Taxpayer Information
Data Sharing and Analysis May Enhance Tax Compliance and Improve Immigration Eligibility Decisions Gao ID: GAO-04-972T July 21, 2004Data sharing can be a valuable tool for federal agencies. The Internal Revenue Service (IRS) can use data from taxpayers and third parties to better ensure taxpayers meet their obligations. Likewise, Congress has authorized certain agencies access to taxpayer information collected by IRS to better determine eligibility for benefit programs. GAO determined (1) the extent to which the IRS and Citizenship and Immigration Services (CIS) within the Department of Homeland Security share and verify data and (2) the benefits and challenges, if any, of increasing such activities. GAO also studied IRS's Offshore Voluntary Compliance Initiative (OVCI) to provide information on (1) the characteristics of the taxpayers who came forward under OVCI and (2) how those taxpayers became noncompliant.
IRS and CIS do not share data with each other to ensure taxpayers meet their tax obligations or to determine immigration eligibility. IRS officials believe that data on taxpayers' income they currently use are more accurate and useful for enforcing tax law than CIS data. In a nationwide selection of 413,723 businesses applying to sponsor immigrant workers from 1997 through 2004, GAO found 19,972 (5 percent) businesses and organizations that were unknown to IRS. Information like this can be used to select taxpayers for audit or other enforcement efforts. Further, CIS officials believe IRS taxpayer data would useful for immigration decisions. In our nationwide selection, GAO found that 67,949 (16 percent) businesses applying to sponsor immigrant workers from 1997 through 2004 did not file one or more tax returns. Failure to file a return could be relevant to a CIS adjudicator's decision about whether a business meets the financial feasibility (ability to pay wages) and legitimacy (proof of existence) tests for sponsoring an immigrant. For data sharing to occur, challenges must be overcome, including I.R.C. Section 6103's limitation on IRS's ability to share data with CIS and technological problems like the lack of automated financial data at CIS. Because the confidentiality of tax data is considered crucial to voluntary compliance, executive branch policy calls for a business case to support sharing tax data. IRS and CIS have not analyzed data sharing benefits and costs. The OVCI program attempted to quickly bring taxpayers who held funds offshore illegally back into compliance while simultaneously gathering more information about them and the promoters of offshore schemes. Under OVCI, 861 taxpayers came forward and IRS received more than $200 million in unpaid taxes, penalties, and interest. According to IRS data, OVCI applicants are a diverse group, with wide variations in income, geographic location, and occupation. Some applicants' noncompliance appears to be intentional, while others' appears to be inadvertent. Given this diversity, multiple compliance strategies may be needed to bring taxpayers holding money offshore back into compliance.
RecommendationsOur 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.
Director: Team: Phone:GAO-04-972T, Taxpayer Information: Data Sharing and Analysis May Enhance Tax Compliance and Improve Immigration Eligibility Decisions
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United States Government Accountability Office:
GAO:
Testimony:
Before the Committee on Finance, U.S. Senate:
For Release on Delivery:
Expected at 10:00 a.m. EDT Wednesday, July 21, 2004:
TAXPAYER INFORMATION:
Data Sharing and Analysis May Enhance Tax Compliance and Improve
Immigration Eligibility Decisions:
Statement of Michael Brostek:
Director, Strategic Issues:
GAO-04-972T:
GAO Highlights:
Highlights of GAO-04-972T, a testimony before the Committee on
Finance, U.S. Senate
Why GAO Did This Study:
Data sharing can be a valuable tool for federal agencies. The Internal
Revenue Service (IRS) can use data from taxpayers and third parties to
better ensure taxpayers meet their obligations. Likewise, Congress has
authorized certain agencies access to taxpayer information collected
by IRS to better determine eligibility for benefit programs.
GAO determined (1) the extent to which the IRS and Citizenship and
Immigration Services (CIS) within the Department of Homeland Security
share and verify data and (2) the benefits and challenges, if any, of
increasing such activities. GAO also studied IRS‘s Offshore Voluntary
Compliance Initiative (OVCI) to provide information on (1) the
characteristics of the taxpayers who came forward under OVCI and (2)
how those taxpayers became noncompliant.
What GAO Found:
IRS and CIS do not share data with each other to ensure taxpayers meet
their tax obligations or to determine immigration eligibility. IRS
officials believe that data on taxpayers‘ income they currently use are
more accurate and useful for enforcing tax law than CIS data. In a
nationwide selection of 413,723 businesses applying to sponsor
immigrant workers from 1997 through 2004, GAO found 19,972 (5 percent)
businesses and organizations that were unknown to IRS. Information like
this can be used to select taxpayers for audit or other enforcement
efforts. Further, CIS officials believe IRS taxpayer data would useful
for immigration decisions. In our nationwide selection, GAO found that
67,949 (16 percent) businesses applying to sponsor immigrant workers
from 1997 through 2004 did not file one or more tax returns. Failure to
file a return could be relevant to a CIS adjudicator‘s decision about
whether a business meets the financial feasibility (ability to pay
wages) and legitimacy (proof of existence) tests for sponsoring an
immigrant. For data sharing to occur, challenges must be overcome,
including I.R.C. Section 6103‘s limitation on IRS‘s ability to share
data with CIS and technological problems like the lack of automated
financial data at CIS. Because the confidentiality of tax data is
considered crucial to voluntary compliance, executive branch policy
calls for a business case to support sharing tax data. IRS and CIS
have not analyzed data sharing benefits and costs.
Businesses Sponsoring Immigrant Workers That May Not Have Met CIS
Financial Feasibility or Legitimacy Requirements, 1997–2004:
[See PDF for image]
[End of figure]
The OVCI program attempted to quickly bring taxpayers who held funds
offshore illegally back into compliance while simultaneously gathering
more information about them and the promoters of offshore schemes.
Under OVCI, 861 taxpayers came forward and IRS received more than $200
million in unpaid taxes, penalties, and interest. According to IRS
data, OVCI applicants are a diverse group, with wide variations in
income, geographic location, and occupation. Some applicants‘
noncompliance appears to be intentional, while others‘ appears to be
inadvertent. Given this diversity, multiple compliance strategies may
be needed to bring taxpayers holding money offshore back into
compliance.
What GAO Recommends:
GAO is making a recommendation to the Secretary of Homeland Security
and the Commissioner of Internal Revenue to assess the benefits and
costs of data sharing to enhance tax compliance and improve
immigration eligibility decisions. IRS and CIS officials generally
agreed with GAO‘s recommendation.
GAO is not making recommendations on the OVCI program.
www.gao.gov/cgi-bin/getrpt?GAO-04-972T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or brostekm@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to participate in the committee's hearing today on issues
related to the tax gap, the difference between what taxpayers annually
report and pay and what they should have reported and paid in taxes. In
addressing the tax gap the Internal Revenue Service (IRS) uses many
strategies, two of which are obtaining corroborating information on
taxpayers' circumstances from third parties and analyzing data obtained
from taxpayers themselves. Just as IRS sometimes obtains corroborating
information from others, some federal agencies obtain tax data from IRS
to use in ensuring that benefits are properly awarded to applicants.
Related to obtaining corroborating information from others, as
requested, my testimony covers (1) the extent to which the IRS and
Citizenship and Immigration Services[Footnote 1] (CIS), within the
Department of Homeland Security (DHS), share and verify data and (2)
the benefits and challenges, if any, of increasing data sharing and
verifying activities. Related to analyzing information obtained from
taxpayers, and also as requested, my testimony provides information on
(1) the characteristics of the taxpayers who came forward under IRS's
Offshore Voluntary Compliance Initiative (OVCI) and (2) how those
taxpayers became noncompliant.
My statement today will address each of these topics in turn. Our scope
and methodology for each of the topics is briefly summarized early in
each section of the testimony, and more detailed explanations of our
scope and methodology are presented in appendix I for data sharing
analysis and appendix II for our analyses related to OVCI. We conducted
our work from July 2003 through June 2004 in accordance with generally
accepted government auditing standards.
Regarding data sharing, in summary we found that IRS and CIS are not
sharing data with each other to ensure taxpayers are meeting their tax
obligations or to determine immigration eligibility but that data
sharing appears to have the potential to assist IRS in identifying
noncompliant taxpayers and to improve CIS eligibility decisions in
granting immigration benefits. For example, IRS may be able to use
immigration information to help identify taxpayers with no record of
recent filing activity and that are not easily identified via current
compliance efforts, such as self-employed and small business taxpayers.
In our nationwide selection of 413,723 businesses applying to sponsor
immigrant workers from 1997 through 2004, we found 19,972 businesses
and organizations that were unknown to IRS. Although IRS does not
currently use CIS data, information like this can be used to select
taxpayers for audit or other enforcement efforts. IRS officials believe
that data on taxpayers' income they currently use are more accurate and
useful for enforcing tax law than CIS data. Similarly, CIS may benefit
from obtaining IRS data. For example, in our nationwide selection,
67,949 businesses and organizations applying to sponsor immigrant
workers did not file one or more tax returns. Failure to file a return
could be relevant to a CIS adjudicator's decision about whether a
business meets the financial feasibility (ability to pay wages) and
legitimacy (proof of existence) tests for sponsoring an immigrant.
Although CIS officials believe IRS taxpayer data would be useful, CIS
does not obtain data from IRS primarily because, under Internal Revenue
Code (I.R.C.) Section 6103, CIS is not authorized to directly receive
information from IRS. To enable data sharing between IRS and CIS,
several challenges must be first overcome, including the limitations of
I.R.C. Section 6103 and technological problems such as the lack of
automated financial data at CIS. Because the confidentiality of tax
data is considered crucial to voluntary compliance, executive branch
policy calls for a business case to support sharing tax data. IRS and
CIS have not analyzed data sharing benefits and costs.
