US IRS Begins FATCA Crackdown-What You Can Expect

The IRS is finally moving to enforce FATCA—exactly what the program has needed for some time.  In a report that confirmed what we already knew, on July 5, 2018, the US Treasury Inspector General for Tax Administration (TIGTA) issued a scathing report the US Treasury’s/US Internal Revenue Service’s FATCA program enforcement to date has been weak to nonexistent. Enforcement is changing and no financial institution should risk being made the example for non-compliance.

If we first consider the derisive review of the lack of results to date, the Inspector General’s report on the IRS’ FATCA efforts begins with a succinct and damning summary by stating:

“TIGTA determined that, despite spending nearly $380 million, the IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap.”

Whether in response to this report, or being done by design, what follows is how the IRS is taking action.  

What Financial Institutions Are at Greatest Risk? (My Placeholder instered here)

Discussions for a multi-prong approach to compliance enforcement but while every global financial institution faces greater risk for non-compliance, it is the global financial institutions that are reliant on correspondent banking relationships to serve their clients that face the greatest risk.  Note the five prongs of heightened enforcement, but especially the first. 

Enforcement efforts include :

  • The first prong is pressure being put on US Correspondence Banks.  Recent reports from US banks indicate they are receiving increasing scrutiny during regulatory reviews regarding the use of FATCA compliance in corresponding banking relationships.

              1. The full report can be found here:  https://www.treasury.gov/tigta/auditreports/2018reports/201830040fr.pdf

  • The second prong targets the termination of Inter-Governmental Agreements (IGAs) with countries that have yet to sign or adhere to their reporting requirements.
  • The third prong targets those FFIs that have customers that have self-reporting foreign income via the US FBAR and US 8938 reporting requirements but have failed to file corresponding FATCA 8966 reports.  The IRS can put these FFIs on notice, giving them an 18-month corrective period to remedy the deficiencies.  Failure to remedy deficiencies during this corrective period would result in expulsion from the FATCA program and the FFI would become subject to the 30% withholding of US Sourced FDAP income. 
  • The fourth prong targets FFIs with direct reporting to the IRS.  The close of the Responsible Officer COPA (Certification of Preexisting Accounts) and Periodic Certifications extended due date of December 18, 2018 appears to be paving the way for holding Foreign Financial Institutions accountable.  Except for Direct Reporting NFFEs, FFIs without reportable accounts do not need to file a Nil Report.  However, all FFIs reporting directly to the IRS need to file RO certifications.  Failure to file these certifications is a failure to adhere to the FFI’s FATCA commitments and can indicate an FFI’s failure to adhere their other reporting requirements.  Remedies include an 18-month corrective period, followed by expulsion from the FATCA program and implementation of the 30% withholding penalties on US-sourced FDAP income.
  • A fifth prong targets US citizens who have been reported by FFIs in FATCA 8966 reports as having overseas assets and have failed to declare these assets.

What to Expect


As with any government regulatory program, there is always a grace period for regulated companies to take the steps to meet the new requirements.  However, the IRS is on the fifth year of data collection and now has 2014, 2015, 2016, 2017, and 2018 data – a substantial database, so enforcement should no longer be a surprise.  Consensus is that enforcement will occur this year, but that not all of the five prongs listed above will be rolled out in 2019. Some of the enforcement initiatives will be piecemeal or phased in over time.  

It is understandable that the US Treasury department would use all avenues available to enforce FATCA reporting, including pressuring Correspondent Banks.  However, de-risking is already a major problem for the global banking industry.  Emphasizing FATCA concerns simply adds to the already straining offshore banking correspondence relationships by adding to already heavy scrutiny of these offshore banks.

For the last several years, the US Treasury have been contacting tax jurisdictions with IGAs to finalize agreements, and to get Model 1 IGAs to collect and exchange tax data. There are twelve IGAs that are still “agreement in substance”, and an unknown number of Model 1 IGAs that have failed to set up systems to collect and exchange data.  We should expect that these agreements will not be terminated unilaterally, but rather a hard deadline will be provided.

US Tax Citizens are required to declare offshore assets via the FBAR and 8938 Forms.  By matching these declarations of assets with the 8966 FATCA forms filed by Foreign Financial Institutions, the IRS can identify Foreign Financial Institutions that are failing to adhere to their FATCA reporting obligations.  The recent addition of a GIIN field on the 8938 form seems to suggest the difficulty the IRS is having matching self-declared foreign assets with their FFI.  This GIIN field is currently optional, but we expect it to become mandatory in future years.  Whether the IRS waits to begin enforcement until this GIIN field is mandatory, or if they use a sampling to begin enforcement this year, is still undetermined.

