IRS seeing difficulties with FATCA reporting

By: Michael Cohn… Accounting Today

The Internal Revenue Service is having trouble dealing with the information it’s getting from foreign banks about U.S. taxpayer assets under the Foreign Account Tax Compliance Act because of problems with the data and various mismatches, according to a new government report.

The report, from the Government Accountability Office, found that data quality and management issues have limited the effectiveness of the IRS’s efforts to implement FATCA, which was part of the HIRE Act of 2010. The law required foreign financial institutions to send information about U.S. taxpayer assets or else face stiff penalties of up to 30 percent on their income from U.S. sources. The law proved to be controversial, and the Treasury Department needed to negotiate intergovernmental agreements with the tax authorities in dozens of other countries to get them to agree to turn over data under their own banking secrecy laws. In most cases, the foreign banks turn over the information first to their own home country’s tax authority, which in turn transmits it to the IRS. The IRS also needed to develop portals where the information could be sent, as well as forms, instructions and other guidance and technology systems to implement FATCA.

However, even with all that work, the IRS has had difficulties matching the information reported by foreign financial institutions with U.S. taxpayers’ tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by the foreign banks. On top of that, the IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. individual taxpayers, partly because some IRS databases don’t store foreign asset data reported from paper filings. The “IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance campaigns,” according to the report. The report also found that nearly 75 percent of taxpayers reporting foreign assets to the IRS also reported them separately to the Treasury Department, indicating potential unnecessary duplication.

Another major problem for FATCA has been the hardships faced by U.S.-born expatriates. Some Americans living abroad can’t get services from foreign banks that find the law too burdensome. Even American actress Megan Markle, who married Prince Harry in the U.K. last year, is expected to face difficulties with tax compliance. With the couple’s baby due soon, some observers have speculated their children could be subject to U.S. tax, unless she renounces U.S. citizenship.

The GAO found that some foreign financial institutions, or FFIs, have closed some U.S. taxpayers’ existing accounts or denied them opportunities to open new accounts after FATCA was enacted thanks to the increased costs and risks they face under FATCA. According to State Department data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449 — or nearly 178 percent — from 2011 through 2016, partly because of FATCA.

The Treasury has already set up some joint strategies with the State Department to address the challenges of U.S. expats in accessing foreign financial services. However, the GAO said they lack a collaborative mechanism to coordinate their efforts with other agencies to address the ongoing challenges of accessing such services or getting Social Security Numbers. The GAO said they need a more formal means to collaboratively address the burdens faced by Americans abroad from FATCA. That way, federal agencies could develop more effective solutions to mitigate the burdens faced by taxpayers abroad, by monitoring and sharing more information, and jointly developing and implementing steps to address the problems.

The GAO made seven recommendations to the IRS and other agencies to enhance the IRS’s ability to leverage FATCA data to enforce compliance, address unnecessary reporting, and better collaborate to mitigate burdens on U.S. persons living abroad. It also recommended one matter for congressional consideration to address the overlap in foreign asset reporting requirements. The State Department and the Social Security Administration agreed with the GAO’s recommendations, but the Treasury Department and the IRS neither agreed nor disagreed with the recommendations.

“FATCA, combined with enforcement efforts on the part of the IRS and Department of Justice, has drawn attention to the requirements to disclose foreign accounts and report income generated by those accounts,” wrote Kiersten B. Wielobob, deputy commissioner for services and enforcement at the IRS. “The increased reporting and disclosure demonstrates improved voluntary compliance thus heightening fairness and integrity in the tax system.”

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