The Internal Revenue Service’s collection efforts need to be improved to make sure that delinquent taxpayers residing in foreign countries comply with their U.S. tax obligations, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, comes amid the implementation of many of the requirements of the Foreign Account Tax Compliance Act, or FATCA, which will require foreign financial institutions to begin reporting on the holdings of U.S. taxpayers to the IRS or else face stiff penalties of up to 30 percent on their income from U.S. sources.
TIGTA’s review found that ineffective management oversight has contributed to a number of control weaknesses in the IRS’s International Collection program. The review also discovered that the IRS does not have reliable statistics on the rate of noncompliance of taxpayers with their U.S. tax obligations.
For example, the IRS’s International Collection program does not have adequate policies, procedures, position descriptions or training to ensure that international revenue officers can properly work on International Collection cases. There is also no specific inventory selection process to ensure that International Collection cases with the highest risk are worked on by IRS employees, nor are performance measures and enforcement results for International Collection cases reported separately from Domestic Collection cases.
In addition, there is no process to measure the value of the so-called “Customs Hold” as an enforcement tool against delinquent international taxpayers. International revenue officers at the IRS can request that a customs hold be input into the Treasury Enforcement Communication System for delinquent taxpayers, and the U.S. Department of Homeland Security will then notify the IRS whenever the taxpayer travels into the U.S. During TIGTA’s interviews with a sample of 15 international revenue officers and all five group managers, many identified the Customs Hold as one of the most effective enforcement tools available to them in dealing with delinquent international taxpayers. International revenue officers use information obtained through a Customs Hold to attempt to contact the taxpayers while they are in the U.S. or to locate the taxpayers’ assets.
“The IRS faces many unique challenges in collecting taxes from international taxpayers,” said TIGTA Inspector General J. Russell George in a statement. “In today’s global economy, businesses and individuals are becoming more and more involved in international transactions. Accordingly, the role of an international revenue officer is very important in helping taxpayers comply with the tax laws and improving international tax compliance.”
TIGTA recommended that the IRS develop a formal International Collection strategic plan and update its International Collection guidance to provide specific policies and procedures to international revenue officers. The IRS should also evaluate and update its current international revenue officer position descriptions, TIGTA suggested, and develop a formal International Collection training plan using subject matter experts to develop and teach international specific courses. The IRS should also evaluate the International Collection inventory selection criteria, develop separate performance measures and track specific enforcement results for International Collection, and continue to pursue direct access to the Customs Hold information, the report recommended..
IRS officials agreed with all of TIGTA’s recommendations and have taken or plan to take corrective actions. They pointed to their offshore voluntary disclosure initiatives, which encourages taxpayers to come forward and voluntarily declare their foreign bank accounts.
“Our offshore voluntary disclosure initiatives are illustrations of our approach to international tax compliance, which have been covered extensively in the press and have been extremely productive in improving reporting compliance,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “More recently, we have worked with Treasury and foreign governments to implement the Foreign Account Tax Compliance Act in a manner that improves reporting compliance in the least burdensome manner. Also, the IRS has efforts underway to re-align all collection related operations into one function under SB/SE with centralized direction and management oversight, which will strengthen our collection efforts overall, including International Collection. We are now developing a process for regular coordination between the SB/SE International Collection and LB&I International programs, so as to provide for a routinized process for information sharing and identifying emerging compliance risks.”
She noted that the IRS has appointed an International Collection program executive to develop an action plan to implement its International Collection strategy. In addition, the IRS has increased the governance of this program by appointing a permanent territory manager with international experience to lead strategy and execution.
During TIGTA’s audit, the IRS also updated its guidance for international revenue officers both in the Internal Revenue Manual and on the IRS’s intranet page and is monitoring these regularly to ensure that they remain current, Schiller pointed out.
“As we discussed with you during this audit, we are committed to making further enhancements to the International Collection Program, including leveraging technology for improved customer contact, developing a Mutual Collection Assistance Request database, maximizing our resources by reviewing the group structure, updating the IRM and training materials, reviewing position descriptions, and improving the measures,” she added.
However, while the IRS has implemented some corrective actions to improve the selection of International Collection inventory, develop separate performance measures and track enforcement results, TIGTA said it does not believe that the IRS’s completed corrective actions fully addressed the recommendations in its report.
An IRS spokesman also emailed a statement Tuesday to Accounting Today commenting on the report. “Fostering international tax compliance remains a very important priority at the IRS,” said the IRS. “Despite the unique challenges in collecting taxes from taxpayers living abroad, our efforts in recent years are already yielding significant improvements. As a result of our widely-publicized offshore voluntary disclosure initiatives, for example, more than 45,000 taxpayers have voluntarily come into compliance over the past five years, paying some $6.5 billion in taxes, penalties and interest. The IRS is committed to making enhancements to the International Collection Program. To streamline and strengthen our collection efforts, the IRS is looking at realigning collection-related operations within the agency’s Small Business and Self Employed Division. Additionally, we have appointed an executive to develop an action plan for our international collection strategy, and a permanent territory manager with extensive international experience to lead our efforts to carry out this strategy. We have already updated our guidance for international revenue officers and we are taking steps to ensure that it remains current.”