For those FFIs reporting directly to the IRS, the RO certification deadline has only recently passed.  We expect continued communication with these FFIs to gain compliance.  We don’t expect any major action this year.

The retirement of the IRS’ Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018, appears to have been in preparation for enforcement of FATCA violations against US citizens in violation of reporting and tax payment requirements. The lynch pin to identify US taxpayers identified on 8966 FATCA Forms and their declarations on tax forms, is the Tax ID Number (Social Security Number).  The inspector general’s report identified that of the 8,000,000 FATCA forms filed, approximately only 50% filed to have a valid SSN.  The IRS’ Notice 2017-46 provided a delay until 2020 to require SSNs on FATCA reports.  This delay seems to be an admission on behalf of the IRS of the difficulties FFIs are having in getting TIN data from their clients.  The point of the FATCA program was to hold US taxpayers accountable.  We expect enforcement on this point, even if it is piecemeal, to answer the Inspector General report’s criticism of inaction.

  2. FATCA IGAs are listed here https://www.treasury.gov/resource-center/tax-policy/treaties/pages/fatca.aspx

 3. https://www.irs.gov/pub/irs-drop/n-17-46.pdf

 About Trans World Compliance:

Trans World Compliance Inc. offers its flagship product, CRS/FATCA OneTM, to simplify the compliance and regulatory requirements for US, Foreign Financial Institutions, tax regulatory bodies, and governments.  CRS/FATCA OneTM saves time, lowers overhead, and improves accuracy for compliance with international regulatory tax regulations and mandates by centralizing data, raising flags, tracking remediation, automated reporting, and providing an independent 3rd party audit of policies and procedures.  CRS/FATCA One™ was created for the purpose of FATCA and CRS regulatory reporting, designed by international compliance and IT experts, adheres to a full range of international standards, and supports multiple rule bases with specifics for different jurisdictions and reporting year.
 
Trans World Compliance Inc
1829 Greenplace Terrace
Rockville, MD 20850 USA
www.transworldcompliance.com
info@transworldcompliance.com

The IRS is finally moving to enforce FATCA—exactly what the program has needed for some time.  In a report that confirmed what we already knew, on July 5, 2018, the US Treasury Inspector General for Tax Administration (TIGTA) issued a scathing report the US Treasury’s/US Internal Revenue Service’s FATCA program enforcement to date has been weak to nonexistent. Enforcement is changing and no financial institution should risk being made the example for non-compliance.

If we first consider the derisive review of the lack of results to date, the Inspector General’s report on the IRS’ FATCA efforts begins with a succinct and damning summary by stating:

“TIGTA determined that, despite spending nearly $380 million, the IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap.”

Whether in response to this report, or being done by design, what follows is how the IRS is taking action.  

What Financial Institutions Are at Greatest Risk? (My Placeholder instered here)

Discussions for a multi-prong approach to compliance enforcement but while every global financial institution faces greater risk for non-compliance, it is the global financial institutions that are reliant on correspondent banking relationships to serve their clients that face the greatest risk.  Note the five prongs of heightened enforcement, but especially the first. 

Enforcement efforts include :

  • The first prong is pressure being put on US Correspondence Banks.  Recent reports from US banks indicate they are receiving increasing scrutiny during regulatory reviews regarding the use of FATCA compliance in corresponding banking relationships.

              1. The full report can be found here:  https://www.treasury.gov/tigta/auditreports/2018reports/201830040fr.pdf

  • The second prong targets the termination of Inter-Governmental Agreements (IGAs) with countries that have yet to sign or adhere to their reporting requirements.
  • The third prong targets those FFIs that have customers that have self-reporting foreign income via the US FBAR and US 8938 reporting requirements but have failed to file corresponding FATCA 8966 reports.  The IRS can put these FFIs on notice, giving them an 18-month corrective period to remedy the deficiencies.  Failure to remedy deficiencies during this corrective period would result in expulsion from the FATCA program and the FFI would become subject to the 30% withholding of US Sourced FDAP income. 
  • The fourth prong targets FFIs with direct reporting to the IRS.  The close of the Responsible Officer COPA (Certification of Preexisting Accounts) and Periodic Certifications extended due date of December 18, 2018 appears to be paving the way for holding Foreign Financial Institutions accountable.  Except for Direct Reporting NFFEs, FFIs without reportable accounts do not need to file a Nil Report.  However, all FFIs reporting directly to the IRS need to file RO certifications.  Failure to file these certifications is a failure to adhere to the FFI’s FATCA commitments and can indicate an FFI’s failure to adhere their other reporting requirements.  Remedies include an 18-month corrective period, followed by expulsion from the FATCA program and implementation of the 30% withholding penalties on US-sourced FDAP income.
  • A fifth prong targets US citizens who have been reported by FFIs in FATCA 8966 reports as having overseas assets and have failed to declare these assets.

What to Expect


As with any government regulatory program, there is always a grace period for regulated companies to take the steps to meet the new requirements.  However, the IRS is on the fifth year of data collection and now has 2014, 2015, 2016, 2017, and 2018 data – a substantial database, so enforcement should no longer be a surprise.  Consensus is that enforcement will occur this year, but that not all of the five prongs listed above will be rolled out in 2019. Some of the enforcement initiatives will be piecemeal or phased in over time.  

It is understandable that the US Treasury department would use all avenues available to enforce FATCA reporting, including pressuring Correspondent Banks.  However, de-risking is already a major problem for the global banking industry.  Emphasizing FATCA concerns simply adds to the already straining offshore banking correspondence relationships by adding to already heavy scrutiny of these offshore banks.

For the last several years, the US Treasury have been contacting tax jurisdictions with IGAs to finalize agreements, and to get Model 1 IGAs to collect and exchange tax data. There are twelve IGAs that are still “agreement in substance”, and an unknown number of Model 1 IGAs that have failed to set up systems to collect and exchange data.  We should expect that these agreements will not be terminated unilaterally, but rather a hard deadline will be provided.

US Tax Citizens are required to declare offshore assets via the FBAR and 8938 Forms.  By matching these declarations of assets with the 8966 FATCA forms filed by Foreign Financial Institutions, the IRS can identify Foreign Financial Institutions that are failing to adhere to their FATCA reporting obligations.  The recent addition of a GIIN field on the 8938 form seems to suggest the difficulty the IRS is having matching self-declared foreign assets with their FFI.  This GIIN field is currently optional, but we expect it to become mandatory in future years.  Whether the IRS waits to begin enforcement until this GIIN field is mandatory, or if they use a sampling to begin enforcement this year, is still undetermined.

For those FFIs reporting directly to the IRS, the RO certification deadline has only recently passed.  We expect continued communication with these FFIs to gain compliance.  We don’t expect any major action this year.

The retirement of the IRS’ Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018, appears to have been in preparation for enforcement of FATCA violations against US citizens in violation of reporting and tax payment requirements. The lynch pin to identify US taxpayers identified on 8966 FATCA Forms and their declarations on tax forms, is the Tax ID Number (Social Security Number).  The inspector general’s report identified that of the 8,000,000 FATCA forms filed, approximately only 50% filed to have a valid SSN.  The IRS’ Notice 2017-46 provided a delay until 2020 to require SSNs on FATCA reports.  This delay seems to be an admission on behalf of the IRS of the difficulties FFIs are having in getting TIN data from their clients.  The point of the FATCA program was to hold US taxpayers accountable.  We expect enforcement on this point, even if it is piecemeal, to answer the Inspector General report’s criticism of inaction.

  2. FATCA IGAs are listed here https://www.treasury.gov/resource-center/tax-policy/treaties/pages/fatca.aspx

 3. https://www.irs.gov/pub/irs-drop/n-17-46.pdf

 About Trans World Compliance:

Trans World Compliance Inc. offers its flagship product, CRS/FATCA OneTM, to simplify the compliance and regulatory requirements for US, Foreign Financial Institutions, tax regulatory bodies, and governments.  CRS/FATCA OneTM saves time, lowers overhead, and improves accuracy for compliance with international regulatory tax regulations and mandates by centralizing data, raising flags, tracking remediation, automated reporting, and providing an independent 3rd party audit of policies and procedures.  CRS/FATCA One™ was created for the purpose of FATCA and CRS regulatory reporting, designed by international compliance and IT experts, adheres to a full range of international standards, and supports multiple rule bases with specifics for different jurisdictions and reporting year.
 
Trans World Compliance Inc
1829 Greenplace Terrace
Rockville, MD 20850 USA
www.transworldcompliance.com
info@transworldcompliance.com