Can the IRS Enforce the FATCA?
The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to register with the Internal Revenue Service (IRS) and report the holdings of United States taxpayers. Foreign institutions that fail to abide by this law face serious monetary consequences — up to 30 percent of the income received from U.S. sources.
But is the threatened penalty enough to encourage compliance? A recent report by the Treasury Inspector General for Tax Administration (TIGTA) digs into this question.
What were the findings of the report? According to the TIGTA, the IRS has spent almost $380 million towards the FATCA. Even with these funds, the report states the IRS has yet to take action on “the majority of the planned activities outlined in the original FATCA Compliance Roadmap.”
What has gone wrong? The TIGTA states the filings provided by foreign financial institutions failed to provide Taxpayer Identification Numbers. This made it difficult for the IRS to match the information provided with individual taxpayer data.
How will the government fix this problem? The TIGTA provided a number of recommendations. Three examples include:
- Initiate follow-up procedures to address errors.
- Encourage compliance for individual taxpayers that failed to file appropriate documents that are reported as having holdings by a foreign financial institution.
- Provide guidance to encourage taxpayers to use available tools on the IRS website to aid in filling out these forms.
The IRS also notes the roadmap did not take into account policy changes that have directly impacted the implementation of this law. As such, the agency is adamant that those who review the report should not believe the IRS is lax about FATCA reporting requirements.