TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

Despite Spending Nearly $380 Million, the Internal Revenue Service Is Still Not Prepared
to Enforce Compliance With the Foreign Account Tax Compliance Act

Final Report issued on July 5, 2018

Highlights of Reference Number:† 2018-30-040 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

The U.S. Congress intended the Foreign Account Tax Compliance Act (FATCA) to improve U.S. taxpayer compliance with reporting foreign financial assets and offshore accounts.† Under the FATCA, individual taxpayers with specified foreign financial assets that meet a certain dollar threshold should report this information to the IRS, beginning with Tax Year 2011, by filing Form 8938, Statement of Specified Foreign Financial Assets, with their income tax return.†

To avoid being subject to withholding, the FATCA also requires foreign financial institutions (FFI) to register and agree to report to the IRS certain information about financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

WHY TIGTA DID THE AUDIT

This audit was initiated to evaluate the IRSís efforts to ensure that taxpayers, the FFIs, and withholding agents comply with the FATCA.

WHAT TIGTA FOUND

TIGTA determined that, despite spending nearly $380 million, the IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap.

The reports filed by the FFIs did not include (or included invalid) Taxpayer Identification Numbers (TIN).† As a result, the IRSís efforts to match FFI and individual taxpayer data were unsuccessful, which affected the IRSís ability to identify and enforce FATCA requirements for individual taxpayers.

Also, the IRS only recently initiated action to enforce withholding agent compliance with the FATCA after TIGTA provided feedback.† TIGTA observed that a significant percentage of the Forms 1042-S, Foreign Personís U.S. Source Income Subject to Withholding, the IRS receives that pertain to the FATCA do not have valid TINs.† However, most Form 1099 series information returns pertaining to the FATCA do have valid TINs and can be used by the IRS in its FATCA compliance strategies.† There were 62,398 Tax Year 2015 Forms 1042-S with invalid TINs reporting more than $717 million, of which just over $47 million was withheld.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS:† 1) establish follow-up procedures and initiate action to address error notices related to file submissions rejected by the International Compliance Management Model; 2) 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; 3) add guidance to the Form 8938 instructions to inform taxpayers on how to use the FFI List Search and Download Tool on the IRSís website; 4) initiate compliance efforts to address and correct missing or invalid TINs on Form 8966 filings by non-IGA FFIs and Model 2 IGA FFIs; 5) 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; and 6) initiate compliance efforts to compare Form 1099 filings with valid TINs to corresponding Form 8938 filings.

The IRS agreed with four of TIGTAís six recommendations.† Corrective actions include:† 1) establishing follow-up procedures and initiating action on error notices with the FFIs; 2) continuing efforts to systemically match Form 8966 and Form 8938 data to identify nonfilers and underreporting related to U.S. holders of foreign accounts and to the FFIs; 3) informing taxpayers how to obtain global intermediary numbers; and 4) strengthening overall compliance efforts directed toward improving the accuracy of reporting by Form 1042-S filers.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2018reports/201830040fr.pdf.

 

Phone Number ††/† 202-622-6500

E-mail Address †/TIGTACommunications@tigta.treas.gov

Website†††††† ††††††/https://www.treasury.gov/tigta