The Internal Revenue Service is often unable to process tax payments made in foreign currencies on a timely basis or at favorable exchange rates, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, noted the IRS requires taxpayers to pay their U.S. taxes in U.S. dollars, but some taxpayers nonetheless still send foreign currency payments because they are either unable or unwilling to convert their payments to U.S. dollars. Foreign currency payments that are not processed on a timely basis or are processed at lower exchange rates can cause undue burden on taxpayers and additional work for the IRS, the report noted.
For the report, TIGTA inspectors tested 393 checks totaling $1.4 million submitted in a foreign currency. They identified a number of internal control issues that adversely affected the processing of the payments. For example, there were no procedures for documenting taxpayer receipts and other information collected and processed by the IRS’s Manual Deposit Unit in the five Submission Processing Centers used by the IRS to receive foreign tax payments. In addition, procedures did not exist to ensure that taxpayers received accurate foreign currency exchange rate information when submitting checks in a foreign currency. Collection notices were not always suspended after taxpayers submitted payments to fully satisfy their outstanding tax liabilities, according to TIGTA.
IRS procedures were also inadequate for monitoring whether taxpayer payments were processed in a timely manner and credited to the right taxpayer accounts. The report also found a lack of procedures for verifying the accuracy of bank processing fees charged to the IRS.
“As a result of the internal control issues, there is increased risk that taxpayer payments and information could be lost, stolen, or misused; taxpayers could be unnecessarily burdened, and the federal government could be charged with excessive or incorrect check conversion fees,” said the report.
TIGTA recommended that the IRS require employees to retain source documentation and create and maintain documentation of the corrective actions taken on rejected payments. The IRS should also ensure that no collection notices are issued to taxpayers while their foreign currency check payments are being processed. TIGTA suggested that the IRS assess the benefits of initiating follow-up actions sooner to address contractor processing delays; provide taxpayers with additional information on determining foreign currency exchange rates; and explore the feasibility of establishing a process to verify foreign currency check processing charges.
In response to the report, IRS officials agreed with all of TIGTA’s recommendations and indicated they have already taken, or plan to take, corrective actions.
“We agree that controls can be strengthened to improve document retention related to the payments made in foreign currencies, and actions can be taken to improve deposit accuracy and timeliness,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division. “Procedures have been updated to ensure accounts are appropriately marked to forestall collection activities while foreign currency payments are being processed, and to require follow-up actions when deposit acknowledgements are not received within one week.”
Bogadi noted that the IRS provides resources and links on IRS.gov to help taxpayers determine the proper conversion rates for transactions conducted in foreign currencies. The U.S. dollar equivalent is to be used when reporting foreign currency transactions for U.S. tax purposes. Therefore, when taxable income and tax liability for the year is determined, the foreign-denominated transactions are included as amounts expressed in U.S. dollars, and there is no further need for consideration of exchange rates, she explained.
“We will update IRS.gov to clarify that exchange rate information is to be used for determining the U.S. dollar equivalent of taxable transactions conducted in foreign currencies,” she said. “We will also clarify that taxpayers are required to remit tax payments in U.S. dollars and that exchange rate information should not be used for calculating the amount of tax payments to remit in foreign currency.”