The FATCA Goose Lays a Rotten Egg: Treasury Watchdog Lambasts IRS & US Supreme Court Denies Relief

I have blogged extensively about the “Foreign Account Tax Compliance Act” (FATCA) in the past.  Most of my readers know that FATCA was enacted in 2010 but has taken years to implement. The law requires foreign (non-US) financial institutions (FFIs) to report financial accounts owned by US persons (including through entities) to the Internal Revenue Service (IRS), thus enabling the IRS to “match” data submitted on US taxpayers’ tax returns (e.g., Form 8938) to see if they are fully reporting their foreign holdings.

July 2018 TIGTA Report

On July 9, 2018 the Treasury “Watchdog”, Treasury Inspector General for Tax Administration (TIGTA) issued a report (July TIGTA Report) pinpointing the IRS’ shortcomings in enforcing FATCA.

This is not the first TIGTA report criticizing the IRS in its offshore efforts. I blogged here (and here) about a TIGTA report issued on September 11, 2017 which revealed the IRS was not up to speed in processing or using information sent to it from foreign countries, including bulk data from the automatic exchange of information.   TIGTA essentially admitted that the IRS treasure trove of information about offshore accounts and assets, as well as its data sharing capabilities with foreign governments were falling short of all the media hoopla. Apparently, the offshore data held by the IRS is currently in a state of chaos and the findings in the July TIGTA Report about the IRS’ FATCA enforcement efforts do not come as a great surprise.

Here are some salient points from the July TIGTA Report:

IRS has spent close to $380 million in its FATCA efforts, but TIGTA says it has taken “limited or no action” on a majority of activities set out in the FATCA Compliance Roadmap.   Briefly, the the most current version of the FATCA Compliance Roadmap was last updated in January 2016. The purpose of this IRS Roadmap is to document compliance planning involving FATCA data and to provide a baseline for future compliance planning and implementation activities across the IRS.  TIGTA noted that for over half of the 31 activities listed in the Roadmap only limited action had been taken or were in the early stages of development, and another 7 have yet to be acted upon at all.  In addition, TIGTA identified delays of one to two years in implementing 20 of the 24 activities, 10 of which are still experiencing delays in full implementation.  This lack of progress continues despite the IRS spending well over $200 million on IT costs in the past few years.

One of the critical FATCA provisions requires FFIs to file Form 8966 with the IRS. This form contains detailed financial information of US taxpayers’ foreign financial accounts.  For the two-year period 2015-2017, 8.7 million new records were included in files submitted to the IRS by FFIs. Of these, however, more than 4.3 million did not include a taxpayer identification number (TIN) or presented an invalid TIN. Without valid TINs, the Form 8966 is rejected.  As of 2017, 2.4 million, or nearly 30 percent of all Forms 8966 filed were rejected.

As mentioned, taxpayers are also expected to report their foreign financial assets on Form 8938. The absence of TINs or invalid TINs reported by FFIs impedes IRS’ matching efforts. As a result, IRS is thwarted in its attempts at identifying and enforcing the FATCA requirements.  This means that to date, FATCA lacks a bite, despite its very loud bark.

To add to this sticky mess, TIGTA reports that the IRS didn’t initiate action to enforce FFI withholding agent FATCA compliance until after hearing feedback from TIGTA.  Again, a loud bark, but no bite.

TIGTA Recommendations

TIGTA made six recommendations to the IRS, two of which piqued my interest and are mentioned here. TIGTA advised IRS to start a compliance effort to address the problem of missing or invalid TINs on the FATCA documentation submitted by FFIs. Not surprisingly, another suggestion urged the IRS to crack down on individuals who failed to report their foreign financial asset information on Form 8938 but who were reported by the relevant FFI to the IRS.

The IRS response is also contained in the TIGTA report (commencing at page 47).

IRS agreed that it would employ continuing efforts to systematically match the FATCA information it receives from FFIs (Form 8966) with foreign financial asset information submitted by taxpayers on Form 8938 data to identify non-filers and curb underreporting of foreign financial assets.

IRS disagreed however, with TIGTA’s recommendation that it should commence efforts to correct missing or invalid TINs in jurisdictions that don’t have a particular type of agreement in place with the US. Such an effort would require checking every TIN when an FFI submits a Form 8966, and according to the IRS, that would be “cost prohibitive.

So, Where Are We?

FATCA has been in effect for eight years but it is clear that implementation and compliance efforts have experienced major struggles. The law is highly complex and based on my own experience I know that the intricacies of FATCA are not understood by many FFIs.  So great are the complexity and implementation hurdles, that IRS has been forced to grant transition and other types of relief to FFIs which are faced with implementation difficulties.  The TIGTA report is not surprising to me but I believe that we are still looking at early days for any kind of smooth FATCA enforcement.  To date, however, FATCA is the goose that is laying a rotten egg.

US Supreme Court: FATCA – Not Going Away

On April 2, 2018, the United States Supreme Court denied certiorari to review the ruling of the US Court of Appeals for the Sixth Circuit in Crawford v. United States Department of the Treasury, 868 F.3d 438 (6th Cir. 2017) (my blog post on the 6th Circuit ruling is here). The appeals court held that the taxpayers “lacked standing” in challenging FATCA’s constitutionality.  In declining to hear the case, the US Supreme Court has effectively validated an earlier district court ruling that denied the plaintiffs’ claims.   Essentially the district court ruling boiled down to “tough luck” for Americans abroad and all the problems FATCA has visited upon them. My blog post on the Ohio district court ruling is here.

The Supreme Court did not provide reasons for its unwillingness to hear the case, but this is standard when writs of certiorari are denied.  In the end it continues to look like the courts will uphold FATCA, its related IGAs and concomitant reporting.  None of it looks likely to go away. Instead, the transparency trend will simply continue to grow.

Published July 31, 2018 

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