High Inaccuracy Rate Seen in FATCA Filings

23 Aug

Wilmington, Mass. (August 19, 2016)

This is an article in AccountingToday.com as written by Michael Cohn and shows the confusion out there in the financial world. FATCA was complicated, but now layer after layer of bureaucratic confusion is being added, including alphabet soup consisting of AEOI, CDOT, CRS, and who knows what’s next. It’s no wonder that this article details the beginnings of this mess. I’m sure there’s more mud to be added to the waters. Here’s the article:

Less than half of filings for the Foreign Account Tax Compliance Act have been accurate, according to a new survey.

The survey, conducted by the Aberdeen Group on behalf of the software company Sovos Compliance, polled leaders at 100 different financial institutions and found that only 44 percent were accurate.

“These 100 survey respondents self-reported that only 44 percent of their filings were accurate, so that meant conversely 56 percent had some sort of error rate,” said Scott Freedman, director of product strategy at Sovos Compliance.

The survey polled leaders at 100 top financial institutions that are subject to the Automatic Exchange of Information, or AEOI, rules developed by the Organization for Economic Cooperation and Development to combat tax evasion. The OECD’s AEOI rules grew out of the U.S. government’s rules for FATCA compliance.

FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions to report on the assets of U.S. taxpayers to the Internal Revenue Service, or else face stiff penalties of up to 30 percent on their income from U.S. sources. The controversial law has led the U.S. Treasury Department to negotiate a series of intergovernmental agreements with other countries, under most of which their banks first report the information to their countries’ own tax authorities, which then pass along the information to the IRS.

The United Kingdom has instituted a similar tax regime known as Crown Dependencies and Overseas Territories, or CDOT, for 10 U.K. jurisdictions, while the OECD has created a system known as the Common Reporting Standard, or CRS, for automatic exchange of tax information between countries, which will grow to encompass nearly 100 countries in the next few years. That growing array of tax reporting requirements is probably leading to some of the inaccuracies that banks are finding.

“On a high level it may seem cut and dried to understand requirements and schemas, and it’s a whole other ballgame to actually implement them accurately,” said Freedman. “One is gathering all the data, and that’s the first huge area where you can introduce errors. These financial institutions have to gather data from a whole lot of different systems, and a lot of those systems are disconnected. The data may be dirty and they may overlap. Just collecting that into one place and cleansing the data is one huge area where all sorts of problems can occur.”

Another problem involves who needs to report the information and then reporting completely and accurately, Freedman noted. “That’s really where you’d be ingesting a lot of this data, validating the data to make sure it has the types of things that you need to comply with the reporting, and then over time what needs to be reported becomes really complex,” he said. “When it was just the U.S., that was one level of complexity. Now you’re going from one jurisdiction to, in a year or two, 90 or more jurisdictions, each with their own deadlines, each with their own guidance and filing requirements. Juggling all of that can be another area where you introduce inconsistencies and errors.”

The AEOI reporting obligations are supposed to expand from nine countries to more than 90 under the Common Reporting Standard by the end of 2018. The survey indicated that 64 percent of financial institutions feel they are significantly prepared for those obligations.

To deal with the compliance challenges, 19 percent of the financial institution leaders polled reported they had some sort of strategic, centralized automated solution in place. Another 30 percent planned to implement such a solution in the next 12 months.

While 64 percent of the financial institution leaders polled believe they are significantly prepared for FATCA and the impending Common Reporting Standard, less than half of current FATCA filings are actually accurate, they admitted. Even though all organizations subject to FATCA will also have to comply with CRS, only 65 percent of the financial institution leaders who responded to the survey believe CRS applied to them. In addition, 80 percent of the survey respondents understood that fines and penalties are among the consequences of compliance issues, but only 43 percent indicated such issues could result in a significant decrease in profit margins.

Penalties are currently limited to FATCA, but they can be high. Over the past two years, respondents reported they have had an average of 6 percent of their gross proceeds withheld due to noncompliance, leading to damages to reputation and lost customers. That trend is expected to increase as more countries implement mandated reporting over the next two years. Some of them have faced penalties of up to 30 percent.

“Fifty-nine percent put noncompliance penalties on the map, but equally or more important is loss of reputation and losing customers,” said Freedman. “There’s more at stake than just dollars and cents in terms of penalties. You really lose a lot of goodwill in the market. You can actually lose customers if you don’t comply, or if you’re inaccurate as well.”

He pointed out that FATCA is the only one of the three regimes for global reporting that currently has hard and fast penalties, though that could change eventually.

“They can be pretty harsh,” said Freedman. “They will actually withhold up to 30 percent of your gross proceeds. To date CRS does not have similar penalties, but that doesn’t mean it won’t going forward, and there has been talk about them implementing some sort of penalty down the road.”

Operational costs can also be high, according to the report, up as much as 20 percent. Approximately half the survey respondents plan to implement a centralized AEOI solution to connect the data from multiple systems and use up-to-date regulatory rules to facilitate all their filings and transmittals from a single system in an effort to reduce those costs.

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