Foreign financial accounts serve many entirely legitimate purposes for US taxpayers, from diversification of wealth to the practical needs of cross-border life and business. These same accounts also offer a familiar means of concealing income from the IRS. Congress and the Treasury Department have responded over the years with a layered set of reporting obligations, noncompliance with which can result in draconian penalties, even where the underlying accounts and assets are legitimate. One such reporting obligation is filing of Form 8938, Statement of Specified Foreign Financial Assets, which was enacted as part of the Foreign Account Tax Compliance Act (FATCA) (Public Law No. 111-147, 124 Stat. 71, 2010). FATCA’s basic design is a dual-reporting regime in which both US taxpayers and certain foreign financial institutions are required to report account information to the IRS.
In theory, the dual-reporting regime should allow the IRS to compare what taxpayers report about their foreign accounts with what foreign institutions report about those same taxpayers. In practice, however, a recent report by the Treasury Inspector General for Tax Administration (TIGTA) suggests that the IRS has failed to convert such data into examinations, penalties, or other enforcement action, even where the IRS has identified “egregious” non-filers with substantial unreported foreign account balances.
TIGTA’s findings should not be read as a prediction that FATCA enforcement will remain weak, but as a call for action for the IRS to better convert FATCA data into examinations, penalties, and collections. More active FATCA enforcement fits a stated mission to narrow the tax gap by better leveraging technology and data to find high-value cases rather than broad auditing activity. The IRS already possesses the data needed to identify a relatively small group of sophisticated taxpayers with substantial foreign-account balances, and the limitations period has not begun to run where Form 8938 was never filed. Professionals advising taxpayers with foreign holdings should prepare their clients for the prospect of more vigorous FATCA enforcement and, if necessary, consider strategies to mitigate prior noncompliance.
FATCA Reporting Framework
FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore Employment Act. Its enforcement design is built around the comparison of two streams of information. The first stream originates with foreign financial institutions (FFI), which report on accounts held by US persons under IRC §§ 1471 through 1474. Most FFIs satisfy that obligation through Form 8966, the FATCA Report, transmitted directly or under one of the intergovernmental agreements in force with the United States. Six different Form 1099s carry a FATCA indicator and may be used in lieu of Form 8966 by certain institutions. According to TIGTA, FFIs filed an average of more than 4,100 Forms 1099 in this category each year from TY 2019 through TY 2024 (TIGTA Report 2026-308-009, at p.2 fig. 1, Apr. 8, 2026, https://tinyurl.com/4xc6ddeu).
The second stream originates with the US taxpayer, who is required to disclose specified foreign financial assets on Form 8938 under IRC § 6038D. A specified person or entity must report when the aggregate value of those assets exceeds the applicable threshold, which begins at $50,000 at year-end (or $75,000 at any time during the year) for unmarried individuals residing in the United States, and is set higher for joint filers and for individuals residing abroad (Treasury Regulations § 1.6038D-2). The covered assets include financial accounts maintained by FFIs and certain other foreign financial assets held for investment outside of an account [IRC § 6038D(b)].
Campaign 896 was created to reconcile the two streams. As described on the LB&I campaign page, the campaign targets taxpayers who fail to report offshore income and file related information returns. FATCA records received directly and under intergovernmental agreements are matched against domestic reporting. The campaign workflow that TIGTA audited proceeds through a series of filters and produces a list of non-filers that are subsequently examined, issued soft letter treatment, or receive no further action (TIGTA Report p.4).
The penalties that follow detection are substantial. Failure to file Form 8938 carries an initial penalty of $10,000 under IRC § 6038D(d)(1) and a continuation penalty of $10,000 for each 30-day period after the 90-day notice period, capped at $50,000 of continuation, for an aggregate maximum of $60,000 per failure [IRC § 6038D(d)(2)]. The accuracy-related penalty under § 6662(j) applies a 40% percent rate to any portion of an underpayment attributable to an undisclosed foreign financial asset understatement [IRC § 6662(j)(1); see also IRC § 6662(b)(7)]. Both penalties are subject to the reasonable cause defense in section 6038D(g), [Treasury Regulations §§ 1.6038D-8(e), 1.6664-4]. In addition, IRC § 6501(c)(8) holds open the period of limitations on the entire return until three years after the taxpayer furnishes the § 6038D information. Thus, when a taxpayer fails to file Form 8938, the assessment period on the return remains open.
