FATCA Is Being Enforced Despite Hiccups And TIGTA Report! was published by JD Supra on 8/28/18.
On July 5, 2018, the Treasury Inspector General for Tax Administration (TIGTA) issued a report https://www.treasury.gov/tigta/auditreports/2018reports/201830040fr.pdf titled: “Despite Spending Nearly $380 Million, the Internal Revenue Service Is Still Not Prepared to Enforce Compliance With the Foreign Account Tax Compliance Act”. The report is based on an audit initiated by TIGTA to evaluate how the IRS is making sure that US Taxpayers, Foreign Financial Institutions (FFIs) and Withholding Agents are complying with FATCA. The audit was conducted as part of the US Department of Treasury annual IRS assessment audit process.
The FATCA law was passed by Congress in March 2010 to prevent the use of foreign financial accounts and assets to facilitate tax non-compliance by US Taxpayers. FATCA identifies US Taxpayers that have certain undisclosed foreign accounts and assets. FATCA’s purpose is to improve US Taxpayer compliance by requiring the FFIs annually report detailed information about US Taxpayers with foreign accounts and assets to the IRS.
How can Financial Institutions in Foreign Countries report to the US Government? The IGAs
The US Department of Treasury negotiated Intergovernmental Agreements (IGAs) with foreign governments in order to supersede the privacy laws of the foreign countries which might otherwise prevent the FFIs from reporting US Taxpayer information to the US Government. There is a Model 1 IGA whereby the FFI reports the US Taxpayer information to its Host Country Tax Authority (HCTA) and in turn, the HCTA reports to the IRS, and a Model 2 IGA, where the FFI reports the US Taxpayer information directly to the IRS.
Obligation of US Taxpayers
US Taxpayers are required to file Form 8938 (Statement of Specified Foreign Financial Assets), with their income tax returns if the aggregate value of their foreign financial assets exceed certain dollar thresholds.
Obligation of FFIs
FFIs are required to electronically file Form 8966 (FATCA Report) on an annual basis with the IRS. The information required to be reported includes the name, address, and Taxpayer Identification Number (TIN) of each accountholder who is a specified U.S. person; the account number; the account balance or value; and the gross receipts and gross withdrawals or payments from the account.
Obligation of Witholding Agents
US Designated Withholding Agents are required to report payments and amounts withheld on Form 1042 (Annual Withholding Tax Return for US Source Income of Foreign Persons) and Form 1042-S (Foreign Person’s US Source Income Subject to Withholding). The information required to be reported includes the name, address, TIN, and Chapter 4 status (applicability of FATCA withholding) of each payee; the gross amount paid; the tax withheld; and the identifying information of the Withholding Agent.
Under FATCA, withholding agents are required to withhold 30 percent on payments of certain US source income to:
- Non-Participating FFIs and non-financial foreign entities.
- Any accountholder of a Participating FFI that fails to provide information required to determine whether the account is a US account, the information required to be reported by the FFI and a waiver of a foreign law that would prevent reporting to the IRS.
Based on its Review, TIGTA Recommends that IRS:
- Establish follow-up procedures and initiate action to address error notices related to file submissions rejected by the International Compliance Management Model (ICMM). IRS is in agreement with this recommendation.
- 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. IRS is in agreement with this recommendation.
- 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. IRS is in agreement with this recommendation.
- Initiate compliance efforts to address and correct missing or invalid Taxpayer Identification Numbers (TINs) on Form 8966 filings by non-IGA FFIs and Model 2 IGA FFIs. IRS is in disagreement with this recommendation.
- 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. IRS is in agreement with this recommendation.
- Initiate compliance efforts to compare Form 1099 filings with valid TINs to corresponding Form 8938 filings. IRS is in disagreement with this recommendation.
IRS recognizes the importance of the TIGTA recommendations but states that “the report leaves the reader with the incorrect impression that FATCA is not being enforced”. IRS also stated that they”:
- “are taking action to reduce inaccurate or missing information and have initiated multiple compliance activities related to the Form 8938, including developing automated risk assessments across the FATCA filing population”
- “will continue our efforts to systematically identify non-filers and underreporting related to U.S. holders of foreign accounts and FFIs”
- “continue to address improving compliance efforts highlighted in the report”
- “agree with four out of the six recommendations”
Don’t be a victim of your own making
If you are a US Taxpayer with undisclosed foreign financial assets or if you hold an ownership interest in a foreign entity, consult a specialized tax advisor. The US Government is determined to end offshore tax avoidance and will continue with its determination whether the IRS has corrections to make or not.