Office of Inspections and Evaluations
A Combination of Legislative Actions and Increased IRS Capability and Capacity Are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap
January 27, 2009
Reference Number: 2009-IE-R001
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone Number | 202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
January 27, 2009
MEMORANDUM FOR COMMISSIONER SHULMAN
FROM: Philip Shropshire /s/ Philip Shropshire
Director for Inspections and Evaluations
SUBJECT: Final Evaluation Report - A Combination of Legislative Actions and Increased IRS Capability and Capacity Are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap (Project # 200110IE002, Previously Audit #200730027)
This report presents the results of our review of the IRS
actions to address the international tax gap.
The overall objective of this review was to identify the accuracy and
reliability of estimates of the size of the
Impact on the Taxpayer
The international tax gap is defined as taxes owed—but not
collected on time—from a United States (U.S.) person[1]
or foreign person[2]
whose cross-border transactions are subject to
Synopsis
The IRS estimated that the entire tax gap for Tax Year 2001 was $345 billion. However, the IRS has not developed an estimate for the international tax gap. Non-IRS estimates of the international tax gap range from $40 billion to $123 billion. While there might be overlap between the IRS tax gap estimate and the international tax gap, it is doubtful that the $345 billion estimate includes the entire international tax gap.
The primary reason for this conclusion is that identifying hidden income within international activity is very difficult and time–consuming.[4] Furthermore, the IRS did not measure for the international tax gap component in the Individual National Research Project (NRP) estimate for the Tax Year 2001 tax gap. Therefore, it is unlikely that hidden offshore income is comprehensively included in the IRS tax gap estimates. In fact, the IRS’s Research, Analysis and Statistics (RAS) organization reasoned that because of cost, staffing, and technical limitations, an NRP type of direct measurement is unfeasible. However, in an attempt to learn more, the IRS has other initiatives underway.
Addressing the international tax gap without the benefit of an NRP type approach is a significant challenge. An important fact to consider is that a prime use of NRP data is to develop algorithms to better identify noncompliant taxpayers and not burden compliant taxpayers. This allows the IRS to make data-driven resource allocation decisions to address patterns of noncompliance. When NRP information is not available, other methods to detect noncompliance are required. As a result, the IRS must allocate its international resources based on factors such as employing previously successful compliance actions, acting on promising initiatives, and sometimes relying on anecdotal evidence.
Consequently, there is less certainty that international tax compliance resources are efficiently allocated to address noncompliance. In fact, the Government Accountability Office determined that about half of offshore examinations resulted in an additional assessment compared to about 70 percent of non-offshore examinations that result in additional assessments.
Nevertheless, over the past few years, the IRS has taken actions to better coordinate international tax compliance issues. First, in September 2007, the Service-wide Approach to International Tax Administration was announced. The approach describes the three strategic goals of 1) improving taxpayer service, 2) enhancing enforcement and modernizing the IRS for improving voluntary compliance with international tax provisions, and 3) reducing the tax gap attributable to international transactions. The Service-wide Approach to International Tax Administration is supported by detailed tracking plans for the strategic accomplishments and initiatives.
Next, the IRS Commissioner has stated that international issues are a top priority during his tenure. Finally, additional changes were made by modifying organizational structures, changing processes to facilitate improving compliance, investing in human capital and information technology, and increasing cooperation and outreach efforts to foreign governments. Together, these changes should provide the IRS with additional capability and capacity to address international tax compliance.
Beyond the IRS, legislation has been introduced to address tax haven abuse. As with most legislation, it is difficult to determine whether the proposed legislation will become law and whether it would achieve its intended purpose if implemented. Additionally, the Senate Finance Committee and the Senate’s Permanent Subcommittee on Investigations both held hearings in July 2008, advocating more tools for the IRS to combat offshore tax evasion. While there is no single solution to addressing the international tax gap, the combination of additional compliance tools and increased IRS capability and capacity promises to improve international tax compliance.
Recommendation
We made no recommendations in this report. However, an advanced copy of the report was shared with key IRS management officials prior to issuance.
Please contact me at (202) 927-7048 or Kevin P. Riley, Inspections and Evaluations, at (972) 249-8355 if you have questions.
