An investigation has shown that the IRS has fallen far short of its goals in implementing the FATCA legislation. With stricter requirements, the department hopes to detect non-compliance more quickly by U.S. Citizens living and working abroad.

The U.S. Tax system, Citizen Based Taxation, has existed for over 150 years, instead of the international tax system based on the residency. However, many U.S. Citizens living and working abroad do not know that this tax liability exists, the same as the FBAR, the second main fiscal obligation of U.S. Citizens.

Since the introduction of FACTA legislation, and the automatic exchange of fiscal information between the IRS and the National Tax Agencies there is a real need for expats to file tax returns in U.S.A.

FATCA Legislation

FATCA (Foreign Account Tax Compliance Act), was introduced in 2010 to combat tax fraud and evasion. It requires financial institutions worldwide to share annual balances and contact information for U.S. Citizens who have any kind of financial accounts. So, the IRS can compare this information with the citizen’s filed tax returns.

Since 2017, Spanish banks, as any other in Europe, are identifying U.S. Citizens, with or without double nationality, asking them to fill up a W9 which will be send to the AEAT to be exchange with the IRS. Spanish financial institutions have the right to block your account if you denied to file with the bank a W9.

Painful conclusion in TIGTA report

Recently, a report by TIGTA (Treasury Inspector General for Tax Administration) made it painfully clear that the IRS has fallen far short of its goals in implementing the FATCA legislation.

The IRS’s previously expected tax revenue of 8.7 billion is stuck at only 14 million. The IRS simply does not have the capacity to process the data received and investigate the alleged fraud while investing $573 million.

Among other things, TIGTA’s research compared the number of Form 1099 issued by financial institutions to the number of tax returns received with investments. The differences are huge, the TIGTA translates this as a huge tax gap. The TIGTA report recommends stricter requirements to detect non compliance U.S. Citizens

Confirmation commissioner Rettig

IRS Commissioner Charles Rettig confirmed this in a committee meeting :

“The U.S. Congress passed FATCA in 2010, but we have yet to receive any significant funding for its implementation. This situation is exacerbated by the fact that when we detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we rarely have sufficient resources to pursue the information and ensure proper compliance.”

What does this mean for U.S. Citizens abroad?

The IRS is clearly challenged for failing to achieve its goal of collecting taxpayer dollars and preventing tax fraud. The IRS has largely adopted and implemented the recommendations.

Controls on financial institutions and on tax returns are being tightened. There is a belief that there are many assets consciously or unconsciously hidden outside the U.S.A., and these are wanted to be uncovered as soon as possible.

Are you a U.S. Person and not yet filing a tax return in the U.S.?

Get well-informed. In our website you will find complete and accurate information on the fiscal obligations of U.S. Expats living in Spain.

It also contains information on the Streamlined Procedure, which allows you to return to the tax system penalty-free.

Do you have more questions? Contact us immediately, we’ll be happy to help, with no obligation and no cost. Book an Appointment