We are making a recommendation to IRS and CIS to assess the benefits
and costs of data sharing to enhance tax compliance and improve
immigration eligibility decisions. IRS and CIS generally agreed with
our recommendation.
Regarding the OVCI program, in summary, IRS's database shows that 861
taxpayers voluntarily came forward, and IRS officials say they have
received more than $200 million in previously unpaid taxes, penalties,
and interest during this attempt to quickly bring taxpayers who held
funds offshore illegally back into compliance while simultaneously
gathering more information about them and the promoters of offshore
arrangements.[Footnote 2] Under the OVCI program, IRS did not impose
certain penalties for those taxpayers who voluntarily come forward,
admitted they illegally held money offshore, and provided amended
returns and complete information about their offshore arrangements for
tax years after 1998. IRS used information provided by the taxpayers to
build a database containing information such as the taxpayers' income,
additional taxes owed, and use of promoters of offshore tax schemes.
Since the data are limited to taxpayers who voluntarily admitted they
illegally held offshore assets, they are not necessarily representative
of any larger population of taxpayers who used offshore arrangements to
avoid paying U.S. taxes. The taxpayers who applied for inclusion in the
OVCI program were a diverse group, with wide variations in income,
geographic location, and occupation, although some commonalities
emerged for certain of these characteristics. In addition, some
applicants' noncompliance appears to be intentional, such as those who
used fairly elaborate schemes, while others' noncompliance appears to
be inadvertent. Further, more than half of the OVCI applicants in each
year we examined generally had reported their offshore income and paid
taxes but had failed to file a Report of Foreign Bank and Financial
Accounts (FBAR), and less than 16 percent said that they used
promoters. Given this diversity, multiple compliance strategies may be
needed to bring taxpayers holding money offshore back into compliance.
Because additional tax, interest, and penalties collected to date from
OVCI applicants who owed tax have been relatively modest--a median of
about $5,400--personnel-intensive investigations of individual
taxpayers who have hidden money offshore could significantly reduce the
net gain to Treasury from these cases.
The next section describes in more detail our analyses related to data
sharing between IRS and CIS. It is followed by detailed information
about the participants in IRS's OVCI.
Data Sharing Between IRS and CIS:
Our key findings resulting from our look at data sharing between IRS
and CIS are as follows:
IRS may benefit from immigration information to select taxpayers who
appear to be noncompliant for enforcement actions and, if immigration
applicants were required to be current on their tax obligations before
applying for immigration benefits, from taxpayers coming to IRS to
resolve tax issues. Regarding improving IRS's selection of potentially
noncompliant taxpayers, IRS could benefit if CIS data helped it
identify taxpayers who fail to file tax returns or who file but
underreport their income. For nonfiling, we matched a nationwide
selection of automated immigration applications from 1997 through
2004[Footnote 3] with IRS taxpayer information and found that of the
413,723 businesses with Employer Indentification Numbers (EINs) or
Social Security Numbers (SSNs)[Footnote 4] in CIS's database that
applied to sponsor immigrant workers, 19,972 businesses and
organizations were unknown to IRS. For underreporting, we found 10
business/organization sponsors in our nonprobability sample of hard
copy immigration applications[Footnote 5] that reported more taxable
income to CIS than to IRS. One business reported approximately $162,000
in taxable income to CIS in 2001 and no taxable income to IRS for the
same period. Although we do not know whether these businesses reported
accurately to either CIS or IRS, discrepancies like these often are
considered by IRS in selecting firms or individuals to audit. Regarding
the potential numbers of taxpayers who would need to resolve their tax
situations if CIS applicants were required to be current on their tax
obligations before applying for benefits, we found, that 18,942
businesses in our nationwide selection sponsoring immigrants from 1997
through 2004 had unpaid tax assessments at the time of application; the
assessments totaled $5.6 billion as of December 2003. Further, in
addition to the 19,972 businesses unknown to IRS mentioned above, all
of the taxpayers that IRS already knew had not filed one or more tax
returns but that applied for immigration benefits--67,949 according to
our match of a nationwide selection of immigration applications--also
would need to resolve their tax issues.
At the same time, CIS may also benefit from having access to IRS
taxpayer information when making immigration eligibility decisions. For
example, IRS taxpayer data can help CIS officials identify those
businesses and organizations that may not have met the requirements for
financial feasibility (ability to pay wages) or legitimacy (proof of
existence) when they apply to sponsor immigrants. We found that 67,949
of 413,723 (16 percent) of business sponsors in our nationwide
selection were in IRS's nonfiler database at the time of their
application to sponsor an immigrant worker. These business sponsors had
not filed one or more income or Federal Insurance Contribution Act
(FICA)/Federal Unemployment Tax Act (FUTA) employment returns between
1997 and 2004. Additionally, 19,972 business sponsors (5 percent) were
unknown to IRS. Especially for smaller businesses, failure to file a
return may indicate the business is struggling financially. CIS
officials told us that access to IRS taxpayer data could also improve
the efficiency of making eligibility decisions by reducing decision-
making time and decreasing rework/follow-up work, which, in turn, could
help CIS address its backlog for processing immigration applications.
CIS and, to a lesser extent, IRS face significant challenges for
establishing a data sharing relationship. CIS faces several technology
challenges, including CIS does not automate any financial data, such as
the applicant's income, and both agencies use different tracking
numbers--that is, CIS uses alien registration numbers, which CIS
assigns to individuals and businesses, while IRS uses SSNs or EINs for
individuals and businesses. Given CIS's data limitations, IRS would
need to determine whether and how it could efficiently access and use
CIS data to identify potentially noncompliant taxpayers. In addition,
since I.R.C. Section 6103 does not authorize IRS to disclose taxpayer
information for immigration eligibility decisions, CIS would need to
seek a legislative change to I.R.C. Section 6103 or ask taxpayers for
consent to obtain tax data directly from IRS. However, because the
confidentiality of tax data is considered crucial to voluntary
compliance, executive branch policy calls for a business case to
support sharing tax data. Further, the Computer Matching and Privacy
Protection Act of 1988 generally requires that no matching program
between agencies can be approved unless the agencies have performed a
cost-benefit analysis for the proposed matching program that
demonstrates the program is likely to be cost effective. IRS and CIS
have not analyzed and do not currently have plans to analyze data
sharing benefits and costs.
Our findings related to data sharing are based on interviews, reviews
of agency documents and various publications, and matching of
immigration and IRS taxpayer data. We used two sets of CIS data to
match with IRS taxpayer data to determine the potential value for
increased data sharing and matching. First, we used nationwide
selection of automated CIS applications that included SSNs and EINs
from immigration applications submitted to CIS service centers from
1997 through 2004. Approximately 3.4 million of 4.5 million automated
immigration records had SSNs or EINs that could be used to match with
SSNs and EINs in IRS databases. We used this data to determine whether
businesses and others that had applied to sponsor immigrant workers or
immigrants applying to change their immigration status had filed a tax
return with IRS and, if so, whether they owed taxes to IRS. Because the
nationwide selection did not include any financial information, we
could not use it to determine whether CIS applicants reported the same
income amounts to IRS as well as to CIS. Therefore, we also selected a
nonprobability sample of about 1,000 immigration hard copy applications
for citizenship, employment, and family-related immigration and change
of immigration status filed by businesses and individuals from 2001
through 2003 at 4 immigration locations.[Footnote 6] We used the hard
copy applications to build a database of personal and financial
information. We used this sample to determine whether CIS applicants
reported the same income information to IRS as to CIS and also as a
second source of information on the extent to which CIS applicants may
not have filed tax returns and may have owed taxes to IRS. We assessed
the reliability of IRS's Individual Master File (IMF) and Business
Master File (BMF) data and the CIS's Computer Linked Application
Information Management System, Version 3.0 (CLAIMS 3), which is a
database containing nationwide immigration data. We determined that the
data were sufficiently reliable for the purposes of this testimony.
Background:
As we have previously found, federal agencies are increasingly using
data sharing to help verify applicant-provided information.[Footnote 7]
To facilitate this, Congress has authorized a number of agencies to
access federal taxpayer information collected by IRS to improve the
accuracy of eligibility decisions. The Social Security Administration
(SSA) is one agency, for example, that has an extensive data sharing
relationship with IRS, which aids in administering Social Security
benefit programs and ensuring taxpayer compliance. Overall, SSA is
responsible for paying approximately $42 billion monthly in benefits to
more than 50 million people. This relationship, which has been in place
for almost 30 years, provides the basis for matching of employee
earnings reported to SSA and IRS; allows for the disclosure of taxpayer
mailing address information for the Personal Earnings and Benefit
Estimate Statement program; and helps SSA determine the eligibility of
applicants and recipients of Supplemental Security Income. IRS, on the
other hand, uses SSA-processed wage and earnings information to ensure
tax compliance by verifying individuals' income tax return information
against that reported by their employers. SSA officials say that
sharing and verifying taxpayer information is cost and time efficient,
reduces waste and fraud, and is mutually beneficial for both agencies.
Although such data sharing arrangements can be useful, privacy
advocates, lawmakers, and others are concerned about the extent to
which the government can disclose and share citizens' personal
information, including sharing with other government agencies.
Historically, lawmakers and policymakers have created legislation to
address these concerns. For example, the Privacy Act of 1974[Footnote
8] regulates the federal government's use of personal information by
limiting the collection, disclosure, and use of personal information
maintained in an agency's system of records. The Computer Matching and
Privacy Protection Act of 1988[Footnote 9] further protects personal
information by requiring agencies to enter into written agreements,
referred to as matching agreements, when they share information that is
protected by the Privacy Act of 1974 for the purpose of conducting
computer matches.
