When Congress passed the Foreign Account Tax Compliance Act (FATCA) (as part of the Hiring Incentives to Restore Employment Act, P.L. 111-147) in 2010, the Joint Committee on Taxation estimated it would bring in $8.7 billion in revenues in the next 10 years.
To that end, the IRS drafted an ambitious, agencywide FATCA Compliance Roadmap and had spent $573 million on FATCA enforcement as of 2020.
But the Service has since shunted its FATCA compliance effort into two smaller campaigns and general field examinations. And while the total revenues attributable to the legislation are unclear, the IRS has collected less than $14 million under one key provision, the Sec. 6038D(d) penalty on taxpayers with interests in a specified foreign financial asset over $50,000 who fail to provide required foreign account information on Form 8938, Statement of Specified Foreign Financial Assets.
The logistics of instituting a global reporting network and, beginning in 2020, the COVID-19 pandemic, have hampered the effort, and the IRS has said that, just by its existence, the reporting regime has increased taxpayer compliance in reporting income from overseas.
But a recent report by the Treasury Inspector General for Tax Administration (TIGTA) points to over a decade of missed opportunities.
"The IRS has not come close to building the compliance plan that was originally contemplated," said the report dated April 7, Additional Actions Are Needed to Address Non-Filing and Non-Reporting Compliance Under the Foreign Account Tax Compliance Act.
The scale of those plans and the revenue estimate seem, if anything, modest, given the amount of U.S. taxpayer money potentially secreted overseas, according to the report. It cites the May 2021 congressional testimony by an IRS official in charge of research and statistics, that an estimated $3.7 trillion in reportable assets are abroad, $2 trillion of which are in countries "known to be used by taxpayers for tax evasion purposes."
The Forms 8938 that have been filed appear to represent only a fraction of those that should be filed, TIGTA said. It compared Forms 8938 received with Forms 8966, FATCA Report, on which foreign financial institutions (FFIs) registered with the IRS and agreed to report certain information about their accounts owned by U.S. taxpayers, including the accounts of foreign entities with substantial U.S. ownership. The approximately 15 million Forms 8966 received between 2016, when reporting began, and 2019 contained 4,976,521 unique taxpayer identification numbers (TINs). During the same period, the IRS received 1,827,556 Forms 8938, leaving more than 3.1 million taxpayers who are potential nonfilers, TIGTA reported.
TIGTA further compared these figures in light of the $50,000 asset reporting threshold and estimated more than 330,000 taxpayers were potentially nonfilers, each of whom might have owed a penalty of up to $10,000.
"The IRS could have assessed at least $3.3 billion using information that was readily available to the IRS," TIGTA concluded.
Yet in the IRS's two FATCA compliance campaigns that remained after it abandoned the road map, the IRS has not assessed any Sec. 6038D(d) penalties because it "was slow" to attempt to identify nonfilers in one of the campaigns, titled Offshore Private Banking, TIGTA said.
The $14 million in penalties that have been assessed have rather come through normal examinations by revenue agents, TIGTA reported. Only recently has the campaign undertaken compliance actions to address potential underreporters, and it did not initially address potential nonfilers at all, TIGTA said.
The other campaign, called FATCA Filing Accuracy, targeted FFIs not filing Form 8966. It, too, has not yielded any penalties. It has been able to review only tax year 2016 so far, for which it has only sent out 12 "soft" letters of advice and education, TIGTA said. For FFIs reporting through their respective countries' tax authority (Model 1 intergovernmental agreements (IGAs)), notifications of data errors were sent to the foreign tax authorities, but "no other type of compliance action or penalties were imposed for FFI noncompliance," TIGTA stated. (Under a smaller number of so-called Model 2 IGAs, FFIs report directly to the IRS.)
Furthermore, this campaign has not reduced noncompliance by FFIs, TIGTA stated. A majority of Forms 8966, 56%, contained missing or invalid TINs for account holders. IRS efforts to resolve the discrepancies failed 61% of the time.
Both campaigns are under the aegis of the IRS's Large Business and International (LB&I) Division, to which TIGTA made six recommendations, five of which the IRS agreed with or said it had already undertaken:
- LB&I should consider taking additional compliance actions with respect to identified underreporters of foreign financial assets, including assessing penalties or conducting examinations. The IRS replied it had implemented this.
- LB&I should establish procedures to identify nonfilers of Form 8938 and conduct examinations and assess penalties where indicated. The IRS said it had implemented this as well.
- LB&I should consider expanding the scope of the FATCA Filing Accuracy campaign to address noncompliance and follow through with compliance action. The IRS said it agreed and so far had identified potential noncompliance by 34 FFIs among 4,000 reviewed.
- LB&I should notify countries with Model 1 IGAs that FFIs must collect and provide the TINs of U.S. individuals owning a foreign bank account. The IRS disagreed, saying the countries are already aware of the requirements. TIGTA rebutted that the prevalence of missing or invalid TINs on Forms 8938 warrants adopting this recommendation.
- LB&I should establish goals, milestones, and timelines for the FATCA campaigns to determine their effectiveness. The IRS agreed.
- LB&I should coordinate with the other primary IRS division involved in examinations of affected taxpayers, Small Business/Self-Employed, to share Form 8938 data in their exams and collections. The IRS said this, too, has been implemented.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.