Attachment
Accuracy and Reliability
of the Estimates of the International Tax Gap
IRS Challenges and Efforts
to Reduce the International Tax Gap
Appendices
Appendix
I – Detailed Objectives, Scope, and Methodology
Appendix II
– Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Service-wide Approach to International Tax Administration
Appendix
VI – Selected International Reports
Appendix
VII – International Tax Gap and Components
Abbreviations
BEA |
Bureau of Economic Analysis |
EDB |
Exporter Data Base |
GAO |
Government Accountability Office |
IIF |
Industry Issue Focus |
IPOC |
International Planning and Operations Council |
I.R.C. |
Internal Revenue Code |
IRS |
Internal Revenue Service |
JITSIC |
Joint International Tax Shelter Information
Centre |
LMSB |
Large and Mid-Size Business |
MLAT |
Mutual Legal Assistance Treaty |
NRP |
National Research Project |
OECD |
Organization for Economic Cooperation and
Development |
RAS |
Research, Analysis, and Statistics |
SME |
Small and Medium-Sized |
TECS |
Treasury Enforcement Communications System |
TIEA |
Tax Information Exchange Agreements |
TIGTA |
Treasury Inspector General for Tax
Administration |
TY |
Tax Year |
|
|
|
|
The international tax gap is defined as taxes
owed, but not collected on time, from a
The Permanent Subcommittee on Investigations of the United
States (U.S.) Senate Committee on Homeland Security and Governmental Affairs
estimates that the international tax gap is $100 billion or more annually.[5] The international tax gap is defined as taxes
owed, but not collected on time, from a
There are two aspects of international taxation. First,
International taxation reflects the
complexity of the global economy. The
This review was performed at the IRS Large and Mid-Size Business (LMSB) Division Headquarters in Washington, D.C., in the Office of the Deputy Commissioner (International) and the Treasury Inspector General for Tax Administration’s Los Angeles Office during the period March 2007 through September 2008. We conducted this evaluation in accordance with the President’s Council on Integrity and Efficiency Quality Standards for Inspections.[10] Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The IRS estimated that the entire tax gap for Tax Year 2001 was $345 billion. However, the IRS has not developed an estimate for the international tax gap. Non-IRS estimates of the international tax gap range from $40 billion to $123 billion. While there might be overlap between the IRS tax gap estimate and the international tax gap, it is doubtful that the $345 billion estimate includes the entire international tax gap. The primary reason for this conclusion is that identifying hidden income within international activity is very difficult and time-consuming.[11] Furthermore, the IRS did not measure for the international tax gap component in the Individual National Research Project (NRP) estimate for the Tax Year 2001 tax gap. Therefore, it is unlikely that hidden offshore income is comprehensively included in the IRS tax gap estimates.
Nevertheless, over the past few years, the IRS has taken actions to better coordinate international tax compliance issues. First, in September 2007, the Service-wide Approach to International Tax Administration was announced. The approach describes the three strategic goals of 1) improving taxpayer service, 2) enhancing enforcement and modernizing the IRS for improving voluntary compliance with international tax provisions, and 3) reducing the tax gap attributable to international transactions. Next, the IRS Commissioner has stated that international issues are a top priority during his tenure. Finally, additional changes were made by modifying organizational structures, changing processes to facilitate improving compliance, investing in human capital and information technology, and increasing cooperation and outreach efforts to foreign governments. Together, these changes should provide the IRS with additional capability and capacity to address international tax compliance.
Beyond the IRS, legislation has been introduced to address tax haven abuse. As with most legislation, it is difficult to determine whether the proposed legislation will become law and whether it would achieve its intended purpose if implemented. Additionally, the Senate Finance Committee and the Senate’s Permanent Subcommittee on Investigations both held hearings in July 2008, advocating more tools for the IRS to combat offshore tax evasion. While there is no single solution to addressing the international tax gap, the combination of additional compliance tools and increased IRS capability and capacity promises to improve international tax compliance.
Accuracy
and Reliability of the Estimates of the International Tax Gap
No one,
including the IRS, has an accurate and reliable estimate of the
The IRS has not developed an accurate and reliable estimate
of the international tax gap, based on empirical evidence.[12] Some non-IRS estimates were developed for
different international tax components. More
specifically, estimates of the
In July 2008, the Permanent
Subcommittee on Investigations of the U.S. Senate’s Committee on Homeland
Security and Governmental Affairs estimated that the international tax gap is
$100 billion or more annually. These
estimates are educated guesses based on a few available figures, the estimators’
experience, and assumptions—rather than being derived from direct measurement. Added to this, the estimates might not include
other international tax gap components, such as abusive tax shelters that
include tax havens—which would add billions of dollars to the total—or the
compliance of foreign taxpayers with
In comparison, the IRS estimates that the overall tax gap for Tax Year (TY) 2001 is $345 billion. In theory, the IRS tax gap estimate includes the international tax gap numbers. However, based on the broad range of the international tax gap estimate, the $345 billion estimate is likely not all-inclusive.