As one of the largest repositories of personal information in the
United States, IRS is often at the center of these concerns. IRS
receives tax returns from about 116 million individual taxpayers who
have wage and investment income and from approximately 45 million small
business and self-employed taxpayers each year. IRS performs a variety
of checks to ensure the accuracy of information reported by these
taxpayers on their tax returns. These checks include verifying
computations on returns, requesting more information about items on a
tax return, and matching information reported by third parties to
income reported by taxpayers on returns (i.e., document matching).
IRS's document matching program has proven to be a highly cost-
effective way of identifying underreported income and thereby bringing
in billions of dollars of tax revenue while boosting voluntary
compliance.
I.R.C. Section 6103, amended significantly by the Tax Reform Act of
1976,[Footnote 10] is the primary law used to restrict IRS's data-
sharing capacity. The law provides that tax returns and return
information are confidential and may not be disclosed by IRS, other
federal employees, state employees, and certain others having access to
the information except as provided in I.R.C. Section 6103. I.R.C.
Section 6103 allows IRS to disclose taxpayer information to federal
agencies and authorized employees of those agencies for certain
specified purposes. Accordingly, I.R.C. Section 6103 controls whether
and how tax information submitted to IRS on federal tax returns can be
shared. I.R.C. Section 6103 specifies which agencies (or other
entities) may have access to tax return information, the type of
information they may access, for what purposes such access may be
granted, and under what conditions the information will be received.
For example, I.R.C. Section 6103 has exceptions allowing federal
benefit and loan programs to use taxpayer information for eligibility
decisions. Because the confidentiality of tax data is considered
crucial to voluntary compliance, if agencies want to establish new
efforts to use taxpayer information, executive branch policy calls for
a business case to support sharing tax data.
CIS is part of DHS, which was established by the Homeland Security Act
of 2002.[Footnote 11] CIS is responsible for administering several
immigration benefits and services transferred from the former
Immigration Services Division of the Immigration and Naturalization
Service. Included among the immigration benefits and services CIS's
offices oversee are citizenship, asylum, lawful permanent residency,
employment authorization, refugee status, intercountry adoptions,
replacement immigration documents, family-and employment-related
immigration, and foreign student authorization. CIS's functions include
adjudicating and processing applications for U.S. citizenship and
naturalization, administering work authorizations and other petitions,
and providing services for new residents and citizens. CIS's employees
for reviewing immigration benefit applications and determining if they
should be approved are its adjudicators, while CIS's Fraud Detection
Units (FDU) investigate cases in which there are trends or patterns
that suggest potential fraud. CIS staff work with applicants through
the adjudicatory process beginning with initial contact when an
application or petition is filed, through the stages of gathering
information on which to base a decision. This contact continues to the
point of an approval or denial, the production of a final document or
oath ceremony, and the retirement of case records.
IRS and CIS Do Not Share and Verify Data for Tax Compliance or
Eligibility Decisions:
IRS does not use personal information collected and maintained by CIS
to ensure that taxpayers meet their tax obligations because IRS
officials believe that data on taxpayers' income they already receive
from taxpayers and third parties is more accurate and useful for
enforcing tax obligations than CIS data. IRS officials cite a previous
data sharing effort with CIS that was ultimately ended due to
incomplete data and increased costs. In the mid-1980s, CIS and IRS
entered into a cost-reimbursable data sharing agreement that enabled
CIS to share immigrant data with IRS by completing IRS Form
9003.[Footnote 12] According to IRS officials, IRS used form 9003 to
help identify whether individuals who filed for U.S. permanent
residency had filed tax returns and properly reported their income. CIS
and IRS shared form 9003 data for about 10 years but ended this
arrangement in 1996, according to an IRS official. Much of the form
9003 immigrant data received from CIS lacked SSNs-a primary mechanism
IRS uses for tracking individual taxpayers, which made it increasingly
difficult for IRS to use the data to determine whether individuals had
filed taxes and properly reported income, according to IRS officials.
Additionally, the costs associated with the data sharing agreement
escalated each year, to the point that, in IRS's opinion, it was no
longer cost effective.
Under I.R.C. Section 6103, CIS is not authorized to receive taxpayer
information from IRS directly. Although CIS officials would like to use
IRS taxpayer data to help make immigration eligibility decisions, they
have not sought it due to perceived difficulty in overcoming the I.R.C.
Section 6103 limitation. CIS obtains self-reported personal and
financial information provided by (1) businesses and individuals
applying to sponsor immigrant workers, (2) individuals applying to
sponsor relatives, and (3) individuals applying to enter the country,
extend their stay or obtain citizenship. CIS also obtains information
from third parties, not including IRS, to verify applicants' self-
reported data. Although CIS adjudicators sometimes ask businesses and
individuals to provide them with either official income tax returns
from IRS or unofficial copies to verify financial information reported
on immigration forms, immigration officials we spoke with in five field
locations said applicants could alter or falsify those documents.
Figure 1 illustrates the current lack of data verification activities
between CIS and IRS during the immigration application process.
Figure 1: Illustration of the Current Lack of Data Verification between
CIS and IRS:
[See PDF for image]
[End of figure]
Increased Data Sharing May Benefit IRS's Tax Compliance Efforts and
CIS's Immigration Eligibility Decisions:
Increased data sharing and verification between IRS and CIS may result
in IRS increasing tax compliance and CIS making better immigration
eligibility decisions. CIS data may be useful to IRS in identifying
businesses and organizations unknown to IRS and those that may not have
reported the same income to both agencies. Further, IRS data may enable
CIS to (1) better identify businesses or individuals that may not have
met immigration eligibility criteria because they had unpaid
assessments or did not file tax returns and (2) improve the efficiency
of adjudicators' eligibility decision making.
IRS May Benefit From Using CIS Information to Identify Taxpayers with
No Recent Filing Activity or That Report Different Incomes to Both
Agencies:
IRS may be able to use immigration information to help identify
taxpayers with no record of recent filing activity and that are not
easily identified via current compliance efforts, such as self-employed
and small business taxpayers. IRS shares with and receives from other
agencies, such as SSA, personal and financial information via document
matching to help identify individuals and businesses with tax
obligations. However, document matching is not very effective for
taxpayers that have sources of income not subject to such reporting.
For example, the income of self-employed taxpayers and others that
receive income directly from clients is not always subject to third
party reporting. Both GAO and the Treasury Inspector General for Tax
Administration (TIGTA) have previously reported on these document-
matching limitations and stated that certain taxpayers, such as those
who are self-employed, are much less compliant in fulfilling their tax
obligations than those whose income is subject to information
reporting.[Footnote 13] IRS has also acknowledged that those taxpayers
that are not well covered by document matching programs represent the
biggest portion of taxpayers that do not voluntarily and timely pay
their full taxes. IRS reports taxpayers served by IRS's Small Business
and Self-Employed Division are among those least covered by their
document-matching programs. As of March 2001, these taxpayers accounted
for 64 percent of IRS's accounts receivable database--which contains
taxes assessed but not paid.
Immigration information may be potentially useful to IRS in identifying
taxpayers required to file but that have not and that may be applying
to (1) sponsor immigrants, (2) seek citizenship, or (3) extend their
stay in the country. We matched a nationwide selection of automated
applications of 413,723 business and organizations applying to sponsor
temporary, permanent and religious workers between 1997 and 2004 and
found 19,972 businesses and organizations that were unknown to IRS. We
matched a nonprobability sample of hard copy immigration applications
submitted between 2001 and 2003 and found 20 of 475 business/
organization sponsors had established an identity with IRS at some time
in the past but had no record of tax activity in the past 5 years. An
additional 13 businesses/organizations in our nonprobability sample
were unknown to IRS. For example, one company sponsoring a temporary
worker reported a gross annual income of $156 million on its CIS
application, but the EIN listed on its application does not match any
of IRS's master file databases. Five business sponsors in our
nonprobability sample submitted income tax returns to CIS with their
applications, but IRS had no record of receiving these returns.
In order to determine whether these businesses/organizations were
operating, and thus, likely to have had filing requirements, we
searched the business/organizations' web sites, "LexisNexis,"[Footnote
14]and the online yellow pages. We found 31 of the 33 total business/
organization sponsors that had established an identity or were unknown
to IRS appeared to be in operation. For example, one business
sponsoring a permanent worker had a website, a listing on LexisNexis,
and on the online yellow pages, all with the same address.
Although the majority of businesses and organizations applying to
sponsor immigrant workers in our nonprobability sample reported the
same income to both agencies, we identified 10 business/organization
sponsors that had submitted tax return information to CIS with
significantly different income than they reported to IRS. As a group,
the 10 business sponsors reported over half a million dollars more to
CIS in taxable income than to IRS for the period from 2001 through
2002. For example, one business reported a little over $162,000 in
taxable income to CIS in 2001 and no taxable income to IRS for the same
period. Although we do not know whether these businesses reported
accurately to either CIS or IRS, discrepancies like these often are
considered by IRS in selecting firms or individuals to audit.
IRS Might Also Benefit if Applicants for Immigration Benefits Were
Required to Be Current on Their Taxes:
IRS might gain an additional benefit from establishing a data sharing
relationship with CIS if immigration applicants were required to be
current on their taxes before they could apply for immigration
benefits. That is, if sponsors or immigrants were required to provide
CIS with evidence from IRS that they had no outstanding tax obligation
before any immigration benefit application could be processed, sponsors
and immigrants would need to have filed returns and paid taxes due. IRS
officials said that such a requirement would likely help with tax
compliance and would be similar to procedures IRS currently follows in
certain other situations.
