TIGTA issued this report: TIGTA, Additional Actions Are Needed to Address Non-Filing and Non-Reporting Compliance Under the Foreign Account Tax Compliance Act (Report # 2022-30-019 4/7/22), here.  I excerpt the highlights below, but for those practicing in this area, there is a lot of detail.  Good stuff in those details.

Why TIGTA Did This Audit

While taxpayers can hold offshore accounts for a number of legitimate reasons, some taxpayers have also used such accounts to hide income and evade taxes. The passage of the Foreign Account Tax Compliance Act (FATCA) sought to reduce tax evasion by creating greater transparency and accountability with respect to offshore accounts and other assets held by U.S. taxpayers.

This audit was initiated to evaluate the IRS’s efforts to use information collected under FATCA to improve taxpayer compliance.

Impact on Tax Administration

Individual taxpayers are required to file Form 8938, Statement of Specified Foreign Financial Assets, with their income tax returns if the aggregate value of the assets exceeds certain dollar thresholds. Foreign financial institutions (FFI) are required to File Form 8966, FATCA Report, to report information about financial accounts in which U.S. taxpayers hold certain “ownership interests.”

The IRS established Campaign  896 – Offshore Private Banking, to address tax noncompliance related to taxpayers’ failure to report income generated and information reporting associated with offshore banking accounts, and Campaign 975 – FATCA Filing Accuracy, which seeks to identify the FFIs that maintain specified foreign financial accounts for U.S. individuals but did not submit Form 8966.

What TIGTA Found

Due to resource limitations, the IRS has significantly departed from its original comprehensive FATCA Compliance Roadmap in favor of a more limited compliance effort. As part of its effort, the Large Business and  International (LB&I) Division established two campaigns to identify noncompliance with the individual and FFI provisions of FATCA. The chart below reflects nearly $574 million of FATCA-related implementation and maintenance costs compared against the LB&I Division’s campaign compliance results from the IRS’s systemic approach to address FATCA noncompliance, as well as FATCA-related assessments from field examinations.

Campaign 896 – Offshore Private Banking (related to individual taxpayers) has been able to complete a review of FATCA forms filed for Tax Years 2017 and 2018; the LB&I Division issued 830 “education letters” and five “soft letters” (soft letters do not necessarily result in compliance action) for Tax Year 2018. Initially, Campaign 896 focused only on taxpayers who have underreported their foreign assets on the Forms 8938 and more recently started to plan to address taxpayers who have not filed Forms 8938. IRS data show there are over 330,000 U.S. taxpayers from 2016 to 2019 who failed to file Form 8938, each with foreign accounts over $50,000. Potentially, these taxpayers would have owed at least $10,000 each in FATCA-related penalties, for a total of $3.3 billion in penalties. A portion of this population could be due to errors in IRS data, misreporting, or failure to file due to reasonable cause, which would reduce the total subject to penalties.

Campaign 975 – FATCA Filing Accuracy (related to the FFIs) has been able to fully review only Tax Year 2016 cases. For Tax Year 2016, the IRS concluded  that the majority of the FFIs identified for potential noncompliance were in fact compliant. Only 12 “soft letters” were sent out between November 2019 and October 2020.

What TIGTA Recommended

            TIGTA made six recommendations to help the IRS address non-filing and non-reporting compliance under FATCA. The IRS agreed to consider expanding the scope of Campaign 975 to address noncompliance by the FFIs from Intergovernmental Agreement countries, and to establish goals, milestones, and timelines for FATCA campaigns. IRS officials indicated that they have already implemented most of the other recommendations; however, they did not agree to issue a notice to countries with Model 1 Intergovernmental Agreements.