The primary reason for this conclusion is that identifying hidden income within international activity is very difficult and time-consuming.[15] Furthermore, the IRS did not measure for the international tax gap component in the Individual National Research Program (NRP)[16] estimate for the Tax Year 2001 tax gap. Therefore, it is unlikely that hidden offshore income is comprehensively included in the IRS tax gap estimates. In fact, the IRS’s Research, Analysis and Statistics (RAS) organization reasoned that because of cost, staffing, and technical limitations, an NRP type of direct measurement is not feasible. In an attempt to learn more, the IRS has other initiatives underway.
IRS Has No
Detailed Plans to Comprehensively Measure the International Tax Gap with a
National Research Project Effort
The IRS’s RAS organization has no plans to comprehensively measure the international tax gap. The Director of RAS stated that an NRP direct-measurement type study was currently not technically feasible due to the challenges in identifying returns with offshore activities, because many of the taxpayers are purposely avoiding detection. Other challenges to such a study are costs and limited staffing.
Nevertheless, the IRS has three initiatives underway to
learn more about the international tax gap and some of its components. First, the IRS is gathering information about
foreign-earned income of
Together, these initiatives should provide better information about international tax compliance. While these efforts might not lead to a comprehensive international tax gap measurement, they should lead to increasing the capability and capacity of the IRS to focus on significant areas of noncompliance.
The IRS Challenges
and Efforts to Reduce the International Tax Gap
International tax administration is highly complex, reflecting
the complexity of the global economy.
The
Figure 1:
Figure 1 was removed due to its size. To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.[19]
Growth in International Activity: The tremendous growth in offshore and international activity is a relatively recent phenomenon, even though corporate and individual use of tax havens started in the 1950s. Since about 1980, the legal and technological barriers to the movement of capital, goods, and services have declined dramatically.[20] Technological advances have provided opportunities for offshore investments that were once only possible for large corporations and wealthy individuals.
Figure 2:
Individual Income Tax Returns Filing Form 1116, Foreign Tax Credit
(1981 – 2001)
Figure 2 was removed
due to its size. To see Figure 2, please
go to the Adobe PDF version of the report on the TIGTA Public Web Page.
One indicator of the increasing offshore investment activity
is the rise in the number of individual income taxpayers filing the Foreign Tax
Credit (Form 1116) (see Figure 2). The
Form 1116 is used by taxpayers to compute the amount of allowable foreign
tax credit they can offset against their
·
The Commerce Department's Exporter Data Base
(EDB)[21]
shows that in 2005, the total number of
Tax policy and administration efforts require a balance regarding what information is needed to enforce tax laws without unduly burdening international business and investments. Achieving this balance is further complicated by taxpayers who intentionally place assets in locations with bank secrecy laws. Due to this, the IRS at times has limited access to information sources concerning taxpayers in these jurisdictions. While the IRS has the capability to obtain significant amounts of information from many of these jurisdictions, it is handicapped by time-consuming requirements on a case-by-case basis to specifically identify the taxpayers under investigation. The time and access limitations encountered in international tax administration create significant differences between the domestic and international tax administration environments.
Therefore, the IRS has developed international compliance programs with different resource allocation approaches by using various compliance case identification information sources. Examples of these information sources are referrals from informants, criminal investigations, the Joint International Tax Shelter Information Centre (JITSIC), and other tax treaty and bilateral exchanges of information agreements. Other compliance cases are also identified through tax return data analysis and other information reporting regimes such as the Qualified Intermediary and U.S. Withholding Agent Programs. However, using these case identification sources presents challenges in measuring the wider compliance effect. Several major international tax compliance issues have come to the public’s attention from investigations and the media reports:
The IRS recognizes that globalization presents challenges for tax administration. The IRS is addressing these challenges by establishing international tax compliance as a strategic priority, modifying organizational structures, changing processes to facilitate improving compliance, investing in human capital and information technology, and increasing cooperation and outreach efforts with foreign governments.
Establishing International Tax Compliance as a Strategic Priority
The IRS is establishing international tax compliance as a strategic priority, based on several actions that have been taken. First, IRS Commissioner Douglas Shulman is making reducing the international tax gap a top priority. In testimony before the Senate’s Permanent Subcommittee on Investigation, Commissioner Shulman stated:
I have made international issues a top priority for the IRS for my five-year tenure as Commissioner. There are a number of activities and initiatives underway, and more in the works, at the IRS to help ensure we are adapting to the global economy. In some cases, this involves proactive dialogue with foreign tax administrators and multinational enterprises.[24]
Prior to appearing before the subcommittee, the Commissioner had emphasized the importance of international issues to the IRS in speeches before the American Bar Association and the Federation of Tax Administrators.