Although the information sharing to help target IRS enforcement
efforts, as previously discussed, would help IRS identify and follow up
on some sponsors and immigrants that may not be fully compliant, a
requirement that all immigration benefit applicants be current on their
tax obligations has the potential to increase the total number of
noncompliant taxpayers that would be brought into compliance. For
example, requiring all immigration benefit applicants to be current on
their tax obligations would mean that delinquent taxpayers IRS knows
about but that have not yet settled their tax debts would need to do
so. Based on our nationwide selection, we found that 18,942 of 413,723
(5 percent) businesses applying to sponsor workers entering the country
from 1997 through 2004 had unpaid assessments of $5.6 billion at the
time they applied to CIS, and 67,949 business sponsors had not filed
one or more required income or employment tax forms. Finally, the
19,972 business sponsors in our nationwide selection that applied to
CIS for which IRS had no record of receiving a tax return would need to
resolve their tax status with IRS. Figure 2 shows our results on
business sponsors that have unpaid assessments or are nonfilers for
both our nationwide selection and nonprobability sample of immigration
applications.
Figure 2: Businesses Who Owed IRS Taxes or Nonfilers Known to IRS When
They Applied to Sponsor Workers to Enter the Country, 1997 to 2004:
[See PDF for image]
[End of figure]
IRS has established a process for taxpayers that need to demonstrate
clean tax records before they can apply for benefits. Taxpayers can
obtain a "fact of filing" or "fact of payment" document to demonstrate
that they have been filing required tax returns and paying their taxes.
For example, the state of Nevada requires casino employees to be
current on their federal taxes, and applicants must sign taxpayer
consent forms allowing the state to verify tax information with IRS via
the "fact of filing" or "fact of payment."
CIS May Benefit from Using IRS Taxpayer Data to Make More Accurate
Immigration Eligibility Decisions:
CIS headquarters officials told us immigration adjudicators use two
basic criteria for evaluating the eligibility of businesses and
individuals to sponsor immigrants: (1) the sponsor's financial
feasibility and (2) the legitimacy of the sponsor's existence.
Financial feasibility refers to the sponsor's ability to pay wages to
or financially support the individual being sponsored. For example, if
a company is sponsoring an immigrant for employment, that company must
show that it has sufficient ability to pay the worker. IRS information
on a taxpayer's income and the status of a taxpayer's account is
relevant and useful to the adjudicator's decision on the ability to
pay, according to CIS officials. In the case of a nonworker petition
(e.g. a relative), such as with the Affidavit of Support (I-864) that
accompanies forms such as the Application to Register Permanent Status
or Adjust Status (I-485)[Footnote 15], the sponsor must provide
evidence that his or her household income equals or exceeds 125 percent
of the federal poverty line. Information on tax returns filed with IRS
would show income levels and could be used to validate applicant-
provided information. Legitimacy, in the case of worker petitions,
refers to whether a sponsoring business or organization actually
exists, has employees, and has real assets. IRS tax data could be used
to verify these facts, according to CIS officials. In the case of
nonworker petitions, legitimacy refers to the relationship between the
sponsor and immigrant as being entered into in "good faith." For
example, with the Petition to Remove the Conditions on Residence (I-
751), which is based on an immigrant's marriage to a U.S. citizen or
permanent resident, the immigrant must show evidence of that
relationship through documents such as financial records including tax
returns. IRS tax data could be used to help verify the marital status
of individuals.
In the case of immigrants applying for citizenship, adjudicators also
use a test of "good moral character" as one of the criteria in
determining an immigrant's eligibility for citizenship. In testing for
"good moral character," CIS asks such things as whether the applicant
was ever imprisoned or failed to file a federal, state, or local tax
return. Adjudicators said that having evidence directly from IRS on
whether an immigrant answered the tax-related questions accurately
would be very useful in their decision-making process.
Our analysis identified sponsors and immigrants that IRS classified as
nonfilers and therefore may not meet immigration financial feasibility
and legitimacy tests. In our nationwide selection submitted between
1997 and 2004, we found 67,949 of 413,723 (16 percent) businesses
applying to sponsor immigrant workers did not file one or more tax
returns, such as income or employment tax forms.[Footnote 16] In
addition, knowing that IRS had no record of receiving a tax return from
19,972 businesses that applied to CIS to sponsor immigrants would be
relevant to adjudicators' decisions. Similarly, 112 of 475 (24 percent)
businesses in our nonprobability sample for sponsorship of temporary,
permanent, and religious workers from 2001 through 2003 did not file
one or more tax returns, such as income or employment tax forms.
Of the individuals applying to sponsor family members' or workers'
entry into or stay in the country, 791 of 51,169 individuals in our
nationwide selection were in IRS's nonfiler database, meaning these
sponsors did not file one or more returns during the period from 1997
through 2004. According to IRS, these individual sponsors are
classified as nonfilers but may not be required to file for a variety
of reasons, including insufficient income. This reason, however, may
raise questions about whether the sponsor is able to meet CIS's
financial feasibility and legitimacy tests. We also found that some
individual immigrants applying to extend their stay were classified as
nonfilers. We found that 25,662 of 2,009,046 individuals in our
nationwide selection applying to CIS from 1997 through 2004 did not
file income tax returns. Some of these individuals may not have been
required to file.
Our analysis also identified business and individual sponsors that had
unpaid assessments with IRS and therefore may not have met
immigration's financial feasibility and legitimacy tests. Our
nationwide results showed that 18,942 of 413,723 business (5 percent)
sponsors applying to sponsor immigrants from 1997 through 2004 had
unpaid assessments at the time of application; the assessments totaled
$5.6 billion as of December 2003. We found that 94 of 475 (20 percent)
businesses in our nonprobability sample applying to sponsor immigrants
from 2001 through 2003 collectively had unpaid assessments at the time
of application. The assessments totaled $39 million as of December
2003. CIS officials said IRS information on small businesses would be
especially helpful in assessing whether small businesses have the
necessary income or financial feasibility to support the workers. We
identified instances in which businesses sponsored a number of workers
over several years but had unpaid assessments to IRS and failed to file
numerous tax forms. For example, one company sponsored more than 600
workers from 1997 through 2004 but is currently delinquent on 12 tax
returns for $8 million and failed to file 3 income tax returns,
employment tax returns, or both. We found that 6,894 business sponsors
in our nationwide selection of immigration applications matched on IRS
databases containing both information on unpaid assessments and
nonfilers. Figures 3 and 4 show matching results identifying nonfilers
and those with unpaid assessments from our nationwide selection and
nonprobability sample.
Figure 3: Business Sponsors in GAO's Nonprobability Sample and the
Nationwide Selection That May Not Have Met Financial Feasibility or
Legitimacy Requirements:
[See PDF for image]
Note: Data from immigration files was matched with IRS's Business
Master File including the Accounts Receivable Database, which contains
IRS data on unpaid assessments and the Nonfiler Database, which
contains IRS data on businesses that should have filed a tax return but
did not.
Source: GAO Analysis:
[End of figure]
Some individuals applying to sponsor immigrants also had unpaid
assessments when they submitted applications to CIS. Of 51,169
individual sponsors in our nationwide selection for which CIS included
SSNs, 889 had unpaid assessments when they applied to CIS and the
assessments totaled $49.8 million as of December 2003. Fourteen of 273
individual sponsors in our nonprobability sample had unpaid assessments
when they applied to CIS; the assessments totaled $84,761 as of
December 2003. We also found individual immigrants applying to extend
their stay had unpaid assessments at the time they applied to CIS. We
found 38,877 of 2,009,046 individuals immigrants from our nationwide
selection that applied to CIS from 1997 through 2004 had unpaid
assessments at the time of application; the assessments totaled $328
million. Similarly, 20 of 804 individuals immigrants in our
nonprobability sample applying to CIS from 2001 through 2003 had unpaid
assessments at the time of application.
Immigration officials we spoke with at five field locations told us
receiving and using IRS taxpayer information would be very valuable in
helping them make better decisions for immigration requests and in
investigating potential benefit fraud cases. Adjudicators expressed
concerns about the legitimacy of tax returns they review when making
immigration eligibility decisions and stated they would like to verify
applicant/sponsor provided data-including copies of tax returns--
against what is maintained in IRS's databases. They told us they have
no way to check tax return information when they suspect applicants
have submitted (1) bogus returns that can be printed from home
computers using readily available tax preparation software and (2)
returns that falsify so-called "IRS-certified tax returns." For
example, adjudicators in the Vermont service center told us about an
instance in which a company sponsoring multiple immigrants provided
copies of tax returns that contained the same company name and EIN but
reported differing income and assets for the same year (see fig. 5).
Additionally, this company submitted the income tax return for U.S.
corporations (IRS Form 1120) with one application and the short-form
income tax return for U.S. corporations (IRS Form 1120-A) with the
other application for the same tax year, even though it did not meet
the IRS Form 1120-A's filing requirement of having gross receipts under
$500,000.
Figure 5: One Business Sponsor Submits Different Tax Returns to CIS:
[See PDF for image]
Note: We used a fictitious business name and EIN to protect the
identity of the CIS applicant.
[End of figure]
CIS Fraud Detection Unit (FDU) officials begin an investigation when
they notice significant trends among a certain class of sponsors,
immigrants, or both, such as certain temporary worker sponsors
submitting inflated tax returns to demonstrate financial
feasibility.[Footnote 17] Currently, FDUs verify self-reported data
through third party sources, such as a private sector company that taps
into state-level data to verify the legitimacy of a company, and state
data on company balance sheets. Obtaining these types of data is a
time-consuming process for CIS fraud staff and the results are
questionable, according to officials we spoke with at the California
and Texas Service Centers. FDU officials said that IRS taxpayer
information would be more helpful for verification purposes because (1)
they could determine directly if the sponsor and immigrant provided the
same information to IRS that they did to CIS and that it was accurate,
(2) they believed they would be able to obtain IRS data quicker, and
(3) IRS data would be more reliable than the self-reported and third-
party data. However, FDU officials explained they have not pursued
obtaining this information from IRS due to I.R.C. Section 6103's
restrictions.
