The US tax authorities are having trouble dealing with the information they receive from foreign banks about US taxpayer assets under the Foreign Account Tax Compliance Act (FATCA) because of problems with the data and various mismatches, according to a report from the Government Accountability Office (GAO)
Under FATCA, foreign financial institutions (FFIs) are required to supply information about US taxpayer assets of those resident abroad – which would include Prince Harry’s wife Megan Markle - or else face stiff penalties of up to 30% on their income from US sources.
GAO’s report says data quality and management issues have limited the effectiveness of the Internal Revenue Service’s (IRS) efforts to improve taxpayer compliance using foreign financial asset data collected under FATCA.
Specifically, the Inland Revenue Service (IRS) has had difficulties matching the information reported by FFIs with US taxpayers’ tax filings due to missing or inaccurate taxpayer identification numbers provided by FFIs.
The report says the IRS also lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by US persons, partly because some IRS databases do not store foreign asset data reported from paper filings, so the tax authority has an incomplete picture.
Due to overlapping statutory reporting requirements, IRS and the Financial Crimes Enforcement Network (FinCEN) - both within the Department of the Treasury - collect duplicative foreign financial account and other asset information from US individuals.
The GAO says this means in the tax years 2015 and 2016, nearly 75% of US persons who reported information on foreign accounts and other assets on their tax returns also filed a separate form with FinCEN, resulting in extra work and increasing complexity and confusion around filing.
GAO says there is evidence FFIs closed some US persons’ existing accounts or denied them opportunities to open new accounts after FATCA was enacted due to increased costs, and risks they pose under FATCA reporting requirements.
It points to Department of State data showing annual approvals of renunciations of US citizenship increased from 1,601 to 4,449 - or nearly 178% - from 2011 to 2016, as a result.
The report noted: ‘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.’
The GAO report makes seven recommendations to the IRS and other agencies to enhance the IRS's ability to leverage FATCA data to enforce compliance and address unnecessary reporting, which include better collaborative working with other agencies.
Government Accountability Office report, Foreign Asset Reporting
Report by Pat Sweet