Second,
from a strategic perspective, in August 2007, the Department of Treasury, Office of Tax Policy, announced a revised
tax gap reduction strategy[25] that included six initiatives focused on
improving international and offshore compliance, along with
24 milestones. The six initiatives
are:
1.
Enhance the ability to identify and address
tax schemes of businesses and individuals involving offshore activity, address
illegitimate use of tax havens to shelter income, and increase information
matching and examination activity for individuals abroad.
2.
Improve the alignment and allocation of
service-wide resources to identify, develop, and resolve challenges better in
the global taxation arena.
3.
Improve tax administration to deal more
effectively with increased emphasis on globalization by all corporation and
individual taxpayers.
4.
Increase industry and global issue focus by
aligning resources to cases and issues with the highest compliance risk.
5.
Leverage the efforts of examiners as well as
external partnerships with foreign tax administrations to identify and address
emerging issues of significant compliance risk.
6.
Address offshore and cross-border compliance
risks through enforcement and by issuing published guidance.
Modifying Organizational
Structures
The Commissioner’s statements represent the latest in a series of actions over the past several years culminating in greater prominence and coordination of international issues across the IRS. In June 2006, the IRS created the position of Deputy Commissioner, International, in the LMSB Division. The IRS describes the purpose of the position: “To improve oversight and focus on global taxation issues.” The position is responsible for international service and compliance activities across the entire IRS and serves as the U.S. Competent Authority responsible for tax treaty administration.
Another step in the process was the announcement on September 16, 2007, of the Service-wide Approach to International Tax Administration (see Appendix IV). The approach describes goals for improving voluntary compliance with international tax provisions of the Internal Revenue Code and reducing the tax gap attributable to international transactions. The new approach envisions using cross-functional cooperation in addressing emerging international tax issues and using tools and authorities already granted. The approach describes a three-pronged strategy, consistent with the strategies described in the IRS strategic plan, of:
To achieve cross-functional cooperation envisioned in the Service-wide approach to International Tax Administration, the International Planning and Operations Council (IPOC) was established. The IPOC is chaired by the Deputy Commissioner, International, with executive participation from the Small Business/Self-Employed Division, Wage and Investment Division, Tax-Exempt Government Entities Division, Criminal Investigations Division, Office of Appeals, and Office of Chief Counsel. The IPOC serves as the forum to develop and coordinate the Service-wide strategy for dealing with international tax administration operational issues and significant international tax transactions, both internally and externally, and reports to the Deputy Commissioner for Service and Enforcement. The Council ensures that resource and operational support issues are properly coordinated to maintain accountability of the international enforcement and customer service strategies and initiatives. The responsibilities of the Council are:
Changing Processes to
Facilitate Improving Compliance
In addition to addressing international income tax issues through income tax examinations, the Service-wide Approach to International Tax Administration is using other forums to resolve tax disputes. For example, the IRS recently completed it first pre-filing agreement on international partnerships and is working on a pre-filing agreement regarding permanent establishments. The IRS is also piloting the process of resolving international tax issue disputes within its Compliance Assurance Process (CAP).
On the examination front, the IRS recently introduced the Industry Issue Focus (IIF) approach to strengthen the industry focus within the LMSB Division by strategically concentrating on high-risk tax issues through the use of coordinating guidance and compliance activities on emerging tax issues. The IIF approach accomplishes these results by identifying, prioritizing, analyzing, and addressing significant compliance issues in one of three tiers. International tax issues compose one-sixth of the 60 Tier I and Tier II issues so far identified. The IRS has also implemented compliance activities dealing with Offshore Private Banking, Offshore Merchant Accounts, and international compliance of Entertainers and Athletes.
Investing in Human
Capital
The IRS has implemented 5 initiatives that are leveraging its international human capital. First, the IRS realigned its LMSB Division by changing international examiner groups from being managed as specialty groups to being supervised by line managers so there would be greater flexibility to employ international examiner skills. Second, managers at all levels are being trained on the basics of international tax so that international examiner skills can be better employed. Third, the LMSB Division is training domestic agents to examine less complex international issues so that international examiners can focus on more complex issues. Fourth, the LMSB Division has just-in-time training resources that can be delivered to assist tax examiners with an international tax issue they are currently or will shortly be working on. Finally, the Appeals Division has been restructured into two teams of International Specialists and Economists to provide technical support to help ensure timely and consistent resolution by appeals of international tax issues.