CIS May Benefit from Using IRS Data to Make More Timely Immigration
Eligibility Decisions:
Both the adjudicator and fraud staff at the five locations we visited
said that access to IRS taxpayer data could also improve the efficiency
of making benefit decisions because it would result in reduced
decision-making time and decreased rework/follow-up work.[Footnote 18]
More efficient benefit decisions have the potential to help CIS address
application backlogs. For example, adjudicators said that if they could
match applicant data against IRS data early in the review process, they
would spend less time researching and following up on the validity of
those data (e.g., they would send fewer requests for evidence [RFE] to
the applicant). According to adjudicators, it could take as long as 12
weeks to receive responses from applicants for a certified IRS tax
return, during which time, the application file sits on a "suspense"
shelf, thereby extending the application processing time. Due to this
time gap, in certain cases, background checks must be redone, which
further lengthens the application processing time. Additionally, as we
reported in May 2001,[Footnote 19] CIS officials said that lengthy
processing times have resulted in increased public inquiries on pending
cases, which, in turn, has caused CIS to shift resources away from
processing cases to responding to inquiries. As a result, the time to
process applications have further increased.
As we reported in January 2004,[Footnote 20] CIS used $80 million in
appropriated funds annually in fiscal years 2002 and 2003 for the
President's backlog initiative, a 5-year effort with a goal to achieve
a 6-month average processing time per application, and will continue to
use $80 million of its appropriations through fiscal year 2006 for the
initiative. Figures 6 and 7 show CIS's application processing times and
its backlog of pending applications, respectively.
Figure 6: CIS Application Processing Time Goals and Average Reported
Processing Time for Fiscal Year 2003:
[See PDF for image]
Notes: Average reported processing time projected as of October 30,
2003. Applications forms are described in appendix I.
[End of figure]
Figure 7: CIS Application Backlogs - End of Fiscal Year 2003:
[See PDF for image]
Note: Applications forms are described in Appendix I.
[End of figure]
Sharing Data Presents Challenges:
While data sharing may be beneficial for IRS and CIS, CIS, and to a
lesser extent, IRS, face significant challenges for establishing a data
sharing relationship. CIS must address a number of technological
challenges in order to lay the foundation that would enable data
sharing to take place efficiently and effectively. For example, IRS and
CIS currently use different identifiers to track individuals, so their
systems may not interact with each other, automate different pieces of
data, and face concerns regarding maintaining the confidentiality of
electronically shared immigration and taxpayer data. IRS and CIS have
two options for overcoming the legal challenge and accessing
information for benefit determination purposes: use the existing I.R.C.
Section 6103 taxpayer consent authority or seek a legislative change to
I.R.C. Section 6103. Finally, both IRS and CIS need to further evaluate
data-sharing options and their related costs to determine whether such
a relationship could be cost beneficial.
CIS Faces a Wide Range of Technological Challenges:
Although CIS and IRS may benefit from data sharing, CIS faces a wide
range of technological challenges that must be overcome in order to lay
the groundwork that would enable data sharing to take place between the
two agencies.
* CIS does not maintain any automated financial data on applicants.
Although CIS automates certain personal information from benefit
applications, such as an individual's name and alien registration
number, it does not automate any financial data that are reported on
the benefit application or in accompanying documents such as tax
returns.
* CIS locations automate data inconsistently. Although CIS service
centers have servicewide automated case management and tracking systems
for the applications they process, the CIS district offices do not.
Instead, most applications are processed manually at the district
offices. Plans are underway to have a nationwide system in place for
the districts by the end of fiscal year 2006.
* CIS systems contain inaccurate data. GAO and the Department of
Justice's Justice's Office of Inspector General (OIG) have criticized
CIS systems because they contain inaccurate data for identifying pieces
of information (such as immigrants' addresses).
* CIS databases could encounter interaction difficulties. CIS uses
immigrant registration numbers as tracking identifiers whereas IRS uses
SSNs or EINs. Although CIS's systems capture SSNs/EINs if they are
provided on applications, CIS does not require them to be entered into
its systems. A little over 1 million of 4.5 million nationwide
immigration records did not have SSN or EIN identifiers that could be
matched against IRS's databases.
While I.R.C. Section 6103 Does Not Allow Data Sharing for Immigration
Eligibility Decisions, CIS Has Options for Gaining Access to Taxpayer
Information:
Information May Be Disclosed with Taxpayer Consent:
IRS cannot disclose taxpayer information to other federal agencies
without specific statutory authorization. As previously mentioned, CIS
is not authorized to directly receive taxpayer information for
immigration decisions under I.R.C. Section 6103. However, individual
taxpayers may authorize IRS to disclose their return information to
agencies through written consent. Under I.R.C. Section 6103(c), a
taxpayer may designate a third party to receive his or her tax return
or return information from IRS. Examples of third-party entities to
which IRS provides information pursuant to taxpayer-signed waivers
include financial institutions (including the mortgage banking
industry); colleges and universities; and various federal, state, and
local governmental entities.
Using this authority however, CIS could require applicants to allow IRS
to share personal and financial information with CIS. IRS already has a
process in place to accomplish this through the use of several forms,
such as IRS Form 4506, Request for Copy of Tax Return; IRS Form 4506-T,
Request for Transcript of Tax Return; and IRS Form 8821, Tax
Information Authorization. Form 4506 allows taxpayers to request that
CIS receive copies of their tax returns (at a cost of $39 to the
taxpayer per copy) directly from IRS. By signing form 4506-T, the
taxpayer consents to another party, like CIS, receiving a tax return
transcript, tax account transcript, information from Form W-2, Wage and
Tax Statement, Form 1099 series information,[Footnote 21] record of
account, or verification of nonfiling directly from IRS, all at no
charge to the taxpayer. Form 8821 allows a third party to inspect
taxpayer information, receive taxpayer information, or both for
specific tax matters listed on the form. This form is different from
the others in that the authority expires upon written request from the
taxpayer, whereas the other two authorities are one-time requests.
Treasury and IRS's National Taxpayer Advocate[Footnote 22] have
expressed concern about the systematic use of taxpayer consent.
Further, IRS's National Taxpayer Advocate suggests that taxpayer
consents should be used in conjunction with pilot tests. A pilot test
would help address whether the disclosure can result in substantial
program benefits. For example, from October 2002 through March 2003,
the Department of Education (Education) conducted a test in which the
department electronically verified a select number of students' (or
parents') tax returns instead of requesting hard copies of the returns.
The students were asked to authorize IRS to release their tax
information to their academic institutions via the Internet. After
authorizing the release, IRS then sent the individuals' tax transcripts
to the schools, which then resolved any inconsistencies between
information on the tax transcripts and on financial aid applications.
According to an Education official, the department received positive
feedback from the participating schools and taxpayers.
However, using taxpayer consent may affect the taxpayer's right to
privacy and IRS's implementation of I.R.C. Section 6103. The Joint
Committee on Taxation and Treasury's Office of Tax Policy warn that the
use of consents for programmatic governmental purposes potentially
circumvents the general rule of taxpayer confidentiality because the
taxpayer waives certain restrictions on agencies' use of the data. In
addition, recordkeeping, reporting, and safeguard requirements do not
apply to agencies that use taxpayer consent. Furthermore, IRS is not
required to track taxpayer consent disclosures and, as a result, cannot
report on how the return information is used or what safeguards are in
place to protect the information. Finally, according to IRS officials,
taxpayer consents can be costly and resource intensive to implement,
primarily because the information has to be retrieved manually unless
the taxpayer makes a request via telephone. IRS estimates that it
receives more than 800,000 requests from taxpayers directing that their
returns or return information be sent to a third party.
Changes to I.R.C. Section 6103 Could Enable CIS to Access IRS Taxpayer
Information:
Over the years a number of exceptions have gradually been added to
I.R.C. Section 6103 that allow access to taxpayer information. In his
March 10, 2004, testimony before the Subcommittee on Oversight, House
Committee on Ways and Means, IRS Commissioner Mark Everson noted that
IRS is broadly restricted under I.R.C. Section 6103 from sharing
taxpayer information with third parties, including other government
agencies, except in very limited circumstances. According to Treasury,
the burden of supporting an exception to I.R.C. Section 6103 should be
on the requesting agency, which should make the case for disclosure and
provide assurances that the information will be safeguarded
appropriately. Table 1 lists the criteria Treasury and IRS have applied
when evaluating specific legislative proposals to amend I.R.C. Section
6103 for governmental disclosures.
Table 1: Criteria Applied by Treasury and IRS When Evaluating Specific
Proposals for Governmental Disclosures:
Criteria to be addressed by the requesting agency;
Is the requesting information highly relevant to the program for which
it is to be disclosed?
Are there substantial program benefits to be derived from the requested
information?
Is the request narrowly tailored to the information actually necessary
for the program?
Is the same information reasonably available from another source?
Criteria to be addressed by the requesting agency and Treasury/IRS;
Will the disclosure involve significant resource demands on IRS?
Will the information continue to be treated confidentially within the
agency to which it is disclosed, pursuant to standards prescribed by
IRS?
Other than I.R.C. Section 6103, are there any statutory impediments to
implementation of the proposal?
Criteria to be addressed by Treasury/IRS;
Will the disclosure have an adverse impact on tax compliance or tax
administration?
Will the disclosure implicate other sensitive privacy concerns?
Source: Office of Tax Policy, Department of the Treasury.
[End of table]
Data-Sharing Costs Have Not Been Analyzed:
Although the results of our matching of IRS and CIS data indicate that
IRS and CIS may benefit from data sharing and verification, not all of
the potential benefits likely would be realized and determining whether
and how those benefits should be pursued also would depend on the cost
of any data-sharing arrangements. Neither IRS nor CIS has documented
benefits that may be gained from additional data sharing nor have they
considered the cost that would be associated with implementing a data
sharing arrangement. The cost of data sharing would depend on a variety
of factors, such as whether CIS would match data from all benefit
applications or some subset and whether the matching processes would be
primarily manual or automated.
