TIGTA Reports that IRS is not Prepared for FATCA Enforcement
In a recent report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a law passed in 2010 requiring all non-U.S. financial institutions (FFIs) to report the identities of U.S. persons to the U.S. Department of Treasury.
The U.S. Congress intended the Foreign Account Tax Compliance Act (FATCA) to improve U.S. taxpayer compliance with reporting foreign financial assets and offshore accounts.
It was estimated that revenue from the FATCA’s offset provision would be $8.7 billion from Fiscal Years 2010 to 2020.
Under the FATCA, individual taxpayers with specified foreign financial assets that meet a certain dollar threshold should report this information to the IRS, beginning with Tax Year 2011, by filing Form 8938, Statement of Specified Foreign Financial Assets, with their income tax return. This requirement is established under IRC § 6038D. Individuals are required to file Form 8938 with their income tax returns if the aggregate value of their foreign financial assets exceed certain dollar thresholds.5
To avoid being subject to a 30 percent withholding rate on U.S. source payments, the FATCA also requires foreign financial institutions (FFI) to register and agree to report to the IRS certain information about financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The intent was for the IRS to use this information to verify that U.S. persons have reported such financial accounts on Form 8938.
TIGTA’s Findings and Recommendations
TIGTA determined that, despite spending nearly $380 million, the IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap.
Of the 31 activities, the IRS indicated that it has taken action on 24 activities. However, TIGTA found that for 16 of those 24 activities, action was either limited or in the early stages of
A large number of reports filed by the FFIs did not include (or included invalid) Taxpayer Identification Numbers (TIN). Consequently, the IRS has not been able to successfully identify and enforce FATCA requirements for individual taxpayers.
TIGTA recommends that the IRS:
- Establish follow-up procedures and initiate action to address error notices related to file submissions rejected by the International Compliance Management Model (ICMM);
- Initiate compliance efforts to address taxpayers who did not file a Form 8938 but who were reported on a Form 8966 filed by an FFI;
- Add guidance to the Form 8938 instructions to inform taxpayers on how to use the FFI List Search and Download Tool on the IRS’s website;
- Initiate compliance efforts to address and correct missing or invalid TINs on Form 8966 filings by non-IGA FFIs and Model 2 IGA FFIs;
Moreover, it does not appear the IRS is using standardized procedures for working a Form 8938 (§ 6038D) penalty case. Revenue agents use judgment in selecting the techniques that apply to each taxpayer. The IRS noted that a lead sheet is available to revenue agents when conducting an examination. The lead sheet was finalized and placed on the IRS website in July 2016. However, there is currently no requirement to use the lead sheet for selecting and reviewing cases under the FATCA.
The IRS responded that it will continue its efforts to systemically match FFI information and Form 8938 data to identify nonfilers and underreporting related to U.S. holders of foreign accounts and to the FFIs. The IRS has initiated development of a data product to automate risk assessments across the FATCA filing population.
Based on the recommendations in this TIGTA audit, we should expect that the IRS will soon begin identifying and acting on Form 8938 non-compliance based on financial information provided by foreign financial institutions.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.