US tax authority failing to tackle FATCA compliance

Despite spending nearly $380m (£287m), the Internal Revenue Service (IRS) is failing to enforce compliance with the Foreign Account Tax Compliance Act (FATCA), which is designed to ensure US taxpayers report 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. 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 US taxpayers or held by foreign entities in which US taxpayers hold a substantial ownership interest.

An audit by the Treasury Inspector General for Tax Administration (TIGTA) has found the IRS has taken ‘limited or no action’ so far 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 IRS’s efforts to match FFI and individual taxpayer data were unsuccessful, which affected the IRS’s ability to identify and enforce FATCA requirements for individual taxpayers.

TIGTA also found the IRS has only recently initiated action to enforce withholding agent compliance with the FATCA.

A significant percentage of the forms 1042-S, foreign person’s US source income subject to withholding, the IRS receives that pertain to the FATCA do not have valid TINs. TIGTA found. 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 orms 1042-S with invalid TINs reporting more than $717m, of which just over $47m was withheld.

TIGTA has made a number of recommendations for the IRS to improve compliance efforts. These included establishing follow-up procedures to address error notices, and initiating efforts to address taxpayers who did not file their own form but were reported on a form filed by an FFI to identify nonfilers and underreporting. It also said the tax authority should make more effort to address and correct the invalid TINs on all form 1042-S filings.

TIGTA’s report is here.

Report by Pat Sweet

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