IRS Makes Progress on FATCA Implementation

The Internal Revenue Service has made progress on implementing the Foreign Account Tax Compliance Act, including explaining the various requirements to the affected stakeholders, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, examined FATCA, which was included as part of the HIRE Act of 2010. Under FATCA, beginning with tax year 2011, individual taxpayers with foreign financial assets that meet a certain dollar threshold are supposed to report the information to the IRS by attaching Form 8938, Statement of Specified Foreign Financial Assets, to their annual Form 1040, U.S. Individual Income Tax Return, or for nonresident alien taxpayers, to their Form 1040-NR, U.S. Nonresident Alien Income Tax Return. FATCA also requires foreign financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest, or else face stiff withholding penalties of up to 30 percent on income from U.S. sources.

TIGTA found that the IRS has taken steps to provide information to affected stakeholders that explains the FATCA requirements and expectations. However, the report identified several improvements needed to ensure compliance and to measure performance for foreign financial institutions. If 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.  Specifically, the transcribed data is not validated to ensure accuracy. Data on Form 8938 continuation statements (used to report additional foreign accounts or other foreign assets) is not transcribed. Losses reported by taxpayers cannot be input as negative amounts.

If these issues are not properly addressed, according to the report, any analysis of the potentially inaccurate or incomplete paper Form 8938 data will likely limit management’s ability to make informed decisions and achieve the IRS’s compliance objectives related to the FATCA.

TIGTA recommended the IRS update the compliance activities in the FATCA Compliance Roadmap for identifying noncompliance by foreign financial institutions. The IRS should also initiate a periodic quality review process for the processing of paper Forms 8938 to ensure the accuracy of the data being transcribed, according to the report. In addition, the IRS should ensure that the transcription issues identified in this report are addressed in the newest version of the Form 8938 transcription program, TIGTA suggested.

The IRS agreed with the first two recommendations. However, the IRS disagreed with some programming changes related to the third recommendation due to budgetary constraints, limited resources and competing priorities. TIGTA pointed out that the accuracy of the data obtained from Forms 8938 is a critical component for the success of the IRS’s compliance activities with implementing the FATCA, and it believes the IRS should make these programming changes a priority.

“FATCA data is expected to open new approaches for the identification and assessment of compliance risks, as well as support many existing IRS tax compliance programs, all of which will provide for greater tax compliance by this sector and hinder the opportunities for off-shore tax evasion,” wrote Douglas W. O’Donnell, commissioner of the IRS’s Large Business and International division, in response to the report. “While elements of the legislation have been in effect since 2011, the main elements of FATCA reporting began in 2015 and will continue to unfold over the next few years. As a result, this year IRS began preparation for application of the first full substantive wave of FATCA data for compliance purposes, specifically for the tax year 2014 filing population.”