My earlier blog post introduced the notion that chaos reigns over at the offshore information vault maintained by the Internal Revenue Service (IRS). My post detailed how the agency is having difficulty processing and using information sent to it from foreign countries, including bulk data from the automatic exchange of information. My insights were based on a September 11, 2017 Report (Report) by the Treasury Inspector General for Tax Administration (TIGTA). Anyone having an interest in anything “offshore” should carefully review the TIGTA Report.
As mentioned in my earlier blog post, Don Fort, the newly appointed Chief of Criminal Investigation for the IRS, is looking to make order out of the chaotic data. Mr. Fort believes the IRS has “more information than anyone” and he is seeking to make sure the IRS mines this data efficiently and achieves results, with “offshore” being the major hot spot of concern. While it appears to me that FATCA itself has not yet caught out taxpayers with unreported accounts, I am certain it’s only a matter of time. Once the data mess is sorted, everyone’s game!
Let’s examine in greater detail the flaws found with regard to the information shared by foreign governments from 3 specific categories that were the subject of the TIGTA audit:
- Automatic Exchange of Information (AEOI) Program
- Mutual Collection Assistance Request (MCAR) Program
- Spontaneous Exchange of Information Program
Here is a brief summary of TIGTA’s overall findings.
- TIGTA determined that the IRS did not have an adequate tracking system to account for the records foreign countries sent on a regular basis under the AEOI Program;
- The system’s searching capacity of bulk data was terribly inadequate;
- Access to the AEOI data is only given to a relatively small percentage of IRS compliance employees. If the information is not being used widely within the agency, it is obvious that the value of the information is seriously compromised.
Specific to the MCAR Program, TIGTA found that the IRS is not using the mutual collection assistance available from foreign countries to its full potential. The MCAR Program overall is rather limited since the United States currently has only five mutual collection income tax treaty partners (Canada, Denmark, France, The Netherlands, and Sweden). Generally, with this kind of treaty each signatory specifically agrees to provide the other country with assistance in collection of taxes owed to it under final assessment. TIGTA’s review of the training to all new revenue officers disclosed no mention of the MCAR Program and no instruction on checking Form 8938, Statement of Specified Foreign Financial Assets, for assets in an MCAR treaty country. TIGTA’s research also found that taxpayers with tax balances due had assets in a MCAR country but this fact was not discovered by the IRS revenue officers.
TIGTA found multiple problems with the Exchange of Information Program Office’s processing of what is called “spontaneous information” received from foreign countries. A “spontaneous” exchange of information involves the transmission of information that has not been specifically requested by another country but which, in the judgment of the country holding the data, may be of interest to a treaty partner for tax purposes. The exchange typically involves information discovered during a tax examination, investigation, or other administrative procedure that suggests or establishes noncompliance with the tax laws of a foreign partner or that is otherwise determined to be potentially useful to a foreign partner for tax purposes. Some of the problems outlined in the Report stemmed from slipshod work at the IRS (not the first instance) such as an inadequate attention to details by analysts, poor communication amongst agents, lack of responses to foreign countries sending the information, letting a matter languish until further pursuit was not possible and so on.
I think this is the program to watch. The AEOI program involves the transmission of bulk information to the IRS on a regular and systemic basis from countries having exchange of information agreements either from United States tax treaties or Tax Information Exchange Agreements. The number of countries in the AEOI program appears to be a meager 28 in number, despite the fact that many more countries have signed treaties or Tax Information Exchange Agreements with the US. According to AEOI Program management, the quality, quantity, and frequency of data transmitted is not mandated by a standard and any information transmitted is provided voluntarily by treaty partners. Consequently, some treaty partners are inconsistent on the frequency of data transmitted. For example, the IRS received data from a total of 28 countries, of which 7 sent data annually during Fiscal Years 2011 through 2015; the remaining countries sent data less frequently than annually.
As mentioned in my earlier post, my initial interest in the TIGTA Report was to learn more about the processing of data collected pursuant to FATCA. As also mentioned, the Report specifically (and surprisingly) did not include FATCA data. The AEOI program would apparently cover data received by the IRS under FATCA, had TIGTA included automatic exchange of information from FATCA in the audit. The balance of this post will focus on the flaws found in the AEOI program because they provide valuable clues as to the shortcomings with the bulk data coming in pursuant to FATCA compliance.
The Problems With the IRS AEOI Program
- The data being received by the IRS is not in a consistent format, cannot be easily accessed and apparently involved security concerns.
- IRS has tried to make the reams of data searchable, but this has not gone very well, either. The Easy-Search “search” feature was reported to be significantly inadequate. The types of questions that the search application can help answer include: (1) Is a taxpayer receiving income abroad? (2) Does a taxpayer have any offshore accounts? (3) What income are foreign entities reporting about United States taxpayers?
- AEOI Program management informed TIGTA that they received a total of 309,559 records from two countries, and 308,492 of those records were uploaded to the AEOI database. However, TIGTA was not able to locate any of these records through the Easy Search application, and these two countries are not included in the drop-down list of searchable countries. AEOI Program management was unaware of this fact until TIGTA brought it to their attention. (Ho Hum….but the Report notes the problem was later fixed. I guess — Better late, than never!).
- Worse yet was the small number of IRS personnel granted access to the AEOI data. According to the Report, as of August 31, 2016, the IRS had a total of 8,153 revenue agents and 3,205 revenue officers on staff in the LB&I and SB/SE Divisions. However, less than 1 percent (i.e., only 36 revenue agents and 25 revenue officers) were approved to access the Easy Search application as of August 31, 2016. Furthermore, only one of the 36 revenue agents was from the LB&I Division’s Global High Wealth area. TIGTA also found that only seven of the 25 revenue officers with access were from the SB/SE Division’s International Collection group.
The IRS has an International Practice Unit (IPU) dedicated to the topic of AEOI. IPUs are a recent IRS development and are used to train its agents and help them learn more about specialized international tax topics.
The AEOI IPU can be accessed here.
A full listing of all IPUs is here.
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