Tax Administration

GAO was asked to review available data on the tax compliance of U.S. citizens living abroad. GAO found the Internal Revenue Service (IRS) has not estimated the overall prevalence of nonfiling abroad or the resulting loss of tax revenue, and the data GAO identified in its review were inadequate to support reliable quantified estimates. Data on the number of U.S. taxpayers residing abroad and the number of returns they file are of uncertain reliability, and the amount of taxes that nonfilers would owe if they were to file is unknown. One recent IRS initiative, however, focused on certain Mideast countries and identified enough nonfilers and additional tax revenue that IRS believes there may be benefit to looking for concentrations of nonfilers in other foreign countries.

GAO noted that: (1) IRS has not estimated the overall prevalence of nonfiling abroad or the resulting loss of tax revenue, and the data GAO identified in its review were inadequate to support reliable quantified estimates; (2) data on the number of U.S. taxpayers residing abroad and the number of returns they file are of uncertain reliability, and the amount of taxes that nonfilers would owe if they were to file is unknown; (3) one recent IRS initiative, however, focused on certain Mideast countries and identified enough nonfilers and additional tax revenue that IRS believes there may be benefits to looking for concentrations of nonfilers in other foreign countries; (4) GAO was able to identify several factors that may limit IRS' enforcement of the filing requirement or otherwise contribute to nonfiling abroad; (5) some of these factors are beyond IRS' control; (6) the income of U.S. citizens residing abroad is generally not subject to U.S. tax withholding or information reporting if it is derived from foreign employers or foreign financial investments; (7) IRS data show that tax withholding and information reporting by employers or other income providers resulted in much higher rates of tax compliance than when neither system is in place; (8) IRS generally cannot collect unpaid taxes from assets that have been transferred to a foreign country; (9) the enforcement actions that IRS uses in the United States have no legal standing in most foreign countries; (10) although IRS obtains passport data from the Department of State, it has made little use of these data; and in recent years, IRS has not attempted to penalize the large number of applicants who fail to furnish a social security number (SSN), as the law provides; (11) IRS has no systematic way of capturing a passport applicant's country of residence and occupation, which could provide demographic data on foreign concentrations of U.S. citizens and help IRS distinguish them from tourists; (12) the instructions for filing form 1040 are potentially misleading and may cause some taxpayers residing abroad to erroneously conclude that they have no obligation to file; (13) IRS' recent initiatives concerning nonfiling abroad include a special project in the Middle East that was initiated as a result of events related to the Desert Storm War and a data-gathering effort to identify other potential concentrations of nonfilers residing abroad; and (14) in fiscal year 1997, IRS began to gather foreign census and other demographic information on U.S. citizens residing abroad to identify other countries where similar compliance efforts may be beneficial.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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