Investing in
Information Technology
The IRS is taking several technology
initiatives to address all aspects of the international tax program. One compliance initiative is to develop a
system to automatically match third party payment information for offshore investors
with income tax return information. Another
multi-purpose initiative is a proposal to bring together all the international data
the IRS receives into a single database.
The database would be used for research, strategic planning, resource
allocation, and examination case selection.
Several taxpayer service initiatives are focusing on upgrading service
to taxpayers with international issues. These
include exploring options to provide low/no-cost telephone services to
Increasing
Cooperation and Outreach Efforts to Foreign Governments: Outreach and cooperation with
In addition to these activities, the
Taken together, these initiatives should increase the capacity and capability to address the international tax gap. However, more tax administration tools are needed to leverage these efforts. In recent years, various Congressional committees held hearings and developed legislative proposals that would benefit the IRS’s efforts to reduce the international tax gap.
Congressional
Hearings and Legislative Proposals:
Congressional hearing and legislative proposals regarding
On June 22, 2006, the Subcommittee on Select
Revenues of the
The current
The hearing
collected testimony from witnesses describing the obstacles the current
On August 1, 2006,
the Senate’s Permanent Subcommittee on Investigations of the Committee
on Homeland Security and Governmental Affairs held a hearing on Tax Haven Abuses: The Enablers, The Tools and Secrecy and
released its staff’s report.[29] Through a series of case histories, the
hearing explored the role of financial professionals, tax attorneys,
accountants, bankers, brokers, corporate service providers, and trust
administrators in aggressively promoting offshore tax haven use to
As a direct result of the hearing, in February 2007, the Committee on Homeland Security and Governmental Affairs referred the Stop Tax Haven Abuse Act (S. 681) to the Senate Finance Committee to reduce the international tax gap, improve compliance, and reduce the abuses associated with tax havens. The proposed legislation would:
On June
17, 2008, The Heroes Earnings Assistance and Relief Tax Act of 2008[30]
became law. It contained a new
expatriation tax that applies to individuals who expatriate from the
On June 26, 2008,
the Senate Finance Committee explored how the
Additionally, the Senate’s Permanent Subcommittee on
Investigations and the Senate Finance Committee both held hearings in
July 2008 advocating more tools for the IRS to combat offshore tax
evasion. On July 17, 2008, the
Senate’s Permanent Subcommittee on Investigations
held a hearing on Tax Haven Banks and
On July 24, 2008, the Senate Finance Committee
held hearings on The
Also distributed at the hearing was a July 23, 2008, analysis prepared by the Joint Committee on Taxation.[33]
On September 11, 2008, the Committee on Homeland
Security and Governmental Affairs, Permanent Subcommittee on Investigations
held a hearing on Dividend Tax Abuse: How
Offshore Entities Dodge Taxes on
The IRS has not developed an
estimate of the international tax gap, nor is there any intention to develop an
NRP type estimate. However, the IRS is
making international tax compliance a strategic priority. Many actions have been planned or implemented
that should increase the IRS' capability and capacity to enhance international
tax administration. Beyond the IRS'
efforts, the Congress is identifying ways to balance a fundamental
reform of the
Appendix I
Detailed Objectives, Scope, and Methodology
The overall objective of this review was to evaluate the accuracy and reliability of estimates of the size of the U.S. international tax gap, determine whether the IRS is planning to develop its own measurement, and identify the efforts the IRS has underway to reduce it.
To accomplish our objective, we relied extensively on interviews, information studies, and internal reports from the IRS. To accomplish our objective, we:
I.
Identified estimates of the potential size of the
A. Interviewed IRS officials regarding the IRS estimate of the $40 billion international tax gap described in Commissioner Rossotti’s letter to Senators Grassley and Baucus on March 22, 2002, the information used, and how it was derived.
B. Interviewed attorney Jack Blum regarding his estimate of a $70 billion international tax gap, the information used, and how it was derived.
C. Interviewed Professor Reuven Avi-Yonah regarding an estimate of the $50 billion international tax gap, the information used, and how it was derived.
D. Interviewed IRS officials in the Research, Analysis, and Statistics Division regarding the lack of a periodic estimate of the international tax gap.
II. Determined what actions and resources the IRS is applying in its efforts to reduce the international tax gap.
A. Determined what action the IRS is taking as part of the Service-wide Approach to International Tax Administration through review of IRS internal monitoring reports.
B. Interviewed IRS officials from the Office of the Deputy Commissioner, International, regarding actions completed and underway as part of the IRS Service-wide Approach to International Tax Administration.
