The Internal Revenue Service has spent millions of dollars trying to get taxpayers located in foreign countries to report their holdings for tax purposes. A new federal audit, however, finds the IRS has fallen short in the effort.
In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA) aimed at improving U.S. taxpayer compliance in reporting overseas financial assets and offshore accounts. FATCA mandated that individual taxpayers with specified foreign assets meeting a certain dollar threshold should report the information to the IRS using Form 8938, Statement of Specified Foreign Financial Assets.
The law also requires foreign financial institutions, termed FFIs, to register and agree to report certain information about accounts held by U.S. taxpayers or held by foreign entities where American taxpayers hold a substantial ownership interest.
There’s only one problem: it didn’t work.
The Treasury Inspector General for Tax Administration (TIGTA) took a close look at the FATCA enforcement program and found that despite spending some $380 million, the IRS has taken little or no action on a majority of the planned activities in outlined in the legislation’s “Compliance Roadmap.”
One problem, TIGTA found, was that reports filed by the foreign financial institutions did not include Taxpayer Identification Numbers (TINs) – or included TINs that were invalid. The IRS was thus unable to match up FFI and taxpayer data, which in turn affected the ability to identify and enforce FATCA requirements for individuals.
The IRS has only recently begun enforcing its withholding agent compliance with FATCA. TIGTA’s audit found a significant percentage of Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, received by the IRS for FATCA do not have valid TINs. In TY 2015, for example, there were 62,398 Forms 1042-S with invalid TINs. Those forms reported more than $717 million in income, of which just over $47 million was withheld.
According to the Inspector General’s office, TIGTA recommended 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;
- 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-Intergovernmental Agreement (IGA) FFIs and Model 2 IGA FFIs;
- 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
- Initiate compliance efforts to compare Form 1099 filings with valid TINs to corresponding Form 8938 filings.
The IRS agreed with four of the six recommendations and outlined corrective actions, including systematically matching Form 8966 and Form 8938 data to identify nonfilers and those underreporting foreign income.