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July 15 — The IRS national taxpayer advocate told lawmakers she will keep up the pressure to lighten the compliance and implementation burdens of the Foreign Account Tax Compliance Act.
In part of a mid-year report to Congress on the office's 2016 objectives, Taxpayer Advocate Nina E. Olson said she would encourage mechanisms that ease the unintended negative consequences of FATCA—particularly for U.S. taxpayers living overseas.
FATCA requires foreign financial institutions to report U.S.-owned accounts to the Internal Revenue Service or face, in some cases, a 30 percent withholding tax on their U.S.-source income. Confronted with that specter, many overseas banks have simply closed accounts owned by Americans.
Olson's office released the mid-year report July 15.
An IRS news release (IR-2015-97) issued the same day highlighted other Taxpayer Advocate Service priorities from the report such as tax-related identity theft, administration of the Affordable Care Act and the agency's long-term strategic planning.
Olson, an outspoken FATCA critic, told Congress she will continue urging the IRS and Treasury Department to consider a “same-country” exception. This would mean financial accounts would be exempt from FATCA requirements if they're held in the country where a U.S. taxpayer is a bona fide resident.
The measure is one Olson has been advocating since 2013, in a report released in January 2014 that labeled FATCA compliance as one of the most serious problems facing taxpayers.
The July 15 report stressed the same-country exception would mitigate the concerns of U.S. nonresidents, reduce the burdens faced by foreign banks, and “allow the IRS to focus enforcement efforts on identifying and addressing willful attempts at tax evasion through foreign accounts.”
The “broad sweep of FATCA” means taxpayers, financial institutions and withholding agents all face hardships that are largely unnecessary to catch those bad apples, the report said.
“The weight of FATCA is being felt not by tax evaders, but by U.S. taxpayers who likely would be compliant regardless,” the advocate's office said in a five-page section of the report. Taxpayers under the FATCA umbrella who also must file the Form 8938, Statement of Foreign Financial Assets, “are generally at least as compliant as the overall U.S. taxpayer population,” the report said.
In another burden, it said, most of FATCA's expanded reporting obligations mirror the filing requirements for the Report of Foreign Bank and Financial Accounts (FBAR), another tool used by the IRS to get information on overseas financial activities.
Olson also criticized recent guidance on withholding as evidence of the shifting compliance focus found under FATCA.
In Notice 2015-10, released in April, the IRS said it plans to issue regulations putting the brakes on refund and credit claims made by beneficial owners of withheld payments unless the withholding agent actually deposited the amount withheld.
Taxpayers would be entitled to a credit or refund only if they can document that the agent did make that deposit—a challenge that the report said would not only be difficult but unfair.
In addition to FATCA, IRS Commissioner John Koskinen has frequently cited implementation of the Affordable Care Act as justification for additional agency funding.
The IRS's implementation of the ACA has been “commendable,” with problems isolated in certain areas, according to a portion of the mid-year report addressing issues related to administering ACA provisions.
The vast majority, 91 percent, of cases the Taxpayer Advocate Service handled related to the ACA had to do with the premium tax credit, including form errors, and additional processing time due to a lack of data.
Taxpayers claimed $7.7 billion in premium tax credits on their tax year 2014 returns, the TAS said. About 2.6 million returns claimed the premium tax credit, with the average return claiming $3,000, according to the report.
The report also found that the introduction of the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, has increased the number of exempt determinations the IRS can make annually.
About 95 percent of organizations applying for 501(c)(3) status have been approved since the introduction of the simplified form, according to a section of the report on exempt organization issues.
However, the process could be too streamlined and approve applicants who would have been rejected if more scrutiny had been required, the report said. The Taxpayer Advocate plans to recommend changes to Form 1023-EZ and the post-determination audit process for exempt organizations.
In addition, the report said return preparer fraud, online tools and customer service are priority areas to address in fiscal year 2016.
Text of the mid-year report to Congress can be found at http://www.taxpayeradvocate.irs.gov/2016ObjectivesReport.
Text of IR-2015-97 can be found at http://op.bna.com/eeu.nsf/r?Open=jbrn-9yfu44.
Text of the IRS response to the TAS report is at http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/2016-JRC/Volume_2.pdf.
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