts to enter into information sharing agreements with foreign countries. Under these intergovernmental agreements (IGA’s), the foreign country will agree to require that the banks within its jurisdiction hand over the necessary American account information to the IRS. Under some of the agreements, the information will be sent directly to the IRS and under others, the information will be sent to the tax authority of the foreign country, which will then be sent to the Service. Even countries that the United States has had some diplomatic problems with as of late, like Russia and China, have enacted legislation to allow their banks to comply with the FATCA requirements.
The IGA’s also have one other variable: whether the responsibility to send tax information to the other signatory is reciprocal. Some countries agree to send tax and financial account information to the United States for nothing in return (other than the avoidance of the 30% withholding of their country’s banks that operate in the U.S.). Many countries are also in search of tax information of their own residents that reside in the United States and have ensured that the IRS will send such information to them. This is the case with India. Recently, the Indian government has been struggling to keep their taxpayers honest as many taxpayers fail to report off-the-book payments that they have received, also known as black money. The agreement between the U.S. and India would see both countries sending tax information to the other.
How is information sent between countries?
The information sharing requirements under FATCA presented a challenge to all of the financial institutions involved: how to get the American account information to the IRS. Luckily, the United States did all of the heavy lifting and developed the IRS information data exchange: an online system that allows foreign banks to send account information to the Service electronically after a short registration process.
For taxpayers that still maintain an interest in a foreign bank account, this news is particularly important. The IRS and DOJ’s efforts to retrieve information from foreign banks are matched in their efforts pursuing the strict enforcement of Foreign Bank Account Reporting (FBAR) laws, domestically. Under the FBAR requirements, U.S. residents are required to disclose any interest in a foreign bank account that has had a balance of $10,000 or more. Taxpayers that fail to declare their interest in such an account face penalties that could approach or exceed the balance of the underlying account, itself. Furthermore, if a taxpayer is found to have willfully failed to disclose the existence of account, they will face additional penalties as well as a criminal prosecution that often leads to time in a federal prison.
Although the IRS has been tough on taxpayers that haven’t been honest about their interests in foreign bank accounts, they have established a way to come clean. The Offshore Voluntary Disclosure Program (OVDP) allows taxpayers with undeclared foreign bank accounts to disclose the existence of their foreign account interest, pay any back taxes, interest, and program specific penalties in exchange for the government agreeing to not criminally prosecute the taxpayer. Though a taxpayer should consult with an experienced tax attorney before making any decision regarding their foreign bank account, the OVDP allows taxpayers to avoid some of the harshest penalties of being caught with an undeclared foreign bank account.
The OVDP has one major catch: it is unavailable to taxpayers that are being investigated or audited by the IRS for any tax matter. Thus, if one of the financial institutions that is participating in the FATCA information data exchange sends your account information to the IRS, they will likely open an investigation to determine whether your foreign account had been reported. At that point, it is likely that it is too late for the OVDP.
The fact that India, U.S. agree to share tax and other financial information continues to send a clear message: there are no safe havens left in the world. The tax and accounting professionals at the Tax Law Offices of David W. Klasing have a plethora of experience in representing and advocating for taxpayers at all stages of the tax planning and controversy process. From determining whether the OVDP is the right avenue for a taxpayer, to representation during an investigation, or full-blown litigation, the team at the Tax Law Offices of David W. Klasing is ready to zealously advocate for you. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
