Responding to the wailing over efforts to collect tax on offshore holdings, the Government Accountability Office has recommended some ideas to the Internal Revenue Service on how to implement the Foreign Account Tax Compliance Act.
GAO says the IRS should put some more elbow grease into its risk assessment and its strategy for how it plans to gather the information it wants under FATCA and how it will use the information to improve tax compliance. GAO says the IRS also should develop a timeline for completing a comprehensive cost estimate for implementing FATCA.
Congress passed FATCA in 2010 to try to reduce tax evasion by gathering new information and establishing new withholding requirements on U.S. taxpayers who send assets offshore. The law requires U.S. taxpayers to report overseas assets to the IRS and asks foreign financial institutions to participate in some reporting on U.S. citizens. It also requires U.S. entities that make payments to foreign financial institutions to withhold a portion of those payments when they are sent to institutions that do not voluntary report certain information to the IRS. The measure takes effect Jan. 1, 2013.
According to GAO, IRS says the implementation of FATCA will arm the IRS with new information that will increase tax compliance to close the tax gap, or the gap between what taxpayers owe and what the IRS has collected. For 2006, IRS says the tax gap was about $385 billion, although that's not exclusively the result of unreported offshore assets.
Susan Grbic, director at accounting firm WeiserMazars, says the IRS and the U.S. Treasury Department collected more than 200 comment letters and entertained 20 speakers at recent hearing to gather feedback on their proposed regulations to implement FATCA. “A common theme representative of many of the comment letters was more time is needed for every aspect of implementation,” she says. The systems changes alone require months of planning and preparation, and the time line for getting that process under way was already ticking before the proposed regulations were even issued for comment, she says.
Steve Brecher, a partner with the firm, says it's not likely the IRS will push back the Jan. 1, 2013, effective date, but those most affected by it are at least hopeful for some leniency if they're not fully prepared to comply when the effective date arrives. Financial institutions are deploying resources and personnel to get the process under way, but they don't yet have final regulations that they can reference to guide their efforts, he says.
GAO says the IRS may face some of its own challenges managing the new information it will collect. GAO acknowledges the implementation plan is separated into stages that will roll into place over time, making a comprehensive risk strategy and an accurate timeline a little tricky.
“While we recognize this difficulty, we believe it is still important to lay the foundation for these plans,” GAO wrote in its report. “GAO's internal control standards suggest that risk assessments can and should evolve as short-term and long-term forecasting occur and therefore should be reviewed on an ongoing basis.” With respect to the strategy, GAO wrote: “Given that IRS's implementation of FATCA is in its early stages, the strategy may be a high-level road map with timelines that could evolve over time.”