Although our work shows potential benefits to IRS and CIS from sharing
data to enhance tax compliance and improve immigration eligibility
decisions, not all of those benefits likely would be realized. For
example, IRS is unable to pursue all of the current leads that it
receives from existing data corroboration efforts, like document
matching. Therefore, to the extent that obtaining and analyzing
additional data from CIS developed more leads for possible enforcement
actions, IRS likely would only be able to pursue some portion of those
cases. Further, some of the apparent noncompliance may not be
substantiated. For example, some of those who appear not to have filed
tax returns may actually have been provided inaccurate information to
CIS or otherwise not have a filing obligation. Of the taxpayers with
delinquent taxes, some portion may already have entered into
arrangements with IRS to pay the taxes and no further IRS action may be
needed. From CIS's perspective, although we found that many businesses
and individuals may not have filed tax returns or may be delinquent in
paying taxes, some of these situations may not be significant enough to
affect a CIS adjudicator's decision about their financial feasibility
or legitimacy. For instance, some of the businesses applying to sponsor
immigrant workers that have delinquent taxes may not owe enough to
raise doubts about their ability to pay the worker. This may be
especially true for larger businesses.
The Computer Matching and Privacy Protection Act of 1988 established
requirements for agencies entering into routine data matching
arrangements. In general, the act states that no matching program can
be approved unless the agency has preformed a cost-benefit analysis for
the proposed matching program that demonstrates the program is likely
to be cost effective. Similarly, Treasury's criteria for considering
whether a statutory change should be made for the sharing of tax data
stress the importance of documenting whether a substantial benefit is
likely and what the resource demands on IRS would be to support sharing
the data. In the case of using taxpayer consents, Treasury suggests
that agencies conduct pilot tests to support a business case for
routine use of such consents.
Conclusions:
Data sharing and verification between IRS and CIS appears to have the
potential to better guide IRS's efforts to identify and correct
noncompliance by taxpayers and result in more informed, accurate, and
timely eligibility decisions by CIS adjudicators. Although IRS
terminated its previous data sharing relationship with CIS for
individual taxpayers because it judged that relationship not to be cost
effective, our matching results show a greater potential for improving
tax compliance for businesses than individuals. Our analysis also shows
the potential to improve thousands of eligibility decisions if CIS has
access to IRS data. However, more needs to be known about the extent to
which the potential benefits likely would be realized if greater data
sharing and verification were to occur and about the costs that would
be incurred to implement a data-sharing effort. The benefits and costs
are key, since both Congress and executive branch policies stress that
sharing of data, and especially tax data, be well justified given
concerns about possible adverse effects on tax compliance if the
confidentiality of taxpayer's data is compromised.
Recommendation for Executive Action:
The Secretary of Homeland Security and the Commissioner of Internal
Revenue should assess the benefits that may be obtained and the costs
that may be incurred to share information to enhance tax compliance and
improve immigration eligibility decisions.
Agency Comments:
Agency officials provided official oral comments and generally agreed
with our recommendation. We talked with knowledgeable agency officials
in IRS and CIS about our findings and recommendation. They had no major
concerns with doing a study on the potential benefits and costs of
establishing a data sharing relationship. IRS officials said I.R.C.
6103 prevents them from sharing taxpayer data with CIS for immigration
eligibility decisions. IRS officials said the use of taxpayer consents
would be an alternative but IRS would need to evaluate resource
implications associated with processing the potentially large number of
requests to verify taxpayers' status that could be associated with this
proposal. CIS officials said they want to have IRS data to assist with
immigration eligibility decisions but have not pursued obtaining IRS
data because of the challenge they would face in trying to change
I.R.C. Section 6103.
IRS's OVCI Program:
The major points arising from our review of the information available
on the taxpayers who came forward under the OVCI program and how they
became noncompliant are as follows:
* Of the more than 1 million taxpayers that IRS estimated might be
involved in an offshore scheme when it initiated the OVCI program, 861
taxpayers came forward. IRS officials say they have received more than
$200 million in previously unpaid taxes, penalties, and interest from
them. The taxpayers that applied for inclusion in the OVCI program were
a diverse group, with wide variations in income, geographic location,
and occupations, but some commonalities emerged for certain of these
characteristics.
* OVCI applicants reported an annual original adjusted gross income
(AGI)[Footnote 23] ranging from over well over $500,000 to substantial
net losses. Because these large outliers tend to skew the distribution
of the income data, we used the population's annual median income to
describe the population's income levels. OVCI applicants' annual median
original AGI ranged from about $39,000 to about $52,000 for tax years
1999, 2000, and 2001. For 2001, the annual median adjustment to the
original AGI of OVCI applicants who had not properly paid tax on money
held offshore was about $23,000, and the median amount of tax,
penalties, and interest was about $5,400.[Footnote 24] The 81
applicants who composed the top 10 percent of originally reported AGIs
in 2001 accounted for more than half of the total reported AGI amount.
* For each year covered by the OVCI program, more than half of the
applicants had generally reported all of their income and paid taxes
due--even on their offshore income---but had failed to disclose the
existence of their foreign bank accounts as is required by Treasury.
Their applications sought relief from FBAR penalties. IRS assesses FBAR
penalties at a rate of up to 100 percent of the value of the assets in
the account. These penalties were waived for OVCI applicants.
* OVCI applicants came from 47 states and the District of Columbia, but
half of all applicants came from only 5 states: Florida, California,
Connecticut, Texas, and New York.
* OVCI applicants reported more than 200 occupations. We classified
more than one-third of applicants' occupations as either retired
individuals, business executives, or business/self-employed.
* Less than 16 percent of OVCI applicants said they used a promoter in
2001. Some promoters offered inexpensive, ready-made package deals that
bundled a standardized set of services together while others offered
more expensive, tailor-made arrangements.
* Some taxpayers appear to have deliberately hidden money offshore
through fairly elaborate schemes involving, for instance, multiple
offshore bank accounts. Other applicants appear have fallen into
noncompliance inadvertently, for example, by inheriting money held in a
foreign bank account.
We used IRS's OVCI database to develop a profile of the characteristics
of the taxpayers that came forward under OVCI. Our information is
limited to those taxpayers who voluntarily admitted they held offshore
assets, so the information we are providing is not necessarily
representative of any larger population of taxpayers who used offshore
arrangements to avoid paying U.S. taxes. We limited our analysis to tax
years 1999, 2000, and 2001 because the vast majority of the OVCI
applicants applied for inclusion for these 3 tax years. IRS officials
said they verified the accuracy of the data entered into the database,
and we observed the verification process. We analyzed IRS's data
reliability processes and verified some of the entry accuracy ourselves
and as a result, we believe the data we are using are sufficiently
reliable and useful for reporting on the characteristics of those who
came forward under the OVCI program. In addition, we reviewed 35 case
files judgmentally selected based on factors such as particularly high
or low AGIs, high or low adjustments to original AGI, or high or low
taxes, penalties, and interest owed to verify IRS's data entry and to
obtain information about how taxpayers became noncompliant and about
the promoters, if any, they used. In addition, we visited 25 promoter
Web sites to gain a better understanding of the type and cost of the
services they provide. The Web sites were judgmentally selected to
ensure the sample included a variety of geographic locations. We did
our work at IRS's campus in Philadelphia and its National Office in
Washington, D.C. We conducted our fieldwork for this portion of the
testimony from January 2004 through June 2004. Appendix II provides
more details on our methodology.
Background:
Launched in January 2003, OVCI was an attempt to quickly bring
taxpayers who were hiding funds offshore back into compliance while
simultaneously gathering more information about those taxpayers as well
as the promoters of these offshore arrangements. It is not illegal to
hold money offshore. It is illegal, however, for a taxpayer to not
disclose substantial offshore holdings including, if applicable, not
reporting income earned in the U.S. and "hidden" through offshore
arrangements and any income generated through them to IRS on a tax
return. As an incentive to come forward, IRS said it would not impose
the civil fraud penalty for filing a false tax return, the failure to
file penalty, or any information return penalties for unreported or
underreported income earned in 1 or more of the tax years ending after
December 31, 1998. However, taxpayers were required to pay applicable
back taxes, interest, and certain accuracy or delinquency penalties. In
addition, Treasury agreed to waive the penalty associated with the
failure to file a Report of Foreign Bank and Financial Accounts (FBAR
penalties).[Footnote 25] To be eligible for the OVCI program,
applicants had to supply certain information about themselves,
including:
* personal information, such as their names, taxpayer identification
numbers, current addresses and telephone numbers;
* copies of their original and amended federal income tax returns for
tax periods ending after December 31, 1998; and:
* information on any related entities that the applicants caused to be
involved in offshore tax avoidance.
In addition, taxpayers had to provide details on those who promoted or
solicited the offshore financial arrangement. IRS is using this
information to pursue promoters and to identify other clients who did
not come forward under OVCI. Taxpayers were required to provide:
* complete information about the promoter, including the promoter's
name, address, and telephone number and any promotional materials that
the taxpayer received;
* descriptions of offshore payment cards, foreign and domestic accounts
of any kind, and foreign assets; and:
* descriptions of any entities through which the taxpayer exercised
control over foreign funds, assets, or investments.
IRS used this documentation to build a database of descriptive
information about the OVCI applicants and any promoters of offshore
schemes that they used. IRS plans to eventually utilize the data to
analyze taxpayer characteristics and then use this information to try
to make taxpayer compliance programs more effective. Specifically the
database contains information on (1) the taxpayer, such as income,
citizenship status, occupation, and compliance history, and (2) the
promoters of offshore tax schemes, such as how much the promoter
charged the taxpayer and the country in which the promotion was
located.
