The Treasury Inspector General for Tax Administration (“TIGTA”) has completed an audit of the IRS’s progress in implementing the Foreign Account Tax Compliance Act (“FATCA”). On October 13, 2015, TIGTA released its audit report indicating that while the IRS has made progress in implementing FATCA, it should make it a priority to implement TIGTA’s recommended improvements. The IRS agreed with most of TIGTA’s improvement measures, but maintains that FATCA implementation continues to be constrained by budget and resource limitations as well as competing priorities.
In addition, foreign financial institutions (“FFIs”) must report to the IRS certain information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In cases in which foreign law would prevent an FFI from complying, the IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (“IGAs”) that facilitate FATCA implementation.
In 2009, prior to the enactment of FATCA, the IRS implemented a Voluntary Disclosure Program (“VDP”) to address non-compliance by U.S. taxpayers using foreign accounts. Under the VDP, individuals who had evaded taxes were offered the opportunity to avoid criminal prosecution, pay civil penalties and enter back into the tax system. Over 18,000 individuals came forward, and the closed cases averaged more than $200,000 in tax collections per case, according to the IRS.
To achieve the goal of improving U.S. taxpayer compliance in this area, the IRS has developed a compliance strategy that uses FATCA and other data to identify potential compliance risk, build and assign cases, conduct enforcement activities and measure results. Its FATCA Compliance Roadmap was created to document compliance planning involving FATCA data and to provide a baseline for future compliance planning and implementation activities.
The IRS indicated that the FATCA Compliance Roadmap is continuously updated, revised and corrected to reflect the most current available information regarding FATCA compliance activities. It serves as the blueprint for measuring and documenting FATCA compliance for the future.
TIGTA found that the IRS has taken steps to provide information to affected stakeholders that explains the FATCA requirements and expectations. “Overall, the FATCA Compliance Roadmap is fairly comprehensive,” according to the report.
However, TIGTA identified improvements that are required to ensure FATCA compliance and to measure performance for FFIs. In this regard, if FATCA plans are not properly documented, implementation and performance of compliance activities could experience unnecessary delays.
TIGTA also identified some limitations with the processing of paper Forms 8938 (Statement of Specified Foreign Financial Assets). Specifically, TIGTA found that:
- Transcribed data are not validated to ensure accuracy;
- Data on the Form 8938 continuation statements (used to report additional foreign accounts or other foreign assets) are not transcribed; and
- Losses reported by taxpayers cannot be input as negative amounts.
According to TIGTA, if these issues are not properly addressed, it could limit management’s ability to make informed decisions and achieve the IRS’s FATCA compliance objectives.
TIGTA has recommended that the IRS:
- Update the compliance activities in the FATCA Compliance Roadmap for identifying noncompliance by FFIs to include more detail, including when, what and how the data related to FATCA compliance will be reviewed and what outcomes are expected;
- Initiate some type of periodic quality review process specifically for the processing of paper Forms 8938 to ensure the accuracy of the data being transcribed; and
- Ensure that the data transcription issues identified in the report are addressed in the newest version of the Form 8938 transcription program.
The IRS agreed with the first two recommendations, but disagreed with some programming changes related to the third recommendation due to budgetary constraints, limited resources and competing priorities.
In TIGTA’s view, the accuracy of the data obtained from Forms 8938 is a critical component for the success of the IRS’s compliance activities with implementing FATCA. As such, TIGTA believes that the IRS should make these programming changes a priority.
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By Mark Farber, CPA, Partner, International Services Group | 212.751.9100 | email@example.com
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