The Tax Times

TIGTA Calls Out IRS Inaction on Highest‑Balance FATCA Nonfilers

On April 8, 2026, the Treasury Inspector General for Tax Administration (TIGTA) released a new audit report titled, “The IRS Has Not Successfully Addressed the Highest Balance Foreign Account Tax Compliance Act Nonfilers” (Report No. 2026‑308‑009). The report continues a theme TIGTA has raised for years: the IRS is sitting on a massive trove of FATCA data about U.S. taxpayers with significant offshore accounts, but has not effectively used that data to pursue nonfilers of Form 8938 and related income tax obligations.

Background: FATCA Data vs. IRS Follow‑Through

FATCA requires foreign financial institutions to report information about accounts held by U.S. persons, which flows to the IRS primarily on Form 8966. U.S. taxpayers with foreign financial assets above certain thresholds must disclose those assets annually on Form 8938, Statement of Specified Foreign Financial Assets. In theory, this creates a closed loop: foreign banks report the accounts, and U.S. taxpayers report the same accounts on their returns, giving the IRS a powerful tool to detect offshore noncompliance.

In practice, TIGTA has repeatedly found that the loop is not closing. A 2022 TIGTA report, for example, identified hundreds of thousands of apparent Form 8938 nonfilers with foreign accounts above 50,000, and estimated at least 3.3 billion in potential FATCA penalties that had not been assessed. The 2026 report zeroes in on an even more troubling subset of that universe: the highest‑balance nonfilers.

What TIGTA Means by “Highest‑Balance Nonfilers”

Although the 2026 report’s detailed figures were not yet widely disseminated at the time of writing, TIGTA’s prior FATCA work makes clear what is at stake. Using Form 8966 data from foreign institutions, the IRS can identify U.S. account holders with:

· Large offshore balances over the relevant FATCA thresholds, and

· No corresponding Form 8938 filing and, in some cases, no U.S. income tax return at all for the same period.

These “highest‑balance nonfilers” are precisely the taxpayers who pose the greatest risk of significant unreported income and unpaid U.S. tax, and who also face the largest potential civil penalties. FATCA penalties start at 10,000 for failure to file Form 8938 and can increase by up to 50,000 for continued noncompliance after IRS notice, in addition to accuracy‑related penalties and, where warranted, more serious civil or criminal consequences.

TIGTA’s Core Criticism: IRS Has the Data, But Not the Results

In this new report, TIGTA essentially repeats and sharpens the criticism from 2022: the IRS has not successfully converted FATCA data on the highest‑risk accounts into concrete enforcement outcomes. Prior TIGTA findings—highly consistent with the new report’s title—have highlighted:

· Limited use of FATCA data analytics to systematically identify and prioritize high‑balance nonfilers for examination.

· Significant data‑matching problems caused by missing or invalid taxpayer identification numbers and incomplete account‑holder information reported by foreign institutions.

· A large and persistent gap between the theoretical FATCA penalty exposure and the relatively small number of cases in which the IRS has actually proposed or assessed those penalties.

The message from TIGTA is not that the IRS lacks information. It is that the Service has not yet built the internal processes, technology, and staffing to fully exploit that information, especially at the top end of the risk spectrum. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.

The IRS used two methods to address the 405 noncompliant taxpayers: referral for examinations and letter issuance.

164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination. However, only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
241 noncompliant taxpayers (who had an average unreported account balance of $377 million) were sent a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.

Campaign 896 Activity and Results

FATCA

Why This Matters for High‑Balance Offshore Clients

For U.S. taxpayers with significant foreign accounts, the 2026 TICTA report is another warning shot. Even if the IRS has been slow to act on FATCA data in the past, TIGTA’s continued focus and public criticism increase the pressure on the Service to show results, particularly against high‑balance nonfilers.

This has several practical implications:

· Discovery risk is rising, not falling. As the IRS improves its data‑matching tools and responds to TIGTA’s recommendations, the probability that a high‑balance nonfiler is identified years after the fact continues to grow.

· Penalties can be severe once a case is selected. FATCA penalties for Form 8938 nonfilers are layered on top of FBAR penalties, accuracy‑related penalties, and interest, and TIGTA has explicitly quantified the billions of dollars of potential assessments still on the table.

· Prior “quiet” noncompliance is not a long‑term strategy. The more data flows through FATCA and related automatic exchange of information systems, the less realistic it is to assume that offshore noncompliance will remain undetected indefinitely.

A Better Approach: Proactive Offshore Compliance

For taxpayers who have not fully complied with Form 8938, FBAR, or related foreign information reporting, the safest path remains proactive remediation rather than waiting to see whether the IRS acts on TIGTA’s latest report. Practically, this may involve:

· Conducting a thorough review of all foreign accounts and assets to determine the years and forms affected (Form 8938, FBAR, Forms 3520/3520‑A, 5471, 8621, etc.).

