U.S. TIGTA report finds 'actions needed' to fix FATCA compliance

The 37-page TIGTA report – apparently bearing as its title its overall conclusion ("Additional Actions Are Needed to Address Non-Filing and Non-Reporting Compliance Under the Foreign Account Tax Compliance Act" ) – is actually dated April 7, and may be viewed and downloaded by clicking here. 

The report says it is "For [the] Commissioner of Internal Revenue" and that it's from Michael E. McKeeney, Deputy Inspector General for Audit at the U.S. Treasury, suggesting that IRS commissioner Charles Rettig would have at least been aware of its findings on April 7, when, as reported, he mentioned, in response to a question during a Senate Finance Committee hearing, that he supported the idea of the U.S. "reciprocating" with respect to the information it currently receives from foreign governments about the overseas banking and financial accounts of U.S. taxpayers, via FATCA. 

He also may have been aware of the report's findings as early as March 17, when, in a 21-page document that was submitted alongside his verbal testimony during a House Ways and Means subcommittee hearing, he admitted that in spite of all the efforts being made by non-U.S. financial institutions to comply with FATCA, the IRS had been struggling to enforce it, owing to the fact that the agency lacked the resources it needed to do so, and had "yet to receive any significant funding appropriation for [FATCA's] implementation."

Among the TIGTA reports key findings is that the inability of the non-U.S. banks and financial institutions – which have borne the burden of collecting the FATCA data (and increasingly, are opting to avoid American clients for this reason) – to obtain and provide to the IRS the Tax Identification Numbers of such clients is a major reason that the IRS has been unable to enforce FATCA better.  

TIGTA: 'Billions' in anticipated
FATCA revenue unrealized

In its introduction, the TIGTA report notes that when FATCA was signed into law in March, 2010, the Congressional Joint Committee on Taxation had "estimated that revenue from FATCA would be US$8.7 billion from Fiscal Years (FY) 2010 to 2020," with the result that by the end of FY 2020, "FATCA should have already generated this US$8.7 billion in tax revenues.

"[But] as we subsequently point out, the IRS has not come close to building the compliance plan that was originally contemplated."

And, the report adds later, in spite of "nearly US$574 million of FATCA-related implementation and maintenance costs compared against the [Large Business & International] Division's campaign compliance results from the IRS's systemic approach to address FATCA non-compliance, as well as FATCA-related assessments from field examinations," the IRS to date has been "unable to quantify revenue generated from FATCA compliance activity, beyond the US$14 million in revenue from penalties unrelated to [its various] campaigns." 

Two major efforts were made to boost the IRS's FATCA compliance standards, referred to as Campaign 896 and Campaign 975, but as the TIGTA report notes, neither resulted in any marked improvement in results of the kind that they were intended to produce.

After detailing why these two campaigns failed, the TIGTA report suggests the fact that the IRS "significantly departed from its original, comprehensive FATCA compliance roadmap, in favor of a more limited compliance effort" was at least in part to blame.

It then goes on to make six recommendations, each of which is followed by a response from "management" (apparently that of the IRS), and in some cases, an Office of Audit Comment (pictured).

Reaction to report's findings 

Tax industry officials, American expats and others who normally monitor developments in the area of FATCA initially expressed surprise at the unexpected arrival of the TIGTA report, its scope, and its findings; some were highly critical.

One of the first to respond was Mishcon de Reya partner and long-time FATCA critic, on behalf of various clients over the years, Filippo Noseda. 

In a letter to Emmanuel Crabit, a European Commission director who is involved in legal issues, which he copied to various others, including European Parliamentarians and individuals involved in the European Parliament's Petitions Committee (PETI), he said that the TIGTA report "confirms that FATCA is a joke" and featured excerpts from it, such as "the IRS received information relating to 34 million accounts. Over 10 million reports were useless ('could not be validated')." 

"Treasury Inspector General says FATCA is a Big Fat Flop... So Far," is how Virginia La Torre Jeker, a Dubai-based U.S. tax lawyer, headed up a website commentary on the subject.

She went on: "The TIGTA audit was undertaken to evaluate IRS efforts to actually use the reams and reams of data collected under FATCA to improve taxpayer compliance with regard to offshore assets and accounts.

"In a nutshell (TIGTA Report p. 2) -

"Enough said."

Nicholas Lee, an American resident in the Netherlands, was among numerous expats who weighed in on social media within hours of the TIGTA report's being made public. In a  tweet (pictured), he observed that as an investment that cost US$574 million to implement, which over 12 years had managed to raise only US$14 million, FATCA has seen a return of -97.5%  – an unimpressive, "harmful and unfit for purpose" means of collecting tax revenue (not to mention a pretty poor ROI).

The six TIGTA recommendations

Recommendation 1: The Commissioner, Large Business & International Division, should consider additional compliance actions for under-reporters identified in its matching, including assessing penalties to taxpayers based on the variance amounts or conducting examinations on taxpayers who consistently under-report.

Management’s Response: IRS management indicated that the recommendation has been implemented.

Recommendation 2: 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 indicated 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.

Penalties are considered in examinations where appropriate. This work will remain ongoing.

Recommendation 3: The Commissioner, LB&I Division, should consider expanding the scope of Campaign 975 to address non-compliance by the FFIs from 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 FFIs from IGA countries and identified potential non-compliance by 34 FFIs. Compliance activities with respect to this population are underway.

Recommendation 4:  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 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 Forms 8966. We reported that for TYs 2016 to 2019, only 44% of the forms 8966 the IRS received contained a valid TIN, while the remaining 5 percent contained an invalid TIN or had no TIN. We recommend emphasis of this requirement.

Recommendation 5: 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.

Recommendation 6: Partner with the 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.