Foreign Account Reporting Requirements: IRS Needs to Further Develop Risk, Compliance, and Cost Plans

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.