The IRS Has Not Successfully Addressed the Highest Balance Foreign Account Tax Compliance Act Nonfilers

Report Information

Summary

Despite identifying hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, IRS Campaign 896 activity only resulted in a few taxpayer examinations and few nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements. The IRS used two methods to address the 405 noncompliant taxpayers: referral for examinations and letter issuance.

• 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination. However, only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
• 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) were sent a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty. Significant assets and income are factors considered when assessing whether taxpayers intentionally evaded their tax responsibilities. Given the large average unreported foreign account balances, these taxpayers likely have higher levels of sophistication and an awareness of their obligation to comply with the law. We also found that the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts. This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.