Adjacent and Overlapping Foreign Reporting Obligations
Foreign account reporting does not end with Form 8938. The Report of Foreign Bank and Financial Accounts (FBAR) obligation applies under a separate Title 31 framework to any US person with a financial interest in, or signature authority over, foreign financial accounts whose aggregate value exceeds $10,000 at any point during the calendar year (31 USC § 5314; 31 CFR § 1010.350). The Form 8938 and FBAR obligations cover overlapping, but not identical, assets, and a single course of conduct may give rise to liability under both regimes. A foreign trust, controlled foreign corporation, passive foreign investment, and foreign partnership may bring still more filing obligations through Forms 3520, 5471, 8621, and 8865. Such complexity has made foreign information reporting a common source of confusion for taxpayers and practitioners. Historically, the FBAR has drawn the most attention because willful penalties can reach up to 50 percent of the account balance and because the IRS and the Department of Justice have pursued FBAR violations aggressively. While the Form 8938 regime has, until now, received less attention from taxpayers and their advisors, the TIGTA report presents reason to consider whether the Form 8938 regime may represent the next enforcement priority.
TIGTA’s Findings
TIGTA’s audit set out to determine the effectiveness of the IRS’s enforcement against egregious FATCA non-filers, with Campaign 896 as its principal subject (TIGTA Report p. 11, app. I). Drawing on campaign results for tax years 2019 through 2021, Form 1099 filing-volume data for tax years 2019–2024, and FATCA program-cost data for fiscal years 2021–2024, TIGTA concluded that the campaign has identified a substantial population of potential Form 8938 non-filers but has produced comparatively little in the way of assessments or penalties.
The campaign began with 1,609 potential non-filers identified through FATCA data and the records maintained by the LB&I FATCA group (TIGTA Report p. 4). Of those 1,609,447 candidates were excluded for data integrity reasons before any compliance review took place, and a further 757 were determined to be compliant upon closer analysis. That left 405 taxpayers who appeared, in TIGTA’s account, to have failed to file Form 8938 in years in which their foreign assets exceeded the section 6038D thresholds. The aggregate foreign account balances of this 405-person cohort approached $6.2 trillion (TIGTA Report p. 4).
Of those 405 taxpayers, 164 were referred for examination, with 122 referrals routed to LB&I and 42 to the High Income Initiative within the Small Business/Self-Employed Division (TIGTA Report p. 4-5). According to TIGTA, only 12 of the 164 referrals had been examined by the conclusion of the audit period. Five of those 12 examinations resulted in assessments, and the aggregate of those assessments was $39.7 million in additional tax, $30,000 in Form 8938 non-filing penalties, and $50,000 in other penalties, which TIGTA describes as including FBAR non-filing penalties (TIGTA Report p. 5, fig. 3).
The 241 taxpayers in the campaign population who were not referred for examination received correspondence rather than examination treatment. According to TIGTA, 225 of those 241 taxpayers received educational letters and 16 received soft letters. The average unreported foreign account balance among the 241 letter recipients was approximately $377 million (TIGTA Report p. 5). None of the 241 was assessed the $10,000 initial penalty available under § 6038D(d)(1), although, as IRS officials confirmed to TIGTA, an examination is not a procedural prerequisite to assessment of that penalty. Thirty-four of the letter recipients filed amended returns, reporting approximately $1.4 million in additional tax (TIGTA Report p. 6, fig. 4). Combining those 241 letter recipients with the 152 referrals that had not yet been examined, TIGTA estimated that the IRS could have assessed approximately $3.93 million in initial § 6038D(d) penalties against the 393 unexamined members of the campaign population, an amount the report classifies as “Funds Put to Better Use” (TIGTA Report p. 6, p.12, app. II).
TIGTA made three recommendations based on these findings. The IRS disagreed with the first, which would have required assessment of the § 6038D(d) initial penalty against unexamined non-filers, and disagreed with the third, which would have required the development of campaign-specific performance measures. The IRS partially agreed with the second recommendation, which concerned incorporation of Form 1099 data bearing a FATCA indicator into the matching process (TIGTA Report pp. 8, 10, “Management Response”). In support of its position, the IRS stated that FATCA functions as a data source rather than as a freestanding compliance program, that FATCA data has contributed to approximately $10 billion in tax, interest, and penalty collections since enactment of the statute, and that FATCA data has supported criminal cases producing aggregate tax deficiencies of approximately $1.5 billion through April 2025 (TIGTA Report pp. 13–14, app. III, “Management Response”). The IRS also disputed the average foreign account balance figures reported by TIGTA. TIGTA reported a per-taxpayer average of nearly $1.7 billion for the 122 LB&I referrals, $1.3 billion for all 164 referrals taken together, and $377 million for the 241 letter recipients, in each case after the exclusion of three outliers totaling nearly $6 trillion under footnote 11 of the report. The IRS asserted an average of approximately $270 million and a median of approximately $181 million (TIGTA Report p. 14 app. III, “Management Response”). These figures are part of the IRS’s response to TIGTA and not findings adopted by TIGTA, and they are appropriately understood as the agency’s own characterization of the data—–rather than as conclusions of the report.
