Form 8938: How This IRS FATCA Weapon is Failing

On July 5, 2018, the Treasury Inspector General for Tax Administration (“TIGTA”) issued a final audit report covering the enforcement efforts of the US Internal Revenue Service (IRS) of the “Foreign Account Tax Compliance Act” (the infamous “FATCA”).  Readers may recall that FATCA was enacted in 2010, but it has been a very rocky road to enforce this law. This is unsurprising, given FATCA’s mandate to, among other things, have foreign financial institutions (or the foreign governments in the relevant country) send detailed financial information about certain US person account holders directly to the IRS.  A foreign financial institution must annually file Form 8966, FATCA Report, with the IRS. The Form 8966 reports the name, address, and Taxpayer Identification Number (TIN) of the US account holder as well as the account balance or value; and gross receipts and gross withdrawals or payments from the account. Bumbling along the rocky road to enforcement, the effective date for this reporting obligation on the Form 8966 began only in 2015, five years after FATCA was enacted.

I have been following FATCA since it became law eight years ago, and I was not surprised with TIGTA’s ultimate assessment. TIGTA concluded that after spending almost $380 million, the IRS is still not prepared to enforce FATCA compliance.  The damning Report notes that the IRS has taken limited or no action to follow the activities outlined in the so-called FATCA Compliance Roadmap, last updated two years ago.  When it comes to data overload, the IRS has a bad case of it, and the agency is apparently really struggling to keep up. You can read more on this issue at my earlier blog post “FATCA, Who Cares?  Information CHAOS at the IRS” (if the link is not working, access the archived version of my post here).

Today’s post will focus on what  the TIGTA Report had to say about taxpayer compliance and IRS enforcement with respect to Form 8938.  A follow-up blog post will provide a detailed overview of the Form and its requirements.

Form 8938 and FATCA

It will be recalled that Form 8938 is the direct result of FATCA which mandated a new information return filing that commenced for the 2011 tax year.  The Form was required for individuals having any interest in so-called “Specified Foreign Financial Assets” (“SFFA”) that reached certain dollar thresholds during, or at the end of, the calendar year.  The Form 8938 filing requirement was extended to domestic entities after December 31, 2015. The purpose behind the Form 8938 is to permit the IRS to “match” information provided by the taxpayer on that form about the taxpayers foreign financial assets, with the information sent to it by foreign financial institutions on the Form 8966, mentioned earlier.  A “Got’cha” moment can result if the foreign financial institution reports an account to the IRS but the taxpayer omits reporting that same account on the Form 8938.

What TIGTA Had To Say About Form 8938

Readers can guess that there is a penalty (of course!) for failing to file Form 8938 if it is otherwise required.  The TIGTA Report noted there has not yet been a penalty assessment against any specified domestic entity that was required to file the Form. It is early days since the filing requirement for US entities only began after December 31, 2015.  The Report noted that between October 1, 2016, and September 30, 2017, only 75 failure-to-file Form 8938 penalty assessments were made with respect to individual taxpayers. The penalties totaled $1,180,000.

Of this amount, $660,000 were initial penalties.  If a taxpayer required to file Form 8938, does not file a complete and correct Form 8938 by the due date (including extensions), he may be subject to an “initial” penalty of $10,000.

The balance of penalties reported by TIGTA in the amount of $520,000 were so-called “continuation” penalties.  If the taxpayer does not file a correct and complete Form 8938 within 90 days after the IRS mails a notice of the failure to file, the taxpayer  may be subject to additional penalties of $10,000 for each 30-day period (or part of a period) during which the failure continues after expiration of the 90-day period.  Continuation penalties for failure to file Form 8938 are capped at the maximum of $50,000.

The penalties reported by TIGTA were asserted through the normal IRS examination process. It was noted that some taxpayers may have submitted delinquent or incomplete/incorrect Forms 8938 as part of the IRS’ Streamlined Procedures or Offshore Voluntary Disclosure Program.

IRS Told to Take Action

TIGTA recommended that IRS initiate compliance efforts to address taxpayers who did not file a Form 8938 but who were reported on a Form 8966 filed by a foreign financial institution.  IRS agreed with this recommendation and will continue its efforts to systemically match Form 8966 and Form 8938 data to identify non-filers and underreporting related to U.S. holders of foreign accounts.

IRS stated it has initiated development of a data product to automate risk assessments across the FATCA filing population.  As such we may expect to see greater enforcement of Form 8938 requirements. A great deal of the problem with FATCA enforcement is the inability of the IRS to match information between the Form 8966 and Form 8938 primarily due to the absence of correct TINs on a high volume of the Forms 8966 submitted by foreign financial institutions to date.

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