On October 30, 2018, the IRS Large Business and International division (LBI) announced the approval of a compliance campaign regarding Foreign Financial Institution (FFI) and certain Non-Financial Foreign Entity reporting of foreign assets held by their U.S. account holders and substantial U.S. owners under FATCA. This campaign addresses entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. IRS will address noncompliance through a variety of treatment streams, including a termination of the FATCA status of a non-compliant entity.
IRS has four years of FATCA information in its vault
The information that IRS holds is sourced from the FATCA reports submitted by FFIs (Form 8966- FATCA Report) and by Individual US Taxpayers that have reporting obligations via Form 8938 (Statement of Specified Foreign Financial Assets). IRS electronically matches (cross-checks) these forms to identify US Taxpayers that are not making required disclosures to IRS through not filing or underreporting as well as FFIs that are not reporting their US account holders through its cross-check process. Through its cross-check process, IRS will identify:
US Taxpayers that are not compliant because they have been reported to the IRS by the FFIs via a FORM 8966 report while the Taxpayer has not submitted FORM 8938 or filed an erroneous Form 8938.
FFIs that are not compliant because the US account holder has reported their foreign accounts via FORM 8938 and the FFI has not submitted FORM 8966.
Consequences of not complying given the IRS Campaign focused on FATCA Filing Accuracy
Taxpayers that are FATCA non-compliant will receive IRS notices and the IRS could potentially issue penalties as high as the greater of $100,000 or 50 percent of an account balance.
FFIs may lose their FATCA status. IRS states that if an entity that is required to certify does not submit its certification(s) by the due date, the entity will be out of compliance with its obligations under FATCA. The consequences of being non-compliant may include revocation of an entity’s FATCA compliant status and the entity’s Global Intermediary Identification Number (GIIN) being removed from the FFI list. A FFI’s FATCA compliant status is critical for its ability to continue operating as a “going concern” in the financial industry. FFIs without a GIIN risk having 30% of payments withheld by counterparties, banking and or correspondent relationships terminated and being classified as a FATCA “Non-Compliant” entity. FFIs that lose their FATCA status could be perceived as Facilitators of U.S. Tax crimes by the IRS and be placed on the IRS Facilitator List.
Taxpayers that fail to file FBARs can be subject to Warning Letters and potential fines of the greater of $100,000 or 50% of the highest amount in a reportable account in the year of the violation.
Don’t be a Victim of your own making
IRS has launched a Compliance Campaign directly targeted at FATCA Filing Accuracy because it is prepared to enforce FATCA compliance. On July 5, 2018, IRS responded to a Treasury Inspector General for Tax Administration (TIGTA) Report by stating that they:
“are taking action to reduce inaccurate or missing information and have initiated multiple compliance activities related to the Form 8938, including developing automated risk assessments across the FATCA filing population”
“will continue our efforts to systematically identify non-filers and underreporting related to U.S. holders of foreign accounts and FFIs”
FFIs and US Taxpayers that are FATCA non-compliant ought to consult with their specialized tax representative now.