The Foreign Account Tax Compliance Act is meeting with some success in prompting foreign banks to disclose the holdings of U.S. taxpayers to the Internal Revenue Service, according to a former IRS official.

FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to reveal the assets of U.S. taxpayers to the IRS or else face stiff penalties of up to 30 percent of their income from U.S. sources. The controversial requirements initially met with resistance from many governments abroad. But the Treasury Department has negotiated a series of intergovernmental agreements with the tax authorities of dozens of other countries to smooth the way, allowing most of them to act as intermediaries before the information is turned over to the IRS. Last year, the IRS opened a portal to begin accepting the information, which has steadily flowed its way.

That has increased the pressure on U.S. taxpayers with foreign accounts to come forward and report their holdings to the IRS, if they haven’t already participated in any of the Offshore Voluntary Disclosure Programs that the IRS has offered over the years.

Since the advent of FATCA, the IRS has expanded its crackdown beyond traditional tax havens like Switzerland and the Cayman Islands, according to David Gannaway, a former IRS assistant special agent and currently a litigation support principal at the accounting firm O’Connor Davies.

“As a result of FATCA, the banks in the nontraditional tax haven countries are now cooperating, which is kind of unprecedented before, because of this legislation,” he said. “Even though it’s been on the books for a few years, it’s really just now starting to be implemented.”

Gannaway noted that banks within those countries that are cooperating with the U.S. as part of FATCA are going through their accounts to see if depositors have U.S. connections.

“Basically what’s happening now is that these banks, to comply with their country’s requirements and internationally with the United States, are going in and kind of scrubbing their own accounts,” he said. “If they find someone or multiple account owners that have United States connections, the banks are sending letters to the clients in the U.S., saying we’ve identified that you are a U.S. citizen, and this is putting you on notice that under FATCA we are potentially going to turn your name over to the IRS, or you need to submit documentation showing that you’ve reported the income on your income taxes.”

Gannaway is a 20-year veteran of the IRS, where he served as a special agent in the Criminal Investigation division, investigating hundreds of cases of tax fraud and corruption. He has seen a growing trend in recent years for countries to cooperate with each other on information sharing, with FATCA just the latest example. He joined O’Connor Davies in February and recently wrote an article on the firm’s Web site about the global implications of FATCA.

“Ever since 9/11, countries are more linked now and cooperating more with each other in law enforcement,” he told me. “Then you add in the economic crash in 2007, 2008 and 2009. Countries are looking for tax revenue as well.”

Gannaway believes accountants need to tell any clients with undeclared foreign accounts that now is the time to come forward and try to get into the IRS’s Offshore Voluntary Disclosure Program, although he cautioned that the streamlined version of the program only applies to taxpayers who have not willfully hidden their bank accounts from the IRS.

“The main issue is if the bank has already turned over the client’s name to the IRS,” he said. “Say I’m representing that same client and I try to go into the voluntary disclosure program or submit an application for them. If the IRS already has their information provided by one of the banks, they may not get into the program. So now with FATCA coming along, I think it increases the chances that a bank is going to turn over that information to the IRS, and the IRS is going to say, ‘No, we already have your information from Bank X in X country. You’re not going to be able to get into the program.’”

But waiting even longer to disclose a foreign bank account could put a client in even more danger.

“Time is still of the essence because information is starting to flow into the IRS about account holders,” said Gannaway. “The key point is that you have to be in the program or make application to get into the program before the IRS finds out about you. That’s my message for anyone is to get off the fence and come in and take care of it because they may not get into the program if their name has already been turned over.”