The New FATCA Information Reporting Requirement Under Code Sec. 6038D and the Temporary and Proposed Regulations: A Comparison to the FBAR

Abstract

According to one recent statement by an IRS official, “Americans now have $1 trillion — trillion with a ‘t’ — in assets offshore and illegally evade $40 to $70 billion in U.S. taxes each year [through] offshore tax dodges.” Another estimate put the tax gap at an estimated $100 billion in tax revenues each year as a result of offshore tax abuses, primarily from the use by U.S. taxpayers or their controlled foreign entities of concealed and undeclared accounts. It is not surprising that the government in order to eliminate this tax gap in the face of a large budget deficit, ratcheted up its pressure on taxpayers who have structured their activities, in many cases with the active help and assistance of promoters and facilitators, to avoid filing FBARs and reporting their taxable income from these offshore accounts. On March 18, 2010, the Hiring Incentives to Restore Employment Act (“HIRE Act”) was signed into law and added an entirely new U.S. withholding and information reporting tax regime, commonly known as “FATCA.” The stated purpose of the new law is to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter and discourage offshore tax abuses. The Congressional sponsors’ joint statement for a predecessor bill said: “[FATCA] will force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. account holders, grantors, and owners, respectively.This article will focus on the new reporting responsibilities under Code Sec. 6038D and the temporary and proposed regulations, which now impose new broad-based information reporting on individuals who are U.S. citizens or resident aliens. More specifically, this article will compare the current FBAR reporting requirements to the new Form 8938, Statement of Specified Foreign Financial Assets, required to be filed as part of an income tax return if certain filing thresholds are met. For a tabular comparison of Form 8938 and the FBAR Form TD F 90-22.1 See Exhibit I. While FBAR reporting based upon the Bank Secrecy Act has in recent years become a powerful device used by the IRS and the Department of Justice to unearth hidden offshore assets and to identify offshore tax evasion by taxpayers, the new Form 8938 for reporting certain foreign financial assets under Code Sec.6038D can be expected to provide even a stronger enforcement tool to help to ferret out offshore tax evasion by Americans.This article is written for several audiences. The article should be of interest to tax practitioners, accountants, and lawyers, as well as students and academics since it provides insights into FATCA's end goal to identify offshore accounts and assets held by Americans by comparing the information provided by foreign financial institutions to what is being reported by individual taxpayers to ascertain if financial account information is being omitted from taxpayers returns.