C. Determined the number of Tax Information Exchange Agreements (TIEAs) made from FY 2001 through FY 2007.
D. Determined what accomplishments the Joint International Tax Shelter Information Centre (JITSIC) has publicized since it creation in FY 2004.
E.
Determined
what actions the IRS is initiating to address the
F.
Determined
what actions were proposed by the Congress to address the problems of tax
havens and the
Appendix II
Major Contributors to This Report
Phil
Shropshire, Director
Earl
Charles Burney, Lead Auditor
Amanda
Fila, Economist
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy
Commissioner Services and Enforcement SE
Chief Counsel CC
Commissioner, Large and Mid-Size Business Division SE:LM
Commissioner, Small Business and Self-Employed Division SE:S
Associate Chief Counsel (International) CC:INTL
Deputy Commissioner, Large and Mid-Size Business Division (Operations) SE:LM
Deputy Commissioner, Large and Mid-Size Business Division (International) SE:LM:IN
Deputy Commissioner, Small Business and Self-Employed Division (SE:S)
Chief, Appeals AP
National Taxpayer Advocate TA
Director, Office of Research, Analysis and Statistics RAS
Director, National Research Program RAS:NRP
Director, Treaty Administration & International Coordination SE:LM:IN
Director, International Compliance, Strategy & Policy SE:LM:IN
Director, Pre-Filing and Technical Guidance SE:LM:PFTG
Director, Research and Workload Identification SE:LM:RWI
Director, Examination SE:S:E
Director, Abusive Transaction SE:S:E:AT
Director, Research SE:S:R
Director, Office of Legislative Affairs CL:LA
Audit Liaisons:
Commissioner C
Chief Counsel CC
Deputy Commissioner for Services and Enforcement SE
Commissioner, Large and Mid-Size Business Division SE:LM
Commissioner, Small Business and Self-Employed Division SE:S
Appendix IV
Service-wide Approach to International Tax
Administration
The IRS will improve tax administration to deal more effectively with the increase of globalization of individual and business taxpayers. This will be accomplished through Service-wide cross-functional cooperation in addressing emerging international issues. The priority will be to improve voluntary compliance with the international tax provisions and to reduce the tax gap attributable to international transactions. Our approach to international tax administration includes the following components:
Strategic Goal
1: Improve Taxpayer Service
International tax law is extremely complex. Providing international taxpayers and taxpayers
in the
Strategic Initiatives:
Strategic Goal
2: Enhance Enforcement of Tax Laws
As globalization continues, tax planning is increasingly focused on minimizing the worldwide effective tax rate. In this context, international/U.S. territories’ non-compliance is a significant area of concern and focus. We are challenged by a lack of information reporting on many cross-border transactions. The ease of utilizing complex international structures and cross-border transactions results in constantly evolving compliance issues. To properly identify, address, and pursue such emerging issues, we will strengthen reporting requirements; enhance IRS access to international data; ensure adherence to professional standards by tax professionals; and increase industry and global issue focus by aligning resources to cases and issues with the highest compliance risk.
Strategic Initiatives:
Strategic Goal
3: Modernize the IRS through its People,
Processes, and Technology
As the flow of trade and capital moves more easily across borders, the global marketplace is developing at an ever increasing rate. The fast pace of change in the global economy requires an equally fast pace of change within our organization. We must strategically manage resources, associated business processes, and technology systems to effectively and efficiently meet international service and enforcement missions. To achieve this, we will improve our resource capabilities to leverage international expertise throughout the IRS and modernize information systems to improve service and enforcement.
Strategic Initiatives:
Appendix V
Selected International Reports
Domestic and
Foreign Controlled Corporations
Tax Administration: Comparison of the Reported Tax Liabilities of Foreign and U.S.-Controlled Corporations, GAO, Reference Number GAO-08-957, July 2008.
International Taxation: Taxes of Foreign- and U.S.-Controlled Corporations, GAO, Reference Number GAO/GGD-93-112FS, June 1993.
Information
Returns
Automating the Penalty-Setting Process for Information Returns Related to Foreign Operations and Transactions Shows Promise, but More Work Is Needed, TIGTA, Reference Number 2006-30-075, May 2006.
Compliance Opportunities Exist for the Internal Revenue Service to Use Foreign Source Income Data, TIGTA, Reference Number 2005-30-101, July 2005.
Controls Over the Identification and Selection of Foreign Controlled Corporations for Examination Need Improvement, TIGTA, Reference Number 2001-30-119, July 2001.
Program Improvements Are Needed to Encourage Taxpayer Compliance in Reporting Foreign Sourced Income, TIGTA, Reference Number 2001-30-052, March 2001.
