The Internal Revenue Service (IRS) announced on November 19, 2012, that the US and Denmark have reached an agreement for information sharing to improve tax compliance and implementation of the Foreign Account Tax Compliance Act (FATCA). This development fits with the Treasury’s earlier announcement that it is negotiating similar agreements with more than 50 countries. The announcement is a strong reminder of just how proactive the US plans to be in completing information sharing agreements to ensure compliance with FATCA.
In keeping with its emphasis on FATCA compliance, on November 14, 2012 the IRS announced a “Model 2 Template” for information sharing agreements regarding implementation of FATCA.
In Model 1 agreements, the information about the foreign assets held by US citizens, required by FATCA, is reported directly by the foreign government to the IRS. In Model 2 agreements, the information is reported by foreign financial institutions directly to the IRS. There are other significant differences in the two models, but it is expected that Model 2, instead of replacing Model 1, will be used with particular countries that have laws limiting what governments may disclose. Then, the onus for disclosure will fall on foreign financial institutions in those countries instead of on the government. Model 2 shows that the IRS is willing to be creative and flexible with respect foreign countries’ laws to ensure greater prospects of signing FATCA agreements with as many countries as possible.
The Denmark agreement is but one more indication that the US intends to limit, if not eliminate the ability of US citizens to avoid their US tax and bank reporting obligations by holding their assets overseas. Although not originally intended as targets of FATCA, all US citizens living outside the United States (particularly those who have failed to comply with their tax and bank reporting obligations) should now consider themselves on notice. FATCA will remove their “cover”, resulting in their identity and the identity of their financial accounts being revealed to the IRS. ”The IRS’ll never find me” is no longer a viable approach for citizens living and banking abroad; by 2014 it will.