Ancient Greek thinker Heraclitus is famous, at least in some circles, for his rather perplexing observation that “the only constant in the universe is change.” Murphy’s Law, a much more familiar axiom, states that “if anything can go wrong, it will.” If these two phrases are combined into some sort of latter-day Frankenstein’s monster of philosophy, you may get something like “change never happens as quickly as you want it to happen.”
Dodd-Frank, the massive 2010 financial reform law which Republicans and their banker allies have taken a blood oath to dismantle while Democrats and their consumer advocate allies have been known to worship with wave offerings, is a good example. Five years after its passage, the law is still only about 50 percent implemented. That’s good news for some people, and bad news for others.
Closer to home, a recent government audit concluded that the FATCA implementation was not going nearly as smoothly as predicted or hoped. The main problem centers around the still-elusive Form 8938, the magic piece of paper with crystal-clear instructions that promises to make foreign account tax compliance a walk in the park. But just like poor Francisco Coronado scoured the American Southwest searching for the Seven Cities of Cibola that were nothing but a myth, taxpayers who eagerly peek into their mailboxes each morning thinking that “today might be the day” may be in line for a similar fate.
New Readers: ‘What the Blank is FATCA?’
As always, we’ll begin with a very brief primer. The Foreign Account Tax Compliance Act has several layers. First, there are information-sharing arrangements between the IRS and foreign governments, in which these states agree to blow the whistle on suspected tax evaders in return for various considerations.
The big kahuna is a 30 percent withholding penalty on certain Foreign Financial Institution (FFI) transactions, whether or not the account owners owe any American taxes. A Seychelles bank has already shut down rather than face the possibility of punishments, and indications are that there are more FFIs to follow. Expats grouse that FATCA will one day effectively prohibit them from obtaining financial services, but very few people in power appear to care.
While implementation is staggered over several years, the day of reckoning is coming. For example, in 2016, due diligence must be completed by June 30 and the withholding requirement is slated to kick in the next day.
FFIs: ‘What the Blank Are We Supposed to Do?’
FATCA has received a lot of ink in this space and elsewhere in the past several years, and the TIGTA noted that consumers seem to be largely aware of the law and its requirements, at least in a big picture sort of way. But, according to the report, the information available to FFIs has been a bit sketchier, despite the fact that dozens of world government leaders already signed on the dotted line. That’s the subject of another blog.
In response to the recommendation, the Service promised to “update the activities in the FATCA Compliance Roadmap for identifying noncompliance by FFIs” and tasked the Large Business and International (LB&I) Division with providing “updated information and additional detail about when relevant data are expected to be available, how such data may be reviewed, and what outcomes may be expected.”
Taxpayers: ‘Where the Blank is my Form?’
As mentioned earlier, and probably most importantly to you, there are issues with Form 8938. Specifically, the report pointed to:
• Data Validation: Basically, there are few or no mechanisms in place to ensure that taxpayers are placing valid numbers into the form or that they even know what to input to begin with.
• Formatting: There is no way to report financial losses as negative numbers. This is a MAJOR snafu.
The report bluntly warns that if these deficiencies are not addressed, there is no way to determine the reliability of submitted forms.
In response, the IRS essentially countered that Form 8938 was a work in progress and by the time it went live, everything would be fixed. The auditors were not impressed, noting that “the IRS will not guarantee that these programming changes will be implemented due to budgetary constraints, limited resources, and competing priorities.” That doesn’t sound very encouraging.
While the clock continues to count down, the IRS faces unexpected FATCA problems from a number of sources. Stay tuned to this space for the latest updates that matter to you, your family, and your money.
Original Post By: Michael DeBlis