The TIGTA Report dated April 7, 2022 details six recommendations for additional actions needed to address Non-Filing and Non-Reporting Compliance Under FATCA. The IRS agreed with five out of the six recommendations in the TIGTA Report which signal that FATCA enforcement will increase in terms of collection actions, compliance actions for under reporters, penalty assessments, civil and criminal examinations, and refinement of metrics. US Taxpayers and Foreign Financial Institutions (FFI) that are out of FATCA compliance ought to expect heightened FATCA enforcement which is currently in place or to be implemented.
IRS Deviation from original FATCA Roadmap
Due to resource constraints since the launch of FATCA in 2010, the IRS departed from the original FATCA Roadmap (finalized in 2016) and opted to focus on a narrower strategy that consisted in two Large Business and International (LB&I) Active Compliance Campaigns. Of note, IRS LB&I overseas implementing FATCA compliance by testing compliance with FATCA provisions and performing field examinations for individual taxpayers and FFIs. The two LB&I FATCA compliance campaigns are:
- Campaign 896 (“Offshore Private Banking”) was launched in March 2019 with the purpose of identifying taxpayers who have not fully reported their foreign bank account holdings on Forms 8938 (Statement of Specified Foreign Financial Assets).
- Campaign 975 (“FATCA Filing Accuracy”) was launched in October 2018 with the purpose of identifying the FFIs that maintain specified foreign financial accounts for U.S. specified persons but do not submit Form 8966 (FATCA Report).
Summarized results of the Campaigns’ audit:
- Departure from the FATCA Compliance Roadmap hampered IRS efforts to improve compliance
- The IRS provided optional codes for TINs that reduce FFI compliance with FATCA requirements to report TINs for TY 2020
- The IRS started terminating noncompliant FFIs from the FATCA program in FY 2019
- FATCA withholding has increased
- Campaign 896 has only recently undertaken compliance actions to address potential under reporters
- Campaign 896 initially did not address potential non-filers
- Campaign 975 has not reduced FFI non-compliance
- Lack of Taxpayer Identification Number (TIN) and Global Intermediary Identification number (GIIN) reporting continues to provide challenges in matching forms
- FATCA campaigns were established without milestones to determine the level of voluntary compliance
- The use of FATCA data for compliance purposes has been limited
Based on the results of the Campaigns audit, the TIGTA Report six recommendations are:
- Consider additional compliance actions for underreporters identified in its matching, including assessing penalties to taxpayers based on the variance amounts or conducting examinations on taxpayers who consistently underreport. Management’s Response: IRS management indicated that the recommendation has been implemented.
- Establish procedures that would identify non-filers of Forms 8938 and encourage compliance of non- filers through examination or penalty assessments. Management’s Response: IRS management stated that this recommendation has been implemented. It has a filter that identifies potential non-filers of Forms 8938, and civil and criminal examinations are underway with respect to the non-filer population.
- Consider expanding the scope of Campaign 975 to address noncompliance by the FFIs from Intergovernmental Agreement (IGA) countries and follow through with compliance action on the identified IGAs. Management’s Response: IRS management agreed with this recommendation and stated that Campaign 975 had reviewed approximately 4,000 FFls from IGA countries and identified potential noncompliance by 34 FFls. Compliance activities with respect to this population are underway.
- Issue a notice to foreign countries with Model 1 IGAs that all the FFIs must collect and provide the TINs of U.S. individuals owning a foreign bank account. Management’s Response: IRS management disagreed with this recommendation and stated that the countries with Model 1 IGAs are already aware that the FFIs must collect and provide the TINs of U.S. individuals owning a foreign bank account (e.g., Article 2, Model 1A Reciprocal IGA; Notice 2017-46). Office of Audit Comment: We do not believe that assuming the FFIs are aware of an IRS notice from 2017 will correct the issue. The lack of a TIN continues to present challenges in enforcing FATCA compliance and makes it harder for the IRS to ensure compliance by the FFIs by using the Form 8938 and ensure compliance by taxpayers by using Forms 8966. We reported that for TYs 2016 to 2019, only 44 percent of the Forms 8966 the IRS received contained a valid TIN, while the remaining 56 percent contained an invalid TIN or had no TIN. We recommend emphasis of this requirement.
- Establish goals, milestones, and timelines for FATCA campaigns in order to determine whether the campaigns are effective in meeting their goals and affecting tax compliance. Management’s Response: IRS management agreed with this recommendation. While stating that their existing campaign metrics track the progress and success of these campaigns, IRS management agreed to refine their metrics with respect to goals, milestones, and timelines.
- Partner with the Small Business/Self-Employed (SB/SE) Division Directors for the Examination and Collection functions to establish an information sharing program that would allow the SB/SE Division to conduct examinations and perform collection actions using Form 8938 data. Management’s Response: IRS management indicated that the recommendation has been implemented.
The IRS response to the 2022 TIGTA report is similar to their response in the 2018 TIGTA report. For the 2022 Report, the IRS response stated that:
- FATCA is a “data source” and not a compliance program
- FATCA data is “woven” into the IRS enforcement framework and used throughout all of the IRS.
- Compliance activities are not limited to the 2 campaigns highlighted in the report as there are compliance actions undertaken outside the campaigns that include transmission of FATCA data, criminal investigations, and collections.
- Horizontal Scan Project that addresses specific issues to enhance FATCA compliance in the areas of web crawling for abuses, citizenship/residency by investment, expatriation, and virtual currency
- There is an association between FATCA data with all offshore examination cases.
- Analysis of FATCA Model 2 IGA competent authority requests for compliance actions.
FFIs and US Taxpayers will be under higher FATCA scrutiny going forward.