The Current Enforcement Environment
Several observations of interest to CPAs advising high-net-worth individuals with foreign holdings can be drawn from the report. First, the infrastructure for FATCA enforcement has been preserved even where the personnel charged with using it have not. The IRS workforce fell from approximately 103,000 to 77,000 employees between January and May 2025 (TIGTA Report 2025-IE-R027, “Snapshot Report: IRS Workforce Reductions as of May 2025,” July 18, 2025). Inflation Reduction Act funding, originally $79.4 billion, was reduced to approximately $26 billion for fiscal year 2026 (GAO-26-107522, Mar. 24, 2026). In testimony before the House Appropriations Subcommittee in May 2025, Treasury Secretary Bessent described the contraction as one the department intends to offset through technology rather than restored headcount, observing that “smarter IT, through this AI boom” can be used “to enhance collections” (David Lawder, “Bessent Says $2 Billion Cut From IRS Technology Budget Without Disruptions,” Reuters, May 6, 2025). The Government Accountability Office documented 126 active IRS AI use cases as of June 2025, of which 65 were withheld from public disclosure on sensitivity or research-and-development grounds (GAO-26-107522, pp. 12, 14). The publicly disclosed portion of the inventory does not name a tool dedicated to the FATCA Form 8966 or Form 8938 datasets.
In the author’s opinion, the FATCA dataset would be among the more attractive applications of the technology. The data are voluminous, third-party, structured, and matched to identified taxpayers, and the cohort TIGTA identified, with its $6.2 trillion in aggregate balances and its substantial overlap with the top 0.01% of the income distribution, is the kind of small, high-balance population from which the use of AI and analytics could yield high returns (Niels Johannesen et al., “The Offshore World According to FATCA,” Tax Policy and the Economy, vol. 38, pp. 61, 85, 2024).
Recommendations for Practitioners
The practical lesson of the TIGTA report is not to predict when the IRS will act, but to prepare clients before it does. Potentially affected clients should have a clear annual reconciliation among Form 8938, the FBAR, Schedule B, foreign-source income, foreign tax credits, account statements, and any related Forms 3520, 5471, 8621, or 8865.
The practical lesson of the TIGTA report is not to predict when the IRS will act, but to prepare clients before it does.
When the review identifies prior noncompliance, the next step is not simply to file amended returns, as the appropriate response requires careful consideration of all the facts and circumstances. A client who reported all income but neglected to file Form 8938 or FBAR may be in a very different position from a client who omitted foreign income, answered Schedule B incorrectly, used nominee structures, or previously received advice about offshore reporting and failed to act. Those facts can affect penalty exposure, the availability of streamlined procedures, and whether the matter should be handled through the IRS Voluntary Disclosure Practice.
Once prior offshore noncompliance is identified, legal counsel should be involved before a taxpayer files amended returns, delinquent FBARs, or delinquent information returns, as the proper remediation strategy likely turns on whether the conduct was willful, whether criminal exposure exists, whether the streamlined procedures remain available, and whether the facts support a reasonable cause defense. Those questions are legal and factual, and legal counsel can evaluate them under privilege, as well as help determine whether VDP, Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, delinquent FBAR, or delinquent international information return submission procedures (DIIRSP) are appropriate, and prepare the client’s reasonable cause narrative, if available. Counsel can also help avoid the common mistake of treating a quiet amended return as a low-risk correction when the facts suggest a more formal disclosure path may be needed.
The TIGTA report suggests Form 8938 is a likely candidate for renewed enforcement attention, particularly in an environment where the IRS’s reduced headcount incentivizes it to seek higher yields of revenue from existing data. Whatever the near-term enforcement environment, the assessment period does not work in a taxpayer’s favor, as the limitations clock for those that fail to file Form 8938 has not begun to run. Anyone who reviews foreign reporting positions now, and engages legal counsel before any IRS contact, retains meaningful access to the streamlined procedures, the Voluntary Disclosure Practice, and the delinquent submission procedures. For advisors whose clients have prior reporting gaps, the better course is to engage legal counsel and address prior noncompliance now—before the IRS initiates that process itself.
