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. The law has attracted considerable controversy abroad and in response the U.S. has been signing a series of intergovernmental agreements, or IGAs, with the tax authorities in other countries.

More than 145,000 financial institutions have registered through the IRS FATCA Registration System, the IRS noted. The U.S. has more than 110 IGAs, either signed or agreed in substance, with other jurisdictions. Financial institutions and their host country tax authorities will use IDES to provide the IRS information reports on financial accounts held by U.S. persons.

“The opening of the International Data Exchange Service is a milestone in the implementation of FATCA,” said IRS commissioner John Koskinen in a statement. “With it, comes the start of a secure system of automated, standardized information exchanges among government tax authorities. This will enhance our ability to detect hidden accounts and help ensure fairness in the tax system.”

Where a jurisdiction has a reciprocal intergovernmental agreement and the jurisdiction has the necessary safeguards and infrastructure in place, the IRS will also use IDES to provide similar information to the host country’s tax authority on accounts in U.S. financial institutions held by the jurisdiction’s residents.

Using IDES, a Web application, the sender encrypts the data and IDES encrypts the transmission pathway to protect data transfers. Encryption at both the file and transmission level is intended to safeguard sensitive tax information.

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