OVCI Applicants Were a Diverse Group, but Some Common Characteristics
Emerged:
When it initiated the OVCI program, IRS estimated that 1 million
taxpayers might be involved in offshore schemes covered by the program;
861 taxpayers came forward under OVCI.[Footnote 26] IRS required
taxpayers to calculate the additional tax they owed and remit that
amount with their OVCI application. IRS has received more than $200
million from taxpayers. IRS has verified through audits that $140
million of that amount was properly due and is continuing to audit the
remainder. In some ways the taxpayers in the OVCI program were a
diverse group. Applicants reported widely varying annual median
original AGIs in 1999, 2000, and 2001. The applicants were
geographically dispersed across the country and were involved in more
than 200 occupations. Despite the diversity, OVCI applicants reported
an annual median original AGI from approximately $39,000 in tax year
2001 to $52,000 in tax year 2000; half came from five states; and about
a third were retired individuals, business executives, or business/
self-employed. In addition, less than 16 percent said they used a
promoter to help them set up their offshore arrangements. Finally, more
than half of OVCI applicants for each year generally had reported their
income and paid taxes but had failed to disclose the existence of their
foreign accounts.
OVCI Applicants' Income:
For the 3 years of the OVCI program we reviewed, 1999 through 2001,
OVCI applicants reported an annual original AGI ranging from well over
$500,000 to substantial net losses. Because these large outliers tend
to skew the distribution of the income data, we believe the most
representative method of describing the "average" applicant is by using
the population's annual median income, that is, the point in the income
distribution where half of the applicants fall above that point and
half fall below that point, rather than the mean AGI. As shown in table
2, the median original AGI of applicants was from $38,761 in tax year
2001 to $51,663 in tax year 2000. Appendix III contains more taxpayer
income information.
Table 2: OVCI Applicants' Original AGI Statistics, Tax Years 1999-2001:
Tax year: 1999;
Number of applicants: 806;
Original AGI: Mean: $332,443;
Original AGI: 10th percentile[A]: $0;
Original AGI: Median: $49,469;
Original AGI: 90th percentile[B]: $545,196.
Tax year: 2000;
Number of applicants: 817;
Original AGI: Mean: $1,191,997;
Original AGI: 10th percentile[A]: 0;
Original AGI: Median: $51,663;
Original AGI: 90th percentile[B]: $583,188.
Tax year: 2001;
Number of applicants: 808;
Original AGI: Mean: $242,515;
Original AGI: 10th percentile[A]: 0;
Original AGI: Median: $38,761;
Original AGI: 90th percentile[B]: $582,593.
Source: GAO analysis of IRS data.
[A] The 10th PERCENTILE REPRESENTS THOSE TAXPAYERS WHO WERE IN THE
BOTTOM ten percent of the distribution of the original AGI. Due to the
number of taxpayers who reported negative original AGIs or were
nonfilers, the value for the10t percentile was zero in all three years
we reviewed.
[B] The 90th percentile represents those taxpayers who were in the top
ten percent of the distribution of the original AGI.
[End of table]
Within the OVCI population, there were three distinct types of
taxpayers:
* Those who had filed their tax returns but omitted their foreign
financial assets.
* Those who failed to file tax returns for 1 or more of the years
covered by the OVCI program.
* Those who filed returns each year and included their offshore
holdings in their reported income but failed to meet their FBAR
reporting requirements.
As shown in table 3, the taxpayers in these groups varied in their
reported median original AGI; adjustment to original AGI; and taxes,
penalties, and interest assessed. In the table, the nonfilers' median
original AGI is shown as zero because, according to an IRS official,
they did not file tax returns, even though they had taxable income
offshore. An IRS official said that for those applying to the program
for relief from FBAR penalties, the data show an original AGI because
they generally reported all of their income and paid taxes due, but had
failed to disclose the existence of their foreign bank accounts.
Table 3: OVCI Applicants' Income and Amount Owed for Tax Year 2001:
Population: Filed federal tax returns but omitted foreign assets;
Number: 326;
Median original AGI for 2001: $55,869;
Median adjustment to original AGI: $20,460;
Median additional tax owed[A]: $4,289;
Median penalties assessed: $523;
Median interest owed: $263.
Population: Nonfilers;
Number: 24;
Median original AGI for 2001: $0;
Median adjustment to original AGI: $82,561;
Median additional tax owed[A]: $7,573;
Median penalties assessed: $2,431;
Median interest owed: $860.
Population: Filers and nonfilers combined;
Number: 350;
Median original AGI for 2001: $49,303;
Median adjustment to original AGI: $22,951;
Median additional tax owed[A]: $4,401;
Median penalties assessed: $657;
Median interest owed: $301.
Population: Filed returns but failed to meet FBAR requirements;
Number: 458;
Median original AGI for 2001: $31,667;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Population: Total;
Number: 808;
Median original AGI for 2001: $38,761;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Source: GAO analysis of IRS data.
[A] THESE FIGURES REPRESENT THE MEDIAN FOR THE AMOUNT IRS HAS VERIFIED
through audits that taxpayers owed IRS. As IRS continues to conduct
audits of OVCI taxpayers, the median may rise or fall somewhat.
[End of table]
For each of the 3 years of the OVCI program that we reviewed, more than
half of the applicants to the OVCI program applied to get relief from
FBAR penalties. This is a substantial relief for taxpayers because an
IRS official told us that IRS can assess FBAR penalties at a rate of up
to 100 percent of the value of the assets in the account.
A few individuals with substantial offshore holdings accounted for a
large percentage of the original AGI reported. For tax year 2001, the
81 applicants with the top 10 percent of originally reported AGIs
accounted for more than half of the total reported AGI amount.
OVCI Applicants' Geographic Characteristics:
Taxpayers from 47 states and the District of Columbia applied for
inclusion in the OVCI program in at least 1 of the 3 years of the
program (see app. IV for more geographic information about the
applicants to the OVCI program). In tax year 2001, applicants for whom
we have data were most commonly from the South (43 percent), but about
22 percent of all applicants came from the Northeast and more than 26
percent came from the West. The Midwest accounted for the fewest number
of applicants (about 9 percent).[Footnote 27] However, half of all
applicants came from only 5 states (Florida, California, Connecticut,
Texas, and New York).[Footnote 28] Three states had no taxpayers apply
to the OVCI program. As shown in figure 8, median adjustment to
original AGI for taxpayers who filed tax returns but omitted foreign
assets or were nonfilers ranged from a low of about $15,000 in the West
to a high of about $32,500 in the Northeast.
Figure 8: OVCI Applicants' States of Residence and Regional Breakout of
the Median Adjustment to Original AGI for Non-FBAR applicants, Tax Year
2001:
[See PDF for image]
[End of figure]
OVCI Applicants' Occupations:
Applicants listed over 200 occupations on their federal tax returns,
including accountants, members of the clergy, builders, physicians, and
teachers, so we grouped the applicants' professions into 18 categories
in order to better analyze them. For all 3 years, the most common
professions of applicants to the OVCI program were retired individuals,
business executives, and business/self-employed. Table 4 provides
information on taxpayers' occupations and the associated AGI
information for 2001.
Table 4: Individual OVCI Applicants' Profession, Median Original AGI,
and Median Adjustment to Original AGI for Tax Year 2001 (Filers and
Nonfilers but not FBAR applicants):
Profession: Retired;
Applicants: 52;
Median original AGI: $43,881;
Median adjustment to original AGI: $25,074.
Profession: Executive;
Applicants: 47;
Median original AGI: $158,183;
Median adjustment to original AGI: $23,302.
Profession: Business/self employed;
Applicants: 32;
Median original AGI: $73,134;
Median adjustment to original AGI: $22,006.
Profession: Banking/finance/insurance[B];
Applicants: 27;
Median original AGI: $3,596;
Median adjustment to original AGI: $22,951.
Profession: Sales;
Applicants: 22;
Median original AGI: $91,000;
Median adjustment to original AGI: $24,329.
Profession: Medical profession;
Applicants: 22;
Median original AGI: $95,928;
Median adjustment to original AGI: $8,397.
Profession: Engineer;
Applicants: 21;
Median original AGI: $55,941;
Median adjustment to original AGI: $5,722.
Profession: Other;
Applicants: 20;
Median original AGI: $23,286;
Median adjustment to original AGI: $15,197.
Profession: Analyst/consultant;
Applicants: 11;
Median original AGI: $49,892;
Median adjustment to original AGI: $20,277.
Profession: Computer/technology;
Applicants: 11;
Median original AGI: $39,348;
Median adjustment to original AGI: $6,461.
Profession: Attorney;
Applicants: 9;
Median original AGI: $137,661;
Median adjustment to original AGI: $23,302.
Profession: Administrative[A];
Applicants: 8;
Median original AGI: $105,804;
Median adjustment to original AGI: $11,028.
Profession: Building trades;
Applicants: 5;
Median original AGI: $22,684;
Median adjustment to original AGI: $6,569.
Profession: Education[C];
Applicants: 5;
Median original AGI: $0;
Median adjustment to original AGI: $36,364.
Profession: Scientist;
Applicants: 5;
Median original AGI: $26,599;
Median adjustment to original AGI: $8,538.
Profession: Real estate;
Applicants: 4;
Median original AGI: $1,100,241;
Median adjustment to original AGI: $291,871.
Profession: Pilot;
Applicants: 4;
Median original AGI: $123,705;
Median adjustment to original AGI: $14,566.
Profession: Arts;
Applicants: 3;
Median original AGI: $123,945;
Median adjustment to original AGI: $70,799.
Profession: Missing;
Applicants: 42;
Median original AGI: $0;
Median adjustment to original AGI: $54,094.
