The amount of information channeling into the IRS as a result of the Foreign Account Tax Compliance Act was expected to be daunting — even unmanageable. Thirteen years on, the size of the proverbial haystack remains unknown, as does the potential for Inflation Reduction Act funding to remedy the regime’s infamous challenges.
Plenty of ink has been spilled about what FATCA has not accomplished. The estimated $8.7 billion that it was expected to raise as an offset provision of the Hiring Incentives to Restore Employment Act hasn’t materialized, and the Treasury Inspector General for Tax Administration reported in April 2022 that the IRS had failed to make “significant measurable progress toward ensuring compliance.”
But FATCA is not a compliance program; it’s a data source, the IRS has said. What has happened is that 113 jurisdictions now have intergovernmental agreements in effect — or are treated as if they do by the U.S. government — and partner jurisdictions have been sending the IRS information on Americans’ foreign accounts for over seven years. How much information is unclear.
The IRS has said it doesn’t have records on how many accounts are being reported by foreign tax authorities under the regime, but clues about what’s changing hands can be gleaned from partner jurisdictions that report having provided information to the United States on accounts numbering in the hundreds of thousands annually. The picture is far from complete, however, as some countries refuse to disclose even aggregated information about what they are reporting, citing potential damage to international relations.
The Canada Revenue Agency told Tax Notes that in 2020 it reported approximately 720,000 accounts to the IRS, with an approximate aggregate value of C $520 billion. That’s down slightly from 2019, when it reported roughly 850,000 accounts worth about C $590 billion, and 2018, when it reported 820,000 accounts worth approximately C $710 billion.
In 2017 the Australian Taxation Office released records on Australian taxpayer data given to the IRS under FATCA, indicating that the number of reports concerning U.S. account information provided by foreign financial institutions totaled 51,136 in 2014, 297,028 in 2015, and 873,790 in 2016.
Asked for an update on the number of accounts reported in more recent years, the ATO declined, stating that even aggregated information “is regarded as confidential by the foreign authority,” and that “there is a real risk that disclosure of the information . . . would or could reasonably be expected to cause damage to the international relations of the Commonwealth.”
HM Revenue & Customs said it has information about the number of accounts reported to the IRS as well as their balances, but that it, too, considers the information exempt from release. “A U.K. government department is not obliged to provide information requested if its release would, or would be likely to, prejudice international relations,” it said.
The Irish Revenue also denied access to its records on the number of accounts reported to the IRS, but it publicly reports information about compliance interventions it conducts on cases selected using FATCA-exchanged information. Between 2018 and 2022 the Revenue concluded 387 such interventions, which have collectively yielded roughly €5.9 million in taxes, interest, and penalties. The number of interventions concluded each year has declined over that time period, according to the Revenue’s annual reports.
When Tax Notes asked the IRS for records on the number of accounts reported to it each year under FATCA intergovernmental agreements and foreign financial institution agreements, the agency said it doesn't have any. “A search was conducted, and no records were located,” it said.
Foreign Bank Account Reporting Numbers
In her response to TIGTA’s 2021 critiques, Nikole Flax, then commissioner of the IRS Large Business and International Division, asserted that FATCA’s effect on voluntary compliance “should be the largest source of the regime’s revenue generation.”
IRC enforcement has been shown to increase rates of voluntary compliance, and “third-party information reporting is a cornerstone of promoting voluntary tax compliance,” Flax said. In FATCA’s case, “this is clearly demonstrated by the approximate doubling of [foreign bank account report] filings annually since the enactment of FATCA, as well as campaign results," she said.
To be clear, FBAR filings have not doubled annually. IRS spokesperson Robyn Walker told Tax Notes that Flax was referring to the doubling in the number of annual FBAR filings that occurred in the decade between 2011, when there were 741,249 filings, and 2021, when there were almost 1.49 million.
The number of FBARs filed annually has increased every year since at least 2003, with the exception of 2010 — the year FATCA was enacted — when filings decreased by a little over 2 percent, according to data from the IRS’s 2020 and 2021 FBAR reports to Congress, seen by Tax Notes. The year-on-year growth rate spiked in 2009 — the year FATCA was introduced — and again in 2011, with filings increasing by 57.7 percent and 37.7 percent, respectively. The average yearly growth rate for FBAR filings is higher for the seven years before 2010 than for the seven years after, and the growth rate has been in the single digits since 2015.
The FBAR filing data could be interpreted, from an IRS perspective, as evidence of successful enforcement efforts that have driven taxpayers to use voluntary offshore compliance options, according to Daniel Price of the Law Offices of Daniel N. Price PLLC. The recent single-digit growth rates could be attributed to recent immigrants to the United States reporting their foreign bank accounts and U.S. individuals moving abroad for work and reporting new foreign bank accounts, he said.
“The IRS has a much larger issue it hasn’t been able to successfully tackle yet: the huge number of U.S. citizens residing abroad,” especially long-term overseas residents, said Price, who was formerly with the IRS Office of Chief Counsel (Small Business/Self-Employed).
An estimated 9 million U.S. citizens live overseas, according to the U.S. Department of State. Although not all of them may be required to file FBARs, “the overwhelming majority of them likely are,” given the $10,000 filing threshold, Price said. “Hence, the FBAR filing statistics indicate a significant compliance gap,” he said.
Handling and Use of FATCA Data
“If you wonder [why the] ‘IRS has all this FATCA information they’ve not been able to use,' we’re waiting for the funding,” then-IRS Commissioner Charles Rettig said during a 2022 policy discussion hosted by Tax Analysts. FATCA’s implementing legislation did not provide implementation funding. But practitioners say FATCA data is not going unused.
“They do use it for purposes of audits and soft letters and denying voluntary disclosures,” Bryan Skarlatos of Kostelanetz LLP said. “When you go into a civil audit or a criminal investigation that could involve unreported foreign assets, you have to take into account the reality that there’s a very good chance the IRS has the info on the foreign account.”
During audits, “you’ll see questions come through" — for example, on information document requests — "about what appears to be some source of information, and you can kind of surmise that it’s FATCA,” although the IRS is sometimes reluctant to disclose details about where its information is coming from, said Michael J. Desmond of Gibson, Dunn, & Crutcher LLP.
Asked for internal materials on the handling of information obtained under FATCA, the IRS produced automatic exchange of information bulletins, training materials, a FATCA information request form, and records that explain data protections and use limitations. The materials describe requirements for accessing FATCA records, confidentiality rules, the interaction between sections 6103 and 6105, and information on the international data exchange system, and include repeated instructions to contact LB&I’s automatic exchange of information office before using FATCA data in FBAR investigations.
“Revenue agents handling examinations involving international issues are aware of FATCA data, understand how to retrieve it, and compare FATCA-exchanged information to tax returns, international information returns, and FBAR submissions,” Price said. FATCA data is a useful cross-check roughly akin to comparing domestic information returns like Form 1099 with domestic returns, he added.
A complication is that FATCA data reported by foreign financial institutions isn’t always accurate, Price said, adding that “inaccurate data . . . may cause the IRS to view accurate reporting by some taxpayers with suspicion.”
Change Is Coming, Maybe
There has been hope among some lawmakers and practitioners that some of the almost $80 billion in supplemental funding provided to the IRS in the IRA will go toward remedying the FATCA regime’s money problems. The IRS’s failure to enforce FATCA “has created an alarmingly permissive environment for offshore tax evasion and money laundering,” Senate Finance Committee Chair Ron Wyden, D-Ore., wrote to Rettig and Treasury Secretary Janet Yellen in an October 2022 letter containing his expectations for the funds.
The IRA strategic operating plan, which was released April 6, doesn’t mention FATCA, but the pursuit of wealthy, noncompliant individuals is a recurring theme. IRA resources will be used to hire “the accountants, attorneys, and data scientists needed to pursue high-income and high-wealth individuals . . . that are not paying the taxes they owe,” IRS Commissioner Daniel Werfel wrote in an April 5 memorandum to Yellen.
One of eight key projects for strategic data use listed in the plan is the improvement of the IRS’s ability to “receive and use data from foreign jurisdictions,” optimizing the use of data on offshore activities to pursue noncompliant taxpayers. The IRS said data and analytics will help it to better understand wealthy individuals’ tax filings and that it will target noncompliance “through a variety of mechanisms.”
“IRS funding should be used to increase staffing to conduct additional examinations and assess more penalties, coordinate internally with other IRS divisions to share data, and to train IRS employees about FATCA compliance,” said Carina Federico of Crowell & Moring LLP. “If these efforts are implemented successfully, tax practitioners should expect to see an increase in FATCA enforcement activity, and the IRS should see an increase in compliance as a result."
According to the April 2022 TIGTA report, “the IRS already has the information necessary to take enforcement action against noncompliant taxpayers,” Federico said. That report said the agency “could have assessed at least $3.3 billion using information that was readily available to the IRS before any penalty abatements or additional applicable failure to disclose penalties.” To get that number, TIGTA multiplied the minimum $10,000 penalty for failure to report foreign financial asset information on Form 8938 by 330,082 — the number of potential nonfilers from 2016 to 2019, which it deduced by comparing unique taxpayer identification numbers on Forms 8966 with Form 8938.
The report disclaimed that some of the nonfiling population estimate could be attributable to "errors in the IRS data, misreporting, or failure to file due to reasonable cause,” and that more information is needed from the IRS to create a more reliable estimate of revenue that could result from additional enforcement efforts. “The IRS does not currently have this information,” it said.
“The money that’s needed is computer money, not bodies,” said Frank Agostino of Agostino & Associates PC. “The goal is matching. . . . At the end of the process, the hope is that the [Forms] 8966 and the [Form] 8938 will go hand in glove,” he said.
The algorithm isn’t going to focus on wealthy taxpayers per se; it’s going to look at taxpayer reporting and whether that matches up with information that the government has, Agostino said. If it doesn’t, “then the agency has to look at the revenue potential and match it against the number of bodies that they have to do the audits,” he said.
Some of the funding will be used to help narrow the field of taxpayers potentially selected for audit, as the agency has been given a mandate to go after wealthy taxpayers, said Joshua D. Smeltzer of Gray Reed & McGraw LLP.
“It will be difficult to target improvements in enforcement directly to FATCA because . . . dissecting enforcement increases on a granular level is just too hard,” Smeltzer said. However, because many more taxpayers in middle- and high-income brackets have worldwide finances, “the efforts by the IRS for FATCA enforcement will increase as well,” he said.
Stephanie Soong contributed to this story.