IRS flagged FATCA noncompliance but followed up with few exams, penalties

The IRS identified hundreds of taxpayers who failed to report significant foreign bank account deposits, but those efforts resulted in few examinations and penalties, a watchdog’s report said.

Campaign 896, which the IRS created to investigate compliance with the Foreign Account Tax Compliance Act (FATCA), identified 405 individual taxpayers with significant foreign account balances who appeared to be noncompliant with FATCA reporting requirements, said the report from the Treasury Inspector General for Tax Administration (TIGTA).

The 405 identified taxpayers had foreign account balances totaling nearly $6.2 trillion. They were supposed to use Form 8938, Statement of Specified Foreign Financial Assets, to report the deposits, the report said.

In that group, 164 had an average unreported account balance of $1.3 billion and were referred for possible examination. “However, only 12 of the 164 were examined,” the report said, “with five having $39.7 million in additional tax and $80,000 in penalties assessed.”

Campaign 896 officials said limited resources and competing priorities were responsible for the low number of examinations, the report said.

Another 241 of the noncompliant taxpayers, who had an average unreported account balance of $377 million, were sent a combination of 225 educational letters that required no response and 16 soft letters that required responses, TIGTA said. None of the 241 taxpayers were assessed the initial $10,000 FATCA penalty for not filing.

That failure to file is unlikely to be a mere oversight by wealthy taxpayers who “likely have higher levels of sophistication and an awareness of their obligation to comply with the law,” the report said.

FATCA background

Congress passed FATCA as part of the Hiring Incentives to Restore Employment Act, P.L. 111-147, in 2010. At that time, the Joint Committee on Taxation estimated it would raise $8.7 billion in revenues in the next 10 years. The IRS then established an Offshore Private Banking Campaign, known as Campaign 896, to address noncompliance.

Under FATCA, taxpayers with specified foreign financial assets that meet a certain dollar threshold should report the information by filing Form 8938 or face a penalty of $10,000 a month, up to $60,000.

The IRS assessed penalties and additional taxes of about $41 million on the 405 taxpayers but could have assessed failure-to-file penalties totaling $4 million on the remaining noncompliant taxpayers, the report said.

The IRS should have assessed the failure-to-file penalty on 393 taxpayers who were not examined, the report said. “Although the campaign identified these egregious nonfilers, campaign officials advised us that failure-to-file penalty assessments are not part of the campaign enforcement strategy,” the report said.

But the failure-to-file penalty under Sec. 6038D(d) “is a significant component of FATCA’s approach to encourage reporting of foreign accounts,” the report said. The IRS should assess penalties to encourage compliance, it said.

Recommendations

TIGTA made three recommendations:

• Revise Campaign 896 processes to include assessing FATCA failure-to-file penalties.

• Assess the viability of using Form 1099 data to identify taxpayers who did not file Form 8938.

• Implement additional performance measures to give decision-makers comprehensive information about the effectiveness of the FATCA program.

IRS management did not agree with assessing penalties in Campaign 896 or with implementing performance measures. It did agree to evaluate the utility of adding Form 1099 to Campaign 896 data. That recommendation included a second part, redacted in the report, with which the IRS did not agree.

FATCA program costs

Despite spending over $680 million on FATCA compliance and oversight, the IRS “has taken limited enforcement actions, even when it has identified egregious noncompliance,” the report said.

“If the IRS does not plan to enforce FATCA using the tools available under the law, it should at a minimum quantify the enforcement impact of its efforts,” it said. “By improving its performance measures, IRS decision-makers will have the information they need to determine whether the FATCA program is worth the investment and will improve taxpayer compliance.”

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.