In a Report, the Treasury Inspector General for Tax Administration (TIGTA) has determined that, despite spending nearly $380 million, IRS Is still not prepared to enforce compliance with the Foreign Account Tax Compliance Act (FATCA).
Background. Congress intended the Foreign Account Tax Compliance Act (FATCA) to improve U.S. taxpayer compliance with reporting foreign financial assets and offshore accounts. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147, which included FATCA) added Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474). In general, Chapter 4 requires withholding agents to withhold and deduct 30% from certain payments made to a foreign financial institution (FFI), unless the FFI has entered into an “FFI agreement” with the U.S. to, among other things, report certain information regarding U.S. accounts. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents for certain payments made to certain non-financial foreign entities (NFFEs). Every chapter 4 withholding agent must file an information return on Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), or other form as IRS may prescribe, to report chapter 4 reportable amounts paid to a recipient during the preceding calendar year
In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (IGAs) that facilitate FATCA implementation. Reporting financial institutions under an applicable Model 1 IGA (reporting Model 1 FFIs) would satisfy their Chapter 4 requirements by reporting specified information about U.S. accounts to their government, followed by the automatic exchange of that information on a government-to-government basis with the U.S. Under a Model 2 IGA, reporting Model 2 FFIs would report specified information about U.S. accounts directly to IRS in a manner consistent with the final FATCA regs (as modified by the applicable Model 2 IGA), supplemented by a government-to-government exchange of information on request.
TIGTA’s conclusions. TIGTA determined that, despite spending nearly $380 million, IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap. The purpose of the Roadmap, which was last updated in January 2016, is to document compliance planning involving FATCA data and to provide a baseline for future compliance planning and implementation activities across IRS.
TIGTA found that many of the reports filed by the FFIs did not include (or included invalid) TINs. As a result, IRS’s efforts to match FFI and individual taxpayer data were unsuccessful. This, in turn, affected IRS’s ability to identify and enforce FATCA requirements for individual taxpayers.
Also, TIGTA concluded that IRS only recently initiated action to enforce withholding agent compliance with the FATCA after TIGTA provided feedback. TIGTA observed that a significant percentage of the Forms 1042-S that IRS received that pertained to FATCA did not have valid TINs. For the 2015 tax year, there were 62,398 Forms 1042-S with invalid TINs reporting more than $717 million, of which just over $47 million was withheld.
TIGTA also found that most Form 1099 series information returns pertaining to the FATCA did have valid TINs and could be used by IRS in its FATCA compliance strategies.
TIGTA’s recommendations. TIGTA recommended that IRS:
(1) Establish follow-up procedures and initiate action to address error notices related to file submissions rejected by the International Compliance Management Model (ICMM). The ICMM is the IRS system that ingests, validates, stores, and manages FATCA information, including FATCA reports received both electronically and on paper 8966 forms. Form 8966 (FATCA Report) is used by certain FFIs and others to report information with respect to U.S. accounts under FATCA.
(2) 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. Under FATCA, individual taxpayers with specified foreign financial assets that meet a certain dollar threshold should report this information to IRS by filing Form 8938 (Statement of Specified Foreign Financial Assets) with their income tax return;
(3) 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. The FFI List Search and Download Tool enables the public to create and download a partial list of FFIs or to download the entire list in several formats. No login or password is required to use this Tool;
(4) Initiate compliance efforts to address and correct missing or invalid TINs on Form 8966 filings by non-IGA FFIs and Model 2 IGA FFIs;
(5) Expand compliance efforts to address and correct the invalid TINs on all Form 1042-S filings by non-IGA FFIs and Model 2 IGA FFIs; and
(6) Initiate compliance efforts to compare Form 1099 filings with valid TINs to corresponding Form 8938 filings.
IRS agreed with four of TIGTA’s six recommendations. Corrective actions included:
…establishing follow-up procedures and initiating action on error notices with the FFIs;
…continuing efforts to systemically match Form 8966 and Form 8938 data to identify nonfilers and underreporting related to U.S. holders of foreign accounts and to the FFIs;
…informing taxpayers how to obtain global intermediary numbers. IRS has established the FATCA Online Registration System, a web-based system that allows users to register (on behalf of themselves and their branches) and, in most cases, obtain a global intermediary identification number (GIIN) online. A GIIN is used by an FFI, etc., to establish its chapter 4 status for withholding purposes and identify the institution for reporting purposes; and
…strengthening overall compliance efforts directed toward improving the accuracy of reporting by Form 1042-S filers.
References: For reporting under FATCA, see FTC 2d/FIN ¶O-13,230 et seq.; United States Tax Reporter ¶14,714 et seq.