Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad
Fast Facts
How does the government prevent tax dodgers from hiding income in offshore accounts?
A 2010 law requires Americans and foreign banks to report more information to IRS about Americans' foreign assets. Implementing the law, however, has raised some concerns.
For example, close to 75% of taxpayers reporting foreign assets to IRS also reported them separately to Treasury—indicating potential unnecessary duplication.
Also, some Americans living abroad can't get services from foreign banks that find the law too burdensome.
Our recommendations to Congress, Treasury, and other agencies address challenges related to foreign asset reporting.
The 2010 Foreign Account Tax Compliance Act, known as FATCA, created new reporting requirements for taxpayers with specified foreign assets.
IRS Form 8938: Statement of Specified Foreign Financial Assets
Highlights
What GAO Found
Data quality and management issues have limited the effectiveness of the Internal Revenue Service's (IRS) efforts to improve taxpayer compliance using foreign financial asset data collected under the Foreign Account Tax Compliance Act (FATCA). Specifically, IRS has had difficulties matching the information reported by foreign financial institutions (FFI) with U.S. taxpayers' tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by FFIs. Further, IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. persons, in part, because some IRS databases do not store foreign asset data reported from paper filings. IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance campaigns. Ensuring access to consistent and complete data collected from U.S. persons—and employing a plan to leverage such data—would help IRS better leverage such campaigns and increase taxpayer compliance.
Due to overlapping statutory reporting requirements, IRS and the Financial Crimes Enforcement Network (FinCEN)—both within the Department of the Treasury (Treasury)—collect duplicative foreign financial account and other asset information from U.S. persons. Consequently, in tax years 2015 and 2016, close to 75 percent of U.S. persons who reported information on foreign accounts and other assets on their tax returns also filed a separate form with FinCEN. The overlapping requirements increase the compliance burden on U.S. persons and add complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Modifying the statutes governing the requirements to allow for the sharing of FATCA information for the prevention and detection of financial crimes would eliminate the need for duplicative reporting. This is similar to other statutory allowances for IRS to disclose return information for other purposes, such as for determining Social Security income tax withholding.
According to documents GAO reviewed, and focus groups and interviews GAO conducted, FFIs closed some U.S. persons' existing accounts or denied them opportunities to open new accounts after FATCA was enacted due to increased costs, and risks they pose under FATCA reporting requirements. According to Department of State (State) data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449—or nearly 178 percent—from 2011 through 2016, attributable in part to the difficulties cited above.
Treasury previously established joint strategies with State to address challenges U.S. persons faced in accessing foreign financial services. However, it lacks a collaborative mechanism to coordinate efforts with other agencies to address ongoing challenges in accessing such services or obtaining Social Security Numbers. Implementation of a formal means to collaboratively address burdens faced by Americans abroad from FATCA can help federal agencies develop more effective solutions to mitigate such burdens by monitoring and sharing information on such issues, and jointly developing and implementing steps to address them.
Why GAO Did This Study
Concerns over efforts by U.S. taxpayers to use offshore accounts to hide income or evade taxes contributed to the passage of FATCA in 2010, which sought to create greater transparency and accountability over offshore assets held by U.S. taxpayers.
House Report 114-624 included a provision for GAO to evaluate FATCA implementation and determine the effects of FATCA on U.S. citizens living abroad. GAO—among other things—(1) assessed IRS's efforts to use FATCA-related information to improve taxpayer compliance; (2) examined the extent to which Treasury administers overlapping reporting requirements on financial assets held overseas; and (3) examined the effects of FATCA implementation unique to U.S. persons living abroad.
GAO reviewed applicable documentation; analyzed tax data; and interviewed officials from IRS, other federal agencies and organizations, selected tax practitioners, and more than 20 U.S. persons living overseas.
Recommendations
GAO is making one matter for congressional consideration to address overlap in foreign asset reporting requirements. GAO is making seven recommendations to IRS and other agencies to enhance IRS's ability to leverage FATCA data to enforce compliance, address unnecessary reporting, and better collaborate to mitigate burdens on U.S. persons living abroad. State and Social Security Administration agreed with GAO's recommendations. Treasury and IRS neither agreed nor disagreed with GAO's recommendations.
