Watchdog Slams IRS Effort on Foreign-Asset Reporting Scofflaws

The IRS has failed to do enough to crack down on wealthy taxpayers who ignore their obligations to report their foreign-held assets, a Treasury Department watchdog said Tuesday.

The IRS has identified hundreds of US taxpayers who failed to file disclosures of significant foreign assets as required under the Foreign Account Tax Compliance Act, but it has rarely gone on to examine or penalize those taxpayers, the Treasury Inspector General for Tax Administration said in a report.

Of 164 noncompliant taxpayers with an average unreported foreign account balance of $1.3 billion who were referred for possible examination, only 12 were ultimately examined, TIGTA said. Five of those 12 were assessed $39.7 million in additional tax and $80,000 in penalties.

Another 241 noncompliant taxpayers, with average unreported balances of $377 million, generally got educational letters that didn’t require them to respond, TIGTA said. Only 16 of them were sent “soft letters” requiring a response, and none of the 241 were assessed the initial $10,000 penalty for nonfiling under the law, TIGTA said.

The IRS should revise its processes addressing FATCA noncompliance to include assessments of failure-to-file penalties; assess the viability of using Form 1099 data to identify nonfilers; and implement added performance measures to give IRS officials more information about FATCA’s effectiveness, TIGTA said.

The IRS mostly disagreed with the recommendations but partly agreed to evaluate the utility of using Form 1099 data. In a response released along with the report, the IRS said it believes TIGTA “fails to consider fundamental aspects” of the agency’s enforcement efforts and administration of FATCA.