This Post continues the interview with Bill Yates:

Jeker: By the way, where are all of these FBARS kept, anyway?

Yates: Let’s talk about that later, OK?

Jeker: OK. Now go on, please.

Yates: Anyway, we ran into trouble from the start. In general, section 6038D requires any individual who holds an interest in a foreign financial asset or assets which an aggregate value that exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe) to report the interest on a form attached to the individuals tax return for the year for taxable years beginning after or March 18, 2010. We had just been assigned the project. We knew there was no way we were going to have a form ready for anyone who had a short taxable year beginning after March 18, 2010. That was totally unrealistic. So, we had to come up with transition rules for people that had a reporting requirement, but no form to satisfy the reporting requirements. In the end, Form 8938 didn’t get released until November, 2012.

Jeker: Why was it going to take you so long?

Yates: There are many, many reasons. First of all, the law provides that the term “specified foreign financial asset” means—

(1) any financial account (as defined in section 1471 (d)(2)) maintained by a foreign financial institution (as defined in section 1471 (d)(4)), and . . .

well, the statute goes on making other references to section 1471, another part of FATCA.

Jeker: So, why was that a problem?

Yates: Our little group was working on providing guidance for purposes of section 6038D; a group of attorneys working across the hall got saddled with the section 1471 part of FATCA. We were going to have to work with them in order to get our guidance out. Ultimately, we were going to have to wait for them to finalize their definitions.

Jeker: So, you stopped?

Yates: Oh, no. You never stop. Your job is to get the guidance out as soon as possible, and it had better be good, too. And, we had other fish to fry.

Jeker: Like what, for example?

Yates: Well, obviously we were going to have to create a new form. What number should we put on the form? We wanted to use number 8938, but we had to get permission from the “owners” of form numbers; in this case, Forms and Publications. Forms and Publications initially said “no,” but later permitted use of this number. Meanwhile, the clock is always ticking. What should the Form 8938 look like? The FBAR was a good starting point, but section 6038D asks for more information than is required to be reported on an FBAR. As attorneys we didn’t have the software needed to create a form. Only the Forms and Pubs people have it. We got Forms and Pubs to assign a project to one of its people. Then, we had someone to give rough sketches and ideas to in order to come up with a rough “draft” of the form. We were starting from scratch; it was tough. The law as drafted by Congress required we avoid requiring reporting of financial assets that “would be duplicative of other disclosures.” So we had to come up with a list of all “international” forms to determine exactly what kind of information was required to be reported on those forms and so on.

Jeker: That sounds easy. As I understand it, the members of your team had all been working in international tax for many years. What was the problem?

Yates: That is a great question because it exposes a fundamental misconception that many in the outside tax bar have regarding the overall knowledge of each attorney in the IRS. Every attorney in Chief Counsel is very specialized. For example, every member of our team knew a lot about 6038D. Naturally, that was our job. But we did not have familiarity with many other areas in the international context that impacted our preparation of the Form 8938. We had to make a list of all of the international tax forms, find out which IRS attorney was responsible for that part of the Code, find out whether the form was current, whether there were any proposed changes to it, and so on. It took us a long time. All the time during this process, we kept working on the form. Finally, after several drafts, Form 8938 started to look somewhat “official.” We felt we were close enough to start thinking about “Master File.”

Jeker: Please tell us about Master File.

Yates: Master file is an IRS database where tax return information is electronically stored. After a tax return is filed, only certain “fields” of information are “captured” from the form and entered into the master file database. Agents and examiners use master file to pull up transcripts of taxpayer filings and these are used to determine if a taxpayer’s filing warrants further IRS scrutiny or investigation.

We wanted all of the “fields”on the Form 8938 to be captured in order to make it easier for agents and examiners to cross-check information reported by entities as paid to a taxpayer (e.g., dividends, brokerage proceeds or other distributions) to the taxpayers’ Form 1040 filing, to which the Form 8938 would be attached.

In other words, if an entity reported to IRS that funds had been paid to a taxpayer, IRS could see if the account or entity was reported on the taxpayer’s Form 8938. More importantly, if IRS saw an account reported on Form 8938 that looked like it should be throwing off income, IRS could verify whether any income from that account was shown on the taxpayer’s Form 1040 and related schedules. Or, more simply put, IRS could question a taxpayer who had reported such an account. “You have this big account,” IRS might ask. “And you are showing no income generated by the account? Hmmm, why is that? Did you have a bad year, or did you just forget?”

Jeker: It sounds like this was an exhausting process.

Yates: That is putting it mildly. People have no idea. While the IRS is often chided for making tax return and related schedules, Treasury Regulations, and other guidance unduly complex, there is little understanding of what goes on behind the scenes or what we, the IRS attorneys, are up against. I have not even mentioned the endless meetings. No part of Chief Counsel drafts, approves and publishes a regulation or any other form of guidance without the approval of the numerous “stake holders” involved, which includes all of Counsel, the Commissioner’s office, Forms and Publications, Treasury Office of International Tax Counsel, Treasury Office of Tax Policy, and on and on.  Lastly, people should realize that Congress enacts all of these laws, not IRS. It is the job of IRS to make it all work, somehow.

On top of that, there are the “parachutists” and “living legislative history”.

Jeker: “Parachutists”, “living legislative history”?

Yates: A “parachutist” is anyone who drops in on a meeting totally unprepared. Again, there was no legislative history underlying section 6038D. For awhile, we were moving ahead as best we could, holding various meetings, reaching decisions and moving on from there. Then, someone from Treasury would “parachute” in on one of our meetings and tell us, in one instance for example, that subjecting a particular group of taxpayers to 6038D reporting was “off the table.” We had already beaten the issue involved to death and had decided to include that group of taxpayers in the universe of taxpayers subject to 6038D reporting. I asked how the individual came to that conclusion in the absence of any legislative history. The individual stated, “because we talk to Joint Committee about this every week.”

There you have it; “living” legislative history.

Jeker: Well, this is very helpful and, also, overwhelming. Thank you. I did, however, want to return to something I asked earlier. Where do all of the FBARs go? Who will look at all of these 8938s that will be filed?

Yates: Well, a practitioner called me with an FBAR question once. And, he told me that whenever he was helping a client fill out an FBAR, he would wonder what the Service does with all of those reports. He said the last scene of the first Raiders of the Lost Arc came to mind. The scene where two men in a big warehouse were carrying a box marked “Top Secret” down an aisle stacked high with boxes of all kinds. Other practitioners I talked to made the identical analogy.

Jeker: So, what did you say?

Yates: That’s Alpha Filing.

Jeker: That’s it?

Yates: That’s it. The truth is that it was never clear to me what happened to the FBARs. But, I will tell you one thing. The 8938s are going to be carefully scrutinized.

Jeker: Thank you again, Bill. This has been very enlightening. In the next part of our interview, we will hear Bill’s thoughts on the American Citizens Abroad organization’s proposal for residence based taxation, as an alternative to FATCA.