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congress should consider amending the Internal Revenue Code, Bank Secrecy Act of 1970, and other statutes, as needed, to address overlap in foreign financial asset reporting requirements for the purposes of tax compliance and detection, and prevention of financial crimes, such as by aligning the types of assets to be reported and asset reporting thresholds, and ensuring appropriate access to the reported information. | No legislative action enacted. As of March 2024, Congress had not amended the Internal Revenue Code, Bank Secrecy Act of 1970, or other statutes, as needed, to address overlap in foreign financial asset reporting requirements as GAO suggested in April 2019. GAO continues to believe that modifying these various statutes would reduce the reporting burden created by navigating multiple reporting requirements. Modifying these statutes would also allow for the use of foreign financial asset information collected under the Foreign Account Tax Compliance Act to prevent and detect financial crimes. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should develop a plan to mitigate risks with compliance activities due to the lack of accurate and complete Taxpayer Identification Numbers of U.S. account holders collected from FFIs. (Recommendation 1) |
The Internal Revenue Service (IRS) developed a plan to mitigate specific risks it faces from not receiving complete and valid Taxpayer Identification Numbers (TINs) on U.S. account holders from Foreign Financial Institutions (FFIs). As part of its plan, IRS developed a multi-year outreach plan to Model 1 FATCA partners to educate them on accounts without TINs to facilitate compliance in advance of the 2020 FATCA data TIN requirement. IRS drafted responses to frequently asked questions on requirements to report TINs for U.S. reportable accounts beginning for the 2020 tax year. IRS also established procedures requiring Model 1 FFIs to correct issues where TINs are missing or are completed using a systemically identifiable pattern that indicates they are invalid. In addition, IRS is in the process of developing potential treatment streams for common scenarios where FFIs in Model 1 FATCA partner jurisdictions could not obtain TINs. These efforts will help IRS identify opportunities to adjust compliance programs to better enforce FFI reporting of valid TINs and identify U.S. persons who are not complying with FATCA reporting requirements.
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| Internal Revenue Service | The Commissioner of Internal Revenue should ensure that appropriate business units conducting compliance enforcement and research have access to consistent and complete data collected from individuals' electronic and paper filings of Form 8938 and elements of parent individual tax returns. As part of this effort, the Commissioner should ensure that IRS provides clear guidance to the business units for accessing such data in IRS's Compliance Data Warehouse. (Recommendation 2) |
The Internal Revenue Service (IRS) took actions to implement the spirit of this recommendation. According to IRS Information Technology division officials, as of December 2019, they deliver paper and electronically filed Form 8938 data to IRS's Research, Applied Analytics, and Statistics organization on a monthly basis, and make such data available in the Compliance Data Warehouse (CDW) for use by agency officials. Because of these efforts, IRS staff have greater access to consistent and complete FATCA data that will help IRS business units strengthen efforts to enforce compliance with FATCA reporting requirements and conduct research. According to IRS officials, staff with access to CDW are already informed and knowledgeable in navigating the system and can better enforce FATCA requirements. For example, according to Large Business and International Division officials, IRS's enforcement functions that have access to the FATCA data can use it to develop compliance examination leads. Since IRS made available FATCA data more accessible to experienced CDW users, it met the spirit of our recommendation. As such, additional guidance to IRS business units on accessing FATCA data from CDW is no longer necessary.
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| Internal Revenue Service | The Commissioner of Internal Revenue should employ a comprehensive plan for managing efforts to leverage FATCA data in agency compliance efforts. The plan should document and track activities over time to • ensure individuals and FFIs comply with FATCA reporting requirements; • assess and mitigate data quality risks from FFIs; • improve the quality, management, and accessibility of FATCA data for compliance, research, and other purposes; and • establish, monitor, and evaluate compliance efforts involving FATCA data intended to improve voluntary compliance and address noncompliance with FATCA reporting requirements. (Recommendation 3) |
As of August 2023, IRS has met the spirit of our recommendation by employing strategies that directly addressed the activities we identified. Specifically, to ensure individuals and FFIs comply with FATCA reporting requirements and establish compliance efforts involving FATCA data, IRS established procedures for its revenue agents to secure FATCA information on cases when appropriate, and created a filter that identifies potential non-filers of Form 8938. To improve the quality, management, and accessibility of FATCA data for compliance, research, and other purposes, IRS made Form 8938 data from electronic and paper filings more readily available and accessible in its Compliance Data Warehouse for use by agency officials. IRS took other steps to manage efforts to leverage FATCA data. For example, to assess and mitigate data quality risks from FFIs, IRS developed a plan to mitigate risks from incomplete or invalid Taxpayer Identification Numbers on U.S. account holders from FFIs. Together, these efforts helped improve IRS FATCA enforcement efforts. For example, IRS began issuing soft letters to potential underreporters of foreign financial accounts, and launched civil and criminal investigations with respect to potential underreporters and non-filers. In addition, as of May 2022, IRS identified potential noncompliance by more than 30 FFIs and had begun following up with them. IRS also created a workbook to track the progress and success of FATCA campaigns through a number of measures such as the volume of letters transmitted and received from taxpayers and examinations opened and closed, and audit cycle days and dollars generated. According to IRS officials, the workbook helped IRS refine its metrics with respect to FATCA, including goals, milestones, and timelines. Cumulatively, these actions helped IRS measure the extent to which their efforts have improved voluntary compliance, and develop new avenues for addressing noncompliance by taxpayers with foreign assets.