Review of Service Efforts to Ensure Compliance of Taxpayers Receiving Foreign Source Income, IRS Internal Audit,[35] Reference Number 072208, April 2, 1997.
International Compliance
Activities
Dividend Tax
Abuse: How Offshore Entities Dodge Taxes
on
Selected Issues Relating to Tax Compliance With Respect to Offshore Accounts And Entities, Joint Committee on Taxation, Reference Number JCX-65-08, July 23, 2008.
Economic Efficiency
and Structural Analysis of Alternative
Actions Are Needed to Control Risks With International Transactions Reported on Corporate Income Tax Returns, TIGTA, Reference Number 2008-30-114, May 30, 2008.
Opportunities Exist to Enhance the International Field Assistance Specialization Program, TIGTA, Reference Number 2000-30-130, September 2000.
Tax Administration: Information on IRS’s International Tax Compliance Activities, GAO, Reference Number GAO/GDD-94-96FS, June 1994.
International Transfer
Pricing
The Controls for Examination Processes for Industry Cases With International Transfer Pricing Issues Can Be Improved, TIGTA Reference Number 2004-30-133, September 2004.
Current Trends in the Administration of International Transfer Pricing by the Internal Revenue Service, TIGTA, Reference Number 2003-30-174, September 2003.
International Taxation: Transfer Pricing and Nonpayment of Tax, GAO, Reference Number GAO/GGD-95-101, April 1995.
International Taxation: Problems Persist in Determining Effects of Intercompany Prices, GAO, Reference Number GAO/GGD-92-89, June 1992.
Tax Havens
Cayman Islands: Business and Tax Advantages Attract
Tax Haven Banks and
Additional Actions Are Needed to Effectively Address the Tax Gap, TIGTA, Reference Number 2008-30-094, April 23, 2008.
Tax Administration: Additional Time Needed to Complete Offshore Tax Evasion, GAO, Reference Number GAO-07-237, March 2007.
Tax Haven Abuse: The Enablers, The Tools and
International Taxation: Tax Haven Companies Were More Likely to Have a
Tax Cost Advantage in Federal Contracting, GAO, Reference Number GAO-04-856, June 2004.
Appendix VI
International Tax Gap and Components
Component |
Low Estimate |
High Estimate |
International Transfer Pricing |
$2.8 billion[36] |
$53.0 billion[37] |
Offshore
Noncompliance of |
$40.0 billion[38] |
$70.0 billion[39] |
Noncompliance of
Foreign Taxpayers with Income from an Effectively Connected Trade or Business
in the |
Unknown |
Unknown |
Noncompliance of
Foreign Taxpayers with Passive Investment Activities in the |
Unknown |
Unknown |
Tax Shelters with Tax Haven Components |
Unknown |
Unknown |
Total International Tax Gap |
UNKNOWN |
UNKNOWN |
|
|
|
Known Estimates of Total International Tax Gap |
$42.8 billion |
$123.0 billion |
Source: TIGTA Analysis of Likely Components of the International Tax Gap with Available Estimates.
[1] A U.S. person is defined by the Internal Revenue Code (I.R.C.) §7701(a)(30) as a citizen or resident of the United States, domestic partnership, domestic corporation, any estate (not defined as a foreign estate under I.R.C. §7701(a)(31)), and any trust, if administered by a U.S. court or supervised by one or more U.S. persons.
[2] A
foreign person includes a nonresident alien individual, a foreign corporation,
a foreign partnership, a foreign trust, a foreign estate, and any other person who
is not a
[3]
[4] See the GAO audit report TAX ADMINISTRATION: Additional Time Needed to Complete Offshore Tax Evasion Examinations (Reference Number GAO-07-237, dated March 2007).
[5]
[6] A U.S. person is defined by the Internal Revenue Code (I.R.C.) §7701(a)(30) as a citizen or resident of the United States, domestic partnership, domestic corporation, any estate (not defined as a foreign estate under I.R.C. §7701(a)(31)), and any trust, if administered by a U.S. court or supervised by one or more U.S. persons.
[7] A
foreign person includes a nonresident alien individual, a foreign corporation,
a foreign partnership, a foreign trust, a foreign estate, and any other person who
is not a
[8]
Foreign persons not effectively connected with a
U.S. trade or business who earn income from passive investment activities in
the U.S. are taxed on fixed or determinable income; certain gains from disposal
of timber, coal, or domestic iron with a retained economic interest; gains
relating to contingent payments received from the sale or exchange of patents,
copyrights, and similar intangible property; and sales of interests in U.S.
real property. Foreign investors with
passive investments as a general rule are not taxed on interest on deposits,
portfolio interest, or capital gains on securities or other personal property.
