The Internal Revenue Service has introduced an International Data Exchange Service that financial institutions and tax authorities in other countries will use to report tax information under the Foreign Account Tax Compliance Act, or FATCA.
Financial institutions and host country tax authorities will use IDES to securely send their information reports on financial accounts held by U.S. persons to the IRS under FATCA or pursuant to the terms of an intergovernmental agreement, as applicable.
FATCA was passed as part of the HIRE Act of 2010 and requires foreign financial institutions to report on the holdings of U.S. taxpayers to the IRS or else face steep penalties of up to 30 percent on their U.S. source income.
Taxpayers were already required to report overseas income and taxpayers with certain foreign financial accounts and foreign business interests are required to file a Report of Foreign Bank and Financial Accounts (FBAR) and Form 5471 if they are officers, directors, or shareholders in certain foreign corporations. FATCA also imposed a new filing requirement, Form 8938, a Statement of Foreign Financial Assets, which is required for taxpayers holding foreign financial assets of more than $50,000. Form 8938 must be attached to the taxpayer's annual U.S. tax return. Those assets include foreign bank accounts, personally held real estate, pension assets, brokerage accounts, interests in foreign partnerships and hedge funds. The failure to report will result in a minimum penalty of $10,000 and a maximum penalty of $50,000. In addition, a 40 percent understatement penalty will be assessed for underpayments of tax from non-disclosed foreign financial assets.
Now that foreign financial institutions will be reporting this information to the IRS, if an individual does not file the required disclosures or tax forms, this failure will certainly come to light.