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| Internal Revenue Service | The Commissioner of Internal Revenue should assess factors contributing to unnecessary Form 8938 reporting and take steps, as appropriate, to address the issue. Depending on the results of the assessment, potential options may include: • identifying and implementing steps to further clarify IRS Form 8938 instructions and related guidance on IRS's website on determining what foreign financial assets to report, and how to calculate and report asset values subject to reporting thresholds; and • conducting additional outreach to educate taxpayers on required reporting thresholds, including notifying taxpayers that may have unnecessarily filed an IRS Form 8938 to reduce such filings. (Recommendation 4) |
In April 2023, in response to our recommendation, IRS assessed factors contributing to unnecessary Form 8938 reporting. IRS officials found that there are several reasons why a taxpayer may file Forms 8938 reflecting amounts less than minimum reporting thresholds, including establishing the existence of the account for non-tax reasons or taxpayer peace of mind. According to IRS officials, another reason for potential filings below the threshold reported on the Form 8938 is that amounts from other information returns may also be re-reported in Part IV of Form 8938. IRS officials said they observed numerous situations in which taxpayers have reported accounts on other forms and summarized them on the Form 8938. Our analysis of Form 8938 and its instructions found that when determining the filing requirement for Form 8938, the taxpayer(s) include the value of all specified foreign financial assets -- even if they are reported on another form listed in Part IV of Form 8938 -- to determine if the taxpayer(s) satisfy the reporting threshold. According to IRS officials and our analysis, this can lead to taxpayers having to meet filing requirements for Form 8938, even when the amounts actually included on the form itself are below the filing threshold. While IRS officials said that additional taxpayer burdens are minimal for listing accounts that might fall below reporting thresholds, IRS took steps to address the issue by providing guidance in the Form 8938 instructions on how to account for assets reported on other forms. IRS officials also provided evidence of multiple outreach and education activities conducted to educate taxpayers and representatives of Form 8938 filing requirements. Taking these steps reduces the risk that taxpayers file -- and IRS processes -- forms that taxpayers were not required to submit.
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| Department of the Treasury | The Secretary of the Treasury should lead efforts, in coordination with the Secretary of State and Commissioner of Social Security, to establish a formal means to collaboratively address ongoing issues—including issues accessing financial services and employment and obtaining SSNs—that U.S. persons living abroad encounter from implementation of FATCA reporting requirements. (Recommendation 5) |
In January 2022, in response to our recommendation, the Department of the Treasury organized and chaired an interagency meeting with the Internal Revenue Service (IRS), the Department of State, and the Social Security Administration (SSA) to discuss the recommendation and common problems relating to Americans abroad, including issues encountered from implementation of FATCA reporting requirements. During the meeting, according to Treasury officials, Treasury and IRS shared efforts they have undertaken to address tax issues linked to FATCA. For example, Treasury led efforts with IRS, State, and SSA to develop frequently asked questions and answers that combine relevant guidance for individuals to obtain a Social Security number, renounce U.S. citizenship, and comply with U.S. tax obligations. Treasury and IRS officials also described the limitations on the extent of relief that they can provide to Americans, and outlined some ideas under consideration that may provide partial solutions to the issues. Representatives from the agencies documented in their summary of the meeting an agreement to meet again in April 2022 and on a quarterly basis following that to address ongoing concerns from Americans living abroad arising from FATCA's implementation. Ongoing quarterly meetings can serve as collaborative interagency mechanisms for Treasury and other agencies to better address the concerns.
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| Department of State | The Secretary of State, in coordination with the Secretary of the Treasury and Commissioner of Social Security, should establish a formal means to collaboratively address ongoing issues—including issues accessing financial services and employment and obtaining SSNs—that U.S. persons living abroad encounter from implementation of FATCA reporting requirements. (Recommendation 6) |
In January 2022, in response to our recommendation, the Department of State met with the Department of the Treasury, the Internal Revenue Service, and Social Security Administration during an interagency meeting organized by Treasury to discuss the recommendation and common problems relating to Americans abroad, including issues encountered from implementation of FATCA reporting requirements. During the meeting, the Bureau of Consular Affairs summarized the loss of nationality process and responded to legal questions from Treasury about the process. Representatives from the agencies documented in their summary of the meeting an agreement to meet again in April 2022 and on a quarterly basis following that to address ongoing concerns from Americans living abroad arising from FATCA's implementation. Ongoing quarterly meetings can serve as collaborative interagency mechanisms for State and other agencies to better address the concerns.
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| Social Security Administration | The Commissioner of Social Security, in coordination with the Secretaries of State and Treasury, should establish a formal means to collaboratively address ongoing issues—including issues accessing financial services and employment and obtaining SSNs—that U.S. persons living abroad encounter from implementation of FATCA reporting requirements. (Recommendation 7) |
In January 2022, in response to our recommendation, the Social Security Administration (SSA) met with the Department of the Treasury, the Internal Revenue Service, and the Department of State during an interagency meeting organized by Treasury to discuss the recommendation and common problems relating to Americans abroad, including issues encountered from implementation of FATCA reporting requirements. During the meeting, SSA officials described challenges Americans encountered in obtaining Social Security numbers while abroad. The officials also described potential solutions to address the challenges. Representatives from the agencies documented in their summary of the meeting an agreement to meet again in April 2022 and on a quarterly basis following that to address ongoing concerns from Americans living abroad arising from FATCA's implementation. Ongoing quarterly meetings can serve as collaborative interagency mechanisms for SSA and other agencies to better address the concerns.
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