Tax Bites #27: Information Exchange, Tax, and You

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

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With increased technology, data matching and information sharing, Inland Revenue has far more information available to it to determine whether taxpayers are returning all income.

At the national level, Inland Revenue receives:

1. Details of all land transactions;

2. Details of all taxable dividends paid;

3. Details of most interest paid; and

4. Details of all funds received from overseas through the banking system of more than $10,000.

At the international level Inland Revenue receives information under the Common Reporting Standard (CRS). CRS is an information standard for the Automatic Exchange of Information (AEOI) regarding financial accounts on a global level, between tax authorities. The purpose of CRS is to combat tax evasion. When I last checked, 106 countries had signed up to CRS, but not the US (see below).

From the information provided to Inland Revenue under CRS, many New Zealand taxpayers have received letters from Inland Revenue saying that it holds information that suggests that foreign income has been earned and not returned. I dealt with such a letter that resulted in an assessment of over $1 million of income tax and interest. By making a voluntary disclosure, shortfall penalties were reduced by 75%.

If you receive a letter from Inland Revenue and do have unreturned foreign income, I suggest that you make a complete voluntary disclosure.

The US treats all US citizens as tax residents. This extends to US passport holders and many Green Card holders. They are US tax residents even if theydo not live in the US. Children born to US citizens living outside of the US generally are US tax citizens and thus US tax residents.

I have raised the issue of non-compliance with US tax with clients and non-clients alike. Often the response is how will they find me? The answer to that is partly the Foreign Account Tax Compliance Act (FATCA) and partly issues relating to US passports.Under US FATCA legislation, financial institutions in New Zealand and many other nations are obliged to supply information to the US Internal Revenue Service (IRS).

Australian financial institutions notified the IRS of over a million Australian accounts held by US tax residents from 2014 to 2016 alone.

US passport holders who also have one or more other passports must use their US passports to enter the US. Holders of US passports wanting to renew their US passports must quote their social security number (i.e. the equivalent of our IRD number).

I believe that the new US administration and the IRS will increase the pressure to find more US tax residents to help pay for the increased debt arising from Covid relief measures. I would not be surprised if the IRS entered into an agreement with Inland Revenue that allowed Inland Revenue to collect tax debt on behalf of the IRS.

“Hiding money” is a thing of the past. If you have evaded tax in the past, that past may well catch up with you. I recommend compliance with the tax laws that apply to you. If you are a US tax resident life is a lot more complicated and potentially costly. If you need to “fess up” to the IRS you need specialist US tax advice. There are such specialists in New Zealand.

Murray McClennan

Director
Tax Central Ltd
027 244-5365

www.taxcentral.co.nz

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