FATCA? Who Cares? Information CHAOS at the IRS

A September 11, 2017 Report (Report) by the Treasury Inspector General for Tax Administration (TIGTA) revealed that the Internal Revenue Service (IRS) is not up to speed in processing or using information sent to it from foreign countries, including bulk data from the automatic exchange of information.   So as of this writing, the US government watchdog admits (perhaps a bit sheepishly?) that the IRS treasure trove of information about offshore accounts and assets, as well as its data sharing capabilities with foreign governments are falling short of all the media hoopla.  I encourage everyone with any interest in all things “offshore” to scour this Report; I believe it holds valuable insight as to the chaos that reigns over at the IRS’ offshore information vault.

First, the title of the report caught my eye and set the stage for things to come: “Exchange of Information Capabilities Are Underutilized by the Internal Revenue Service”.

The Report examined IRS use of information being shared by foreign governments.  One must understand that the data involves information about foreign income, and is not information that is detailed such as from a foreign tax return.   The information was set into 3 categories:

  1. Automatic Exchange of Information (AEOI) Program
  2. Mutual Collection Assistance Request (MCAR) Program
  3. Spontaneous Exchange of Information Program

FATCA Data Not Examined by TIGTA

Significantly, the Report noted that the TIGTA audit excluded the automatic exchange of information that the United States conducts pursuant to the “Foreign Account Tax Compliance Act” (FATCA).  I had to wonder why that could be.  Why are we not finding statistics and heaps of information about the data being generated by the FATCA IGA partners and FFIs in non-IGA jurisdictions? After reading the Report and learning of the various problems with the AEOI program, generally, I think it is more than likely that the FATCA information is currently in such a serious state of chaos, it precluded any audit by TIGTA from even taking place.  My hunch is bolstered by 2 other recent announcements by the IRS.

First, while I omit specific details of the Notice, the IRS announced in Notice 2017-46 that it is essentially giving certain foreign financial institutions more time to obtain the taxpayer identification numbers (TIN) of US persons holding pre-exisiting accounts at the institution.   Basically this indicates that FATCA data being sent to the IRS by some FFI’s is incomplete in certain very significant respects. Indeed, a TIN is a critical tool for the IRS to gather and track a taxpayer’s financial information and compare it with what is reported on his or her tax return. (While a date of birth is required, and would permit matching, I imagine this is a more time-consuming and less reliable process). Second, on September 26 the IRS advised that it has a very high volume of files coming in, impeding its ability to send out File Status Notifications which will take longer than usual to be sent.

Flaws, Flaws and More Flaws

The more serious problems found with the AEOI program were the IRS’ lack of an adequate tracking system to account for the records sent to it by foreign countries, a seriously flawed system used for searching bulk data and the fact that only a miniscule number of IRS staff have access to the AEOI data. It does not take much imagination to conclude that the FATCA data being hoarded by the IRS would suffer the same deficiencies listed by TIGTA concerning the AEOI Program (if not worse ones, given FATCA’s relative newness to the AEOI game).  Part II of this blog post will examine in greater detail what the TIGTA Report revealed.

Taxpayer Complacency is Not the Right Move

I urge taxpayers not to be complacent.  The bulk data continues to be sent by FFIs and the foreign countries which have agreed to be FATCA-compliant. While I believe the data is currently in a state of chaos, this will not remain the case indefinitely. Don Fort, the newly appointed Chief of Criminal Investigation for the IRS, is looking to turn this trend around! He has data mining at the forefront of his goals for offshore enforcement actions. You can read more about his plan here. Now is the window of opportunity to rectify your US tax matter – BEFORE the IRS finds you and forecloses any opportunity for you to avoid sanctions including (in some cases) criminal and civil tax penalties.

Don’t Know What To Do?

Everyone’s situation is different and a one-size-fits-all approach is not the answer.  Seek advice from a US tax attorney familiar with the offshore issues and various IRS voluntary disclosure initiatives. You will then have the protection of attorney-client privilege. This is NOT available with any other party such as a financial advisor or accountant.  Such third parties can be engaged directly by your attorney by way of a so-called “Kovel” arrangement to help extend the attorney-client privilege to communications with these non-attorney parties.

I have prepared a concise summary of the various options available to noncompliant taxpayers wishing to rectify their tax situation. I can help you achieve tax compliance in a reasonable fashion. I don’t believe in using scare tactics, nor will I sugar-coat the truth.  Contact me if you need help.

All the US tax information you need, every week — Just follow me on Twitter @VLJeker


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