· Exploring available compliance options—such as amended returns, delinquent information return submissions, or, where appropriate, voluntary disclosure pathways—based on the taxpayer’s facts and risk profile.

· Documenting reasonable cause where supportable, particularly for clients who had legitimate confusion about overlapping FATCA and FBAR rules but are now prepared to bring their filings current.

TIGTA’s 2026 message is clear: the IRS has had, for years, detailed information about U.S. persons with large offshore accounts and missing FATCA filings, and it has not yet delivered the enforcement results Congress expected. For high‑balance taxpayers who remain noncompliant, this is not a reassurance—it is a sign that they are squarely in TIGTA’s spotlight, and sooner or later, they are likely to be in the IRS’s as well.

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Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 163 T.C. No. 4 (Aug. 26, 2024), is a key U.S. Tax Court decision on whether a fiscal‑year corporate taxpayer could claim a section 245A participation‑exemption DRD on a section 78 gross‑up during the TCJA “gap period,” and what that meant for its foreign tax credits.

Case overview

Varian, a U.S. parent filing a consolidated return, owned controlled foreign corporations (CFCs) and for its 2018 fiscal year both elected foreign tax credits and was required to include a section 78 gross‑up in income tied to deemed‑paid foreign taxes. On its return, Varian reported a section 78 dividend of roughly 159 million dollars and claimed an approximately 60‑million‑dollar deduction under section 245A related to that gross‑up, while also claiming significant foreign tax credits. Following examination, the IRS issued a notice of deficiency disallowing the section 245A deduction on the section 78 amount and increasing the section 78 dividend by about 1.9 million dollars, and alternatively asserted that if the deduction were allowed, Varian’s foreign tax credits must be limited.^[2]^[5]^[1]

The statutory “gap period” issue

The dispute grew out of a mismatch in effective dates created by the TCJA between new section 245A and the contemporaneous amendment to section 78. Section 245A, the participation exemption, generally applies to certain dividends received by U.S. corporations from specified 10‑percent owned foreign corporations, allowing a 100 percent DRD for qualifying distributions. Section 78, which treats deemed‑paid foreign taxes as a dividend “gross‑up,” was later amended to say that amounts taken into account under section 245A are not eligible for a section 78 gross‑up, but for fiscal‑year taxpayers there was a period in 2018 where the new section 245A applied while the amended section 78 did not yet apply. Varian’s position was that, during that window, the text of section 245A permitted a DRD for the section 78 dividend, because the statute did not carve out gross‑ups, and no other operative provision barred the deduction.

The Commissioner relied heavily on Treasury Regulation section 1.78‑1, as amended in 2019, to argue that the section 78 gross‑up could not be treated as eligible for the section 245A DRD. The IRS also argued that, even if a deduction were allowable, section 245A(d)(1) and related rules operate to limit foreign tax credits to prevent a double benefit when a taxpayer both claims a DRD and foreign tax credits on the same earnings.

The Tax Court’s holding

On cross‑motions for partial summary judgment, the Tax Court held that Varian was entitled to a 100 percent DRD under section 245A on the section 78 gross‑up for the 2018 fiscal year gap period. The Court found that the operative statutory text of section 245A, as in effect for Varian’s year, encompassed the section 78 gross‑up and that the government’s attempt to exclude such amounts via regulation was inconsistent with the statute. In doing so, the Court invalidated the long‑standing regulation under section 78 to the extent it barred section 245A treatment for the gross‑up, and it invoked the Supreme Court’s Loper Bright framework to reject deference to the IRS’s interpretation.

However, the Tax Court also agreed with the Commissioner that section 245A(d)(1) required a reduction in Varian’s foreign tax credits attributable to the same earnings covered by the DRD. The Court concluded that allowing both a full section 245A DRD on the section 78 dividend and an unreduced foreign tax credit on the related deemed‑paid taxes would confer an impermissible double benefit, so Varian’s foreign tax credits had to be proportionately disallowed under the statutory limitation formula.

Practical implications for corporate taxpayers

Varian confirms that, for fiscal‑year taxpayers caught in the TCJA effective‑date gap, section 245A can reach section 78 gross‑up amounts, notwithstanding contrary regulatory language, allowing a 100 percent DRD on those deemed dividends. At the same time, the decision underscores that taxpayers cannot stack both full participation‑exemption benefits and full foreign tax credits on the same pool of foreign earnings; section 245A(d)(1) will require a calculated reduction in foreign tax credits to offset the DRD.

Beyond the technical DRD and FTC computation, the case has broader significance in tax administration because it represents a unanimous Tax Court willingness to invalidate an IRS regulation where it conflicts with the statute, using the post‑Loper Bright approach to agency deference. For multinational groups with similar fact patterns, Varian provides both an opportunity—asserting DRDs for section 78 gross‑ups in the gap period—and a warning that collateral issues, especially around the foreign tax credit limitation, can materially affect the net benefit even when the primary statutory interpretation issue is decided in the taxpayer’s favor.

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