[9] See Table 2. International Investment Position of the United States at Year End, 1976-2007, U.S. Department of Commerce, Bureau of Economic Analysis (BEA). Accessed online at: http://www.bea.gov/international/index.htm
[10] The evaluation was also performed in accordance with Generally Accepted Government Auditing Standards. These standards require that we plan and perform the project to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions, based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions, based on our evaluation objectives.
[11] See the GAO audit report TAX ADMINISTRATION: Additional Time Needed to Complete Offshore Tax Evasion Examinations (Reference Number GAO-07-237, dated March 2007).
[12] The IRS has not performed a National Research Project (NRP) on individual or business international taxes. An NRP is a statistical sample of returns that may be examined to determine compliance.
[13] The Organization for Economic Cooperation and Development (OECD) utilizes four criteria to identify a jurisdiction as a tax haven: 1) no or only nominal taxes (generally or in special circumstances); 2) a lack of transparency; 3) laws or administrative practices that prevent the effective exchange of information for tax purposes; and 4 ) no requirement that foreign activity be substantial. Although the first criterion is a necessary condition, it is insufficient by itself to identify a jurisdiction as a tax haven. The other criteria reflect conditions that, in conjunction with no or nominal tax, enable a jurisdiction to pursue harmful tax competition and effectively obstruct authorities in other countries from accessing information for tax purposes.
[14] See the TIGTA audit report Current Trends in the Administration of International Transfer Pricing by the Internal Revenue Service (Reference Number 2003-30-174, dated September 2003).
[15] See the GAO audit report TAX ADMINISTRATION: Additional Time Needed to Complete Offshore Tax Evasion Examinations (Reference Number GAO-07-237, dated March 2007).
[16] The National Research Program conducts studies to produce timely, reliable information about the filing of tax returns, the reporting of income, deductions, taxes credits, and payment of tax liabilities. The information is a service-wide resource that will support a variety of user needs, including development of strategic plans and customer-focused programs, products, and services.
[17] The foreign information return document is Form 1042-S, and the nonresident tax return is Form 1040NR and Form 1042.
[18] See footnote 5.
[19] Ibid.
[20]
Guttentag, Joseph and Reuven Avi-Yonah.
“Chapter 5 - Closing the international tax gap” Bridging
the Tax Gap: Addressing the Crisis in
Federal Tax Administration. Edited
by Max B. Sawicky. Economic Policy
Institute.
[21] The EDB captures companies exporting merchandise, but not firms that export only services.
[22] A small or medium sized enterprise is defined as a company with fewer than 500 workers.
[23]From about 108,000 firms in 1992 to over 232,000 firms in 2005.
[24] Written Testimony of Douglas Shulman, Commissioner of Internal Revenue, Before the Senate Committee on Homeland Security and Government Affairs’ Permanent Subcommittee on Investigations Hearing on Tax Haven Financial Institutions: Their Formation and Administration of Offshore Entities and Accounts for Use by U.S. Clients, July 17, 2008, page 1.
[25] Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance. IRS.
[26] The
Leeds Castle Group consists of the tax administrators of
[27] Under
these treaties, residents of foreign countries are taxed at a reduced rate or
are exempt from
[28]
[29]
[30] P.L. 110-245 (2008).
[31] See the Joint Committee on Taxation analysis Economic Efficiency and Structural Analysis of Alternative U.S. Tax Policies for Foreign Direct Investment, (Reference Number, JCX-55-08, June 25, 2008).
[32] See the GAO audit report CAYMAN ISLANDS: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist, (Reference Number GAO-08-778, July 2008).
[33] See the Joint Committee on Taxation analysis Selected Issues Relating to Tax Compliance With Respect to Offshore Accounts and Entities, (Reference Number, JCX-65-08, July 23, 2008).
[34] Dividends,
[35] As a consequence of the IRS Restructuring and Reform Act of 1998, the IRS Office of Audit became the Office of Audit of the Treasury Inspector General for Tax Administration (TIGTA) on January 18, 1999.
[36]
[37] U.S. Trade with the World: An Estimate of 2001 Lost U.S. Federal Income Tax Revenues Due to Over-Invoiced and Under-Invoiced Exports, by Professors Simon J. Pak, Ph.D. of Penn State University – Great Valley, and John S. Zdanowicz, Ph.D. of Florida International University.
[38] Rossotti, Charles O. 2004. Letter to Senators Charles Grassley and Max Baucus. March 22.
[39]
Sullivan, Martin A. 2004.