Foreign Account Reporting Requirements:

IRS Needs to Further Develop Risk, Compliance, and Cost Plans

GAO-12-484: Published: Apr 16, 2012. Publicly Released: May 16, 2012.

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What GAO Found

  • IRS has taken initial steps to implement FATCA requirements in line with leading implementation practices, including establishing a team to manage the implementation process and issuing guidance and proposed regulations. IRS has involved external stakeholders in the implementation process, which has helped inform IRS’s implementation plans and regulations. IRS has also communicated initial information to IRS staff. However, although IRS assessed the risks of some aspects of FATCA implementation, it has not consolidated existing risk assessment information or future risk assessment plans into an overall risk assessment. Without a consolidated assessment, there is less assurance that all risks have been comprehensively identified. FATCA officials told us they had not documented a consolidated risk assessment because they were awaiting the release of final regulations, which will increase their ability to develop an overall risk assessment. Officials also cited the challenge of conducting a full risk assessment for a multiphased program still in its early stages. While we recognize this difficulty, we believe it is still important to lay the foundation for these plans. GAO’s internal control standards suggest that risk assessments can and should evolve as short-term and long-term forecasting occur and therefore should be reviewed on an ongoing basis.
  • IRS plans to compare multiple sources of information to identify U.S. taxpayers and FFIs failing to comply with the FATCA requirements and, more broadly, taxpayers failing to report their overseas income. IRS has begun to discuss how it will use information to improve compliance, but it has not yet completed or fully documented a broader strategy for doing so, which we identified as a leading implementation practice in our prior work. For example, it has not developed key internal milestones for accomplishing the tasks necessary to enable it to use FATCA information to improve taxpayer compliance or performance measures to assess the cost and benefits of its compliance efforts. IRS officials told us that many of these decisions are contingent on areas of program design that have not yet been finalized. If IRS does not document a broad strategy, it risks negatively affecting FATCA implementation. Given that IRS’s implementation of FATCA is in its early stages, the strategy may be a high-level road map with timelines that could evolve over time.
  • IRS has developed its initial resource estimate for FATCA implementation, specifically for IT systems. For its IT resource estimate, IRS has taken steps to incorporate leading practices for a well-documented resource estimate, as identified in GAO’s CostEstimating and Assessment Guide. However, IRS has not developed a comprehensive resource estimate for FATCA implementation. Comprehensiveness is another resource estimation leading practice. Without a timeline to develop the estimate, IRS may not be able to develop a reliable cost estimate and therefore risks not communicating key cost information to Congress and IRS management in time for them to make decisions affecting the implementation of FATCA. Given that IRS is in the early stages of implementing the FATCA requirements, it would be difficult for IRS to develop a comprehensive cost estimate at this time. However, IRS can take steps that would help ensure that it produces a timely, comprehensive estimate, such as establishing a timeline for completing the estimate. IRS told us that it does not have a timeline for a comprehensive estimate because some design details will not be known until later in the implementation process.

Why GAO Did This Study

Given the mobility of money and proliferation of foreign financial institutions (FFI), the potential for U.S. taxpayers to evade taxes on funds held in offshore accounts is greater than ever. To improve tax compliance for foreign accounts and entities, and cross-border transactions, Congress passed the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentives to Restore Employment Act of 2010. FATCA requires certain U.S. taxpayers to report to the Internal Revenue Service (IRS) their overseas assets and requires U.S. entities to withhold a portion of certain payments made to FFIs that have not entered into an agreement with IRS to report certain information with respect to the FFI’s U.S. accounts. FATCA is an effort to reduce tax evasion by creating greater transparency and accountability with respect to offshore accounts and entities held by U.S. taxpayers and by providing IRS with tools to further enforce tax laws. IRS believes that implementing these new requirements will increase tax compliance, which will help close the gap between taxes owed and taxes paid. IRS recently estimated a net tax gap of $385 billion for tax year 2006, though IRS has not estimated the percentage of the tax gap specifically attributable to offshore accounts. Implementing FATCA will provide IRS with a substantial amount of new information. However, that new information could be challenging to manage.

Congress asked us to review IRS’s FATCA implementation plans. Our objectives were to (1) assess IRS’s approach for implementing the FATCA requirements, (2) assess the extent to which IRS has developed plans to use the information from FATCA to improve tax compliance, and (3) determine the extent to which IRS is incorporating leading practices to develop its resource estimate for implementing FATCA.

What GAO Recommends

In order to improve FATCA implementation, but recognizing that IRS is phasing in implementation, we recommend that the Commissioner of Internal Revenue take the following three actions, which may evolve over time:

  • develop a consolidated risk assessment;

  • complete a broad strategy, including a timeline and performance measures, for how IRS intends to use information collected based on the FATCA requirements to improve tax compliance; and

  • establish and document a timeline for completing a comprehensive FATCA cost estimate.

For more information, contact James R. White at (202) 512-9110 or whitej@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In April 2012, the Internal Revenue Service (IRS) told us that it had begun developing a consolidated Risk Management Plan for the Foreign Accounts Tax Compliance Act (FATCA) program. In July 2012, IRS told us that they completed the plan. On September 6, 2012, IRS provided GAO with a copy of this plan that lays the foundation for its risk activities, and will evolve as the program implementation advances. This plan consolidates information on the FATCA program workstreams, the roles and responsibilities of staff involved in the risk management planning process, an explanation of the risk management process, and the risk management methodology. The plan also includes a comprehensive template where internal stakeholders identify risks and issues on a continuous basis while monitoring mitigation procedures.

    Recommendation: In order to improve FATCA implementation, but recognizing that IRS is phasing in implementation, the Commissioner of Internal Revenue should develop a consolidated risk assessment.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: The agency provided GAO with a documented strategy in July 2013 documenting its current and planned efforts to use information collected based on the FATCA requirements to improve tax compliance. This strategy includes a timeline and discussion of using performance measures.

    Recommendation: In order to improve FATCA implementation, but recognizing that IRS is phasing in implementation, the Commissioner of Internal Revenue should complete a broad strategy, including a timeline and performance measures, for how IRS intends to use information collected based onthe FATCA requirements to improve tax compliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: In our April 2012 report, we recommended that the Internal Revenue Service (IRS) establish and document a timeline for completing a comprehensive cost estimate for the Foreign Account Tax Compliance Act (FATCA) program. Recognizing that IRS is phasing in implementation, we acknowledged that the timeline may evolve over time. IRS agreed with our recommendation and told us in July 2012 that the agency's implementation date for establishing and documenting a timeline was October 2012. In October 2012, January 2013, and March 2013, IRS provided us with interim updates for FATCA program costs. Additional updates are pending as IRS identifies dependencies for the program.

    Recommendation: In order to improve FATCA implementation, but recognizing that IRS is phasing in implementation, the Commissioner of Internal Revenue should establish and document a timeline for completing a comprehensive FATCA cost estimate.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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