New IRS FATCA Compliance Campaign High Risk Areas

November 12, 2018

The IRS Large Business and International division (LB&I) recently announced five new compliance campaigns including a FATCA compliance campaign.


What Is LB&I?


LB&I is a division within the IRS.  It handles tax issues related to corporations, subchapter S corporations, and partnerships with assets greater than $10 million.  Its work includes studying compliance issues and suggesting IRS compliance audits covering the following areas:

 

  • Cross border activities

  • Enterprise activities

  • Pass through entities

  • Treaty and transfer pricing operations

  • Withholding and international individual compliance


What Are the Five New Campaigns?

 

  • Individual Foreign Tax Credit: to identify taxpayers who claimed the credit but do not meet the requirements.

  • Offshore Service Providers: to identify taxpayers who used offshore service providers to create structures concealing beneficial owners of foreign financial accounts and assets.

  • FATCA Filing Accuracy: to identify financial institutions that have not complied with their FATCA reporting obligations.

  • 1120-F (U.S. Income Tax Return of a Foreign Corporation) Delinquent Returns Campaign: to conduct examinations of compliance risk delinquent returns and undertake external education outreach programs.

  • Work Opportunity Tax Credit: to review aspects of this U.S. tax credit for employers hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.

 

FATCA Circumvention through Offshore Service Providers


Similar to the Common Reporting Standard (CRS), FATCA also has an anti-avoidance rule.  [See my June 6, 2017 blog: CRS: Anti-avoidance & The Disgruntled Employee].


FATCA requires that the Responsible Officer (RO) undertake a reasonable inquiry to determine whether there have been any formal or informal practices or procedures in place to assist account holders in the avoidance of FATCA since August 6, 2011.


During its new compliance campaign, it is likely that the IRS will review FFI records for communications between the FFI and the account holder and between the FFI and offshore advisors.  In reviewing this documentation, the IRS will look for evidence of coordination in creating offshore structures that have no purpose other than to obfuscate the beneficial owner.  It is possible that a relationship manager, trust officer or other client-facing individual has facilitated an offshore structure avoidance scheme with an account holder that the RO and other senior management are unaware of.  The FFI will still be on the hook.


What to do?  As part of the upcoming December certification process, drill down through management layers by requesting sub-certifications.  [See my July 11, 2018 blog: FATCA:  Sub-Certifications as Part of FATCA Compliance].


Before the sub-certification is due to the RO, the FFI should provide group FATCA training so that team members are aware of the anti-avoidance rule.  The IRS is interested in foreign entities and tiered structures but that does not mean every foreign entity, tiered structure and offshore advisor is engaging in anti-avoidance schemes.  It is the RO’s responsibility to make sure FFI employees understand the difference. 


FATCA Filing Accuracy


In July U.S.Treasury Inspector General for Tax Administration (TIGTA) issued an audit report criticizing IRS FATCA enforcement.  Despite spending nearly US$380 million on IT and other costs for the FATCA program, the IRS had taken limited or no action.   TIGTA listed missing and incorrect tax identification numbers (TINs) as a major issue.
In response to the TIGTA report, the IRS has created the FATCA Filing Accuracy campaign.  This campaign will identify reporting FFIs that do not meet all of their compliance responsibilities.  Noncompliance may result in the termination of an FFI’s FATCA status.


What to do?  It is important to review any Forms 8966 that received a filing error response during submission. 

 

  • If the error was the result of a TIN, determine the source of the error: wrong TIN included in field, wrong TIN in client file, client’s records were never validated, the client never provided the FFI a TIN, etc. 

  • If the TIN issue cannot be resolved internally, contact the account holder to obtain a new withholding form.

  • Document the steps taken to resolve TIN issues.

 

The IRS description of the FATCA Filing Accuracy campaign is not narrowly written.  Accordingly, internal compliance review should not be limited to TIN reviews.  For example, given the Adrian Baron conviction, the IRS will likely also be interested in FFI’s conveniently ignoring U.S. indicia.  [See my September 18, 2018 blog: First FATCA Criminal Conviction: Case Background & Impact].


TIGTA’s report has put the pressure on, so expect greater IRS FATCA enforcement.

 

For additional blog posts, please go to my website: elizabethmcmorrowlaw.com/blog-index.
 

 

Please reload

Recent Posts

July 22, 2019

Please reload

Archive
Please reload

  • LinkedIn Clean

Disclaimer: The information on this website is for general informational purposes only. Nothing on this site should be taken as legal advice. The viewing of this website does not constitute an attorney-client relationship. 

Copyright  © Elizabeth A. McMorrow Law LLC.  All rights reserved.