The Internal Revenue Service could improve its exchange of tax compliance information with other countries by collecting better data on the types of information requested and how successfully it was collected.
A report released Friday by the Government Accountability Office evaluated the effectiveness of the various tax treaties and other agreements with foreign countries. Tax treaties and agreements provide tax authorities in the U.S. and abroad with a useful tax law enforcement tool. As of April 30, 2011, the United States had agreements in force with 90 foreign jurisdictions.
Many of the agreements have similar features, but the restrictions on the types of information that can be exchanged typically depend upon the legal and administrative arrangements between the U.S. and each of its overseas partners.
Between 2006 and 2010, 5,111 requests for information to or from the United States and 75 foreign jurisdictions were completed. Of these, 4,217 were incoming requests for information such as tax returns or corporate records, while 894 were outgoing requests from the United States.
The IRS also relies on several other methods of enforcement to obtain the information it is seeking, including an automated information exchange mechanism that yields about 2.1 million records annually from 25 of the U.S.’s treaty partners.
The GAO estimated that most of the information requests are closed in approximately 50 to 200 days after they are opened, but some of the requests take much longer. The time it takes to close the requests can be influenced by factors such as the complexity of the requested information and the legal system of the treaty partner. The GAO’s analysis of the IRS data shows that the U.S. often takes more time to close incoming requests for some groups of countries than others.
The extent of the assistance can also depend on the type of treaty. For example, the U.S. has a Mutual Legal Assistance Treaty with Uruguay, but that MLAT does not allow for assistance related to tax offenses unless they pertain to other crimes. Since the U.S. has no other similar agreement with Uruguay, tax information is not exchanged with that country unless the tax offense relates to the concealment of income obtained from another crime covered by the treaty. Therefore, Uruguay is not counted as an exchange partner.
At the same time, multiple partners may be signatories to a single instrument. For example, the United States has an MLAT with four countries in the Eastern Caribbean States Organization, which provides a basis for tax information exchange relationships with Antigua, Barbuda, Dominica, Grenada and St. Lucia.
The terms of an agreement may specifically include or exclude an associated territory. For example, the U.S.-Australia income tax treaty includes Australia’s territories of Norfolk Island, Christmas Island, Cocos (Keeling) Islands, Ashmore and Cartier Islands, and the Coral Sea Islands, while the U.S.-Denmark income tax treaty terms exclude the Faroe Islands and Greenland.
A territory may also be included in one agreement and excluded in another. For example, the U.S.-United Kingdom MLAT extends to the Isle of Man (a dependency of the British Crown), but the territory is excluded from the U.S.-U.K. income tax treaty. Since the United States also has a unique Tax Information Exchange Agreement with the Isle of Man, it is counted as a separate foreign treaty partner.
While the IRS collects data on exchanges between the U.S. and its treaty partners, the agency does not consistently collect or analyze performance information, such as the type of information requested, whether the information was collected successfully, or feedback from the staff making the requests about the usefulness of the information or their views on the process for obtaining it. The GAO said that collecting this information could help program managers assess how well the IRS is managing the information exchange process, and whether changes to the administrative processes and procedures could improve the exchange of information between the U.S. and its treaty partners.
The GAO recommended that the IRS determine the key types of performance information that exchange program managers could use to ensure the program is working as well as possible. Specifically, the IRS commissioner should require the collection of consistent and accurate data on specific tax information exchange cases, along with feedback from program users on a routine basis as part of regular program operations.
The IRS agreed with the recommendation. “The Internal Revenue Service and other tax authorities around the world have been working together to improve and enhance our information exchange programs,” wrote IRS deputy commissioner for services and enforcement Steven T. Miller in response to the report. “The recommendation made in the draft report concerning the potential use of performance information brings to light additional steps that should be taken.”
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