The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA's previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers' failure to file Form 8938 and information reporting associated with offshore banking accounts, but it's had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of 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 ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but 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) received 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.
"While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes," said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes 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," said the report. "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.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA's recommendations and partially agreed with the remaining recommendation. IRS officials didn't agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
"From our perspective, TIGTA's conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of 'potential noncompliance' as tantamount to 'egregious noncompliance' that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938," wrote Mabeline Baldwin, acting commissioner of the IRS's Large Business and International Division, in response to the report.