Total[E];
Applicants: 350;
Median original AGI: $49,598;
Median adjustment to original AGI: $23,124.
Source: GAO analysis of IRS data.
[A] A small number of taxpayers who applied to the OVCI program listed
their occupations as secretary but their incomes were each in excess of
$1 million for each of the years 1999, 2000, and 2001.
[B] Although a large number of applicants were from the banking/
finance/insurance sector, a large number of these applicants reported
large losses on their tax returns. As a result, the median original AGI
was relatively low.
[C] Some occupations had more nonfilers apply to the OVCI program than
filers, so for these cases the median original AGI was zero.
[D] Seven applicants were identified as "deceased", and we included
these people in the "other" category.
[E] We did not include FBAR applicants in this table because, according
to IRS officials, there is no adjustment to the FBAR applicants'
original AGI. These applicants generally reported their offshore
holdings on their original federal tax returns and incurred no
additional taxes or interest owed. Because these applicants made up
more than half of all applicants, if we included them in the table, the
median adjustment to original AGI, taxes, and interest would all be
zero.
[End of table]
Few Applicants Said They Used Promoters:
Less than 16 percent of all OVCI applicants said they used a
promoter.[Footnote 29] The services provided by promoters ranged from
simple incorporation offshore to more elaborate schemes involving such
things as bogus charities.
The relatively small percentage of OVCI applicants reporting use of a
promoter may be due in part to the definition of a promoter used in the
OVCI instructions. IRS defined a promoter as any party who "promoted or
solicited the taxpayer's use of offshore payment cards or offshore
financial arrangements." Some taxpayers may have learned about offshore
arrangements from friends, an attorney, a paid preparer, or others.
However, IRS did not record detailed information in the OVCI database
about how the taxpayers learned about the offshore arrangement and
therefore we do not know the extent to which taxpayers learned of the
offshore arrangement from these individuals. If OVCI applicants did
learn of the arrangements from these individuals, they may not have
considered them to be promoters under IRS's promoter definition,
particularly if they did not feel that the individual actively sought
them out to encourage or convince them to use an offshore arrangement.
IRS did record information on whether the OVCI applicants used a paid
preparer. For example, 326 of the 350 tax year 2001 OVCI applicants, or
93 percent, said that a paid preparer prepared their original tax
return.
Recognizing that the data may change as IRS completes additional
investigations on promoters, taxpayers who said they used a promoter
had similar median original AGIs to those who reported not using a
promoter. For example, in 2001, those who said they used a promoter
reported a median original AGI of about $41,000, while those applicants
who said they did not use a promoter reported a median original AGI of
about $39,000. For those taxpayers who said they used a promoter, the
fees they paid those promoters varied from nothing to a high of $85,000
for the promoter's services.
One possible explanation for the range in fees is that promoters offer
different services, from off-the-rack services to custom-tailored
arrangements. We visited 25 Web sites maintained by individuals or
companies promoting offshore investments to gain a better understanding
of the type and cost of the services they provide. The Web sites were
judgmentally selected to ensure the sample included a variety of
geographic locations. Of the 25 Web sites we visited, 19 offered off-
the-shelf offshore companies or package deals. One company advertised
that taxpayers could incorporate offshore within the next day by buying
an off-the-shelf company, which is an existing company that has been
set up by the promoter. At a cost of $1,500, the taxpayer would receive
a package of services that would include an agent and local office,
mail forwarding, nominee corporate directors and officers, offshore
credit card applications, banking forms, and the payment of all
government fees. These companies are not legitimate business
enterprises. Instead, they exist strictly to provide taxpayers a way to
quickly and easily move money offshore and repatriate it without
declaring that money to IRS.
Several taxpayers who used promoters of this type to avoid paying taxes
appeared to be scammed themselves. For example:
* One taxpayer was persuaded by a promoter to create an offshore
corporation. The taxpayer also opened an offshore bank account and gave
the promoter over $50,000 in cash to deposit into the account. The
promoter told the taxpayer that the money was stolen before it was ever
deposited in the account, leaving the taxpayer with practically
nothing.
* Another taxpayer invested over $30,000 in an offshore investment
opportunity that promised a return of 20 percent per year. The taxpayer
got the money he/she invested through credit card advances. The
taxpayer received returns on the investment for a while, but the
payments soon stopped. The taxpayer said he/she still owes money on the
credit cards.
* Other promoters' schemes are more complicated and targeted toward
wealthy taxpayers interested in avoiding taxes. Figure 9 is a
hypothetical example based on an actual case of how a promoter can help
taxpayers repeatedly send money offshore and repatriate it later,
avoiding hundreds of thousands of dollars in taxes. We calculated the
tax savings below using a popular tax software program.
Figure 9: Hypothetical Example of a Self-Employed Taxpayer Filing
Singly and Filing a Schedule C (for Profit and Loss from a Sole
Proprietorship Business):
[See PDF for image]
[End of figure]
In our hypothetical example, the self-employed taxpayer reports $3
million in annual business income on his Schedule C (the form attached
to a tax return that is used to calculate profit or loss for a sole
proprietor business). The first year, the taxpayer hires the promoter
to set up an offshore scheme for a fee of $70,000 for financial
planning services and tax preparation. The promoter creates a bogus
offshore charity that actually has no charitable activity and a
corollary offshore business entity. The taxpayer controls both
organizations by sitting on the board of directors. The taxpayer then
sends money offshore, basically to himself, through a $500,000
"donation" to the offshore charity,which in turn sends the money to the
offshore business entity. The offshore business entity then gives the
taxpayer a $500,000 "home equity loan," which actually repatriates that
amount to the taxpayer's domestic bank account. Throughout the year,
the taxpayer sends monthly mortgage payments to the offshore business
entity. The taxpayer can then deduct the promoter's fees as a business
expense on his Schedule C and the charitable donation and mortgage
interest as part of his itemized deductions on his Schedule A. These
false deductions would reduce the taxpayer's tax liability from about
$1.1 million to about $920,000, a savings of about $180,000.
In the second year, the promoter would charge our hypothetical taxpayer
less--only $10,000 for tax preparation services. The taxpayer can send
the $500,000, repatriated as a home equity loan, back to the offshore
charity as a donation and continue to send mortgage payments offshore.
In a new wrinkle, however, the offshore business entity has purchased a
luxury automobile worth about $74,000 and leased it back to the
taxpayer. The taxpayer would have use of the automobile and would send
lease payments to the offshore business entity. On his tax return for
the second year, the taxpayer can deduct his charitable contribution of
$500,000, the interest on the home loan, the lease payments, and
promoter fees as business expenses. These false deductions would reduce
the taxpayer's taxes by about $163,000.
Therefore, in return for promoter fees of about $80,000, the taxpayer
has avoided more than $340,000 in taxes in just these 2 years. The
taxpayer received more than a 300 percent return on his money, a high
return when compared with those on other traditional investments. In
addition, the taxpayer receives a level of asset protection from
potential creditors. If, at some time, creditors were to pursue the
taxpayer to collect money, they may be unable to reach the assets
because it would appear that his house is heavily mortgaged and that
his expensive car is leased.
There are many more options for transferring money offshore and then
repatriating it. For example, according to some promoters' Web sites,
an offshore charity could award a "scholarship" to the taxpayer's child
to defray college expenses, or a business entity could provide
administration services such as bookkeeping for the taxpayer. An IRS
official conservatively estimated that one promoter of this type of
scheme has cost the U.S. Treasury about $100 million in tax revenues.
Some Taxpayers' Noncompliance Appears Deliberate, Others Appears
Inadvertent:
Some taxpayers went to great lengths to establish and maintain offshore
bank accounts and credit cards, creating the appearance that the
noncompliance was deliberate,[Footnote 30] whereas others appeared to
be unaware of their U.S. tax obligations for foreign holdings.
Deliberately noncompliant taxpayers would include some of the taxpayers
who, as discussed earlier, used promoters and, for example, put funds
into their offshore arrangements on a cash basis. Examples of other
taxpayers who appear deliberately noncompliant include the following:
* A taxpayer who reported an original AGI of less than $20,000 on his/
her federal tax return and claimed the Earned Income Tax Credit. This
taxpayer's amended federal return showed income in 1 year of over $1
million and multiple foreign bank accounts. Before applying to the OVCI
program, the taxpayer never paid any tax on any income received. IRS
told us that had this taxpayer not applied for inclusion in the
program, it is doubtful the taxpayer's tax avoidance would have ever
been discovered.
* A taxpayer who maintained multiple bank accounts in different foreign
countries. Each of the accounts contained funds invested in various
financial instruments. The taxpayer traveled abroad and physically
brought the money back into the United States.
* A taxpayer who initially hired attorneys to create an offshore
entity, and then used wire transfers and a mailbox abroad to route
after-tax income from the United States to the foreign account for
deposit. The taxpayer did not pay U.S. taxes on the interest income
earned on these funds and claims to have not repatriated any of the
foreign deposits during that time.
In an increasingly global and mobile world, taxpayers may hold foreign
accounts and credit cards for a number of legitimate reasons. For
example, taxpayers may have worked or traveled overseas extensively or
inherited money from a foreign relative. Some taxpayers in these
situations told IRS that they were unaware they had to pay U.S. taxes
on this income and that their noncompliance was unintentional. For
example:
* One taxpayer said that he/she had made a personal loan overseas and
had not reported the interest income of about $10,000 he/she had
received. Because the taxpayer held about 1 percent of his/her original
AGI offshore and had paid taxes on all other income, it appears that
this taxpayer may not have intentionally avoided his/her tax
obligation.
* Another taxpayer along with a sibling invested an inheritance in a
joint account in a foreign country for convenience. The taxpayer
realized, when the OVCI program was announced, that the interest income
on this account should have been reported. He/she reported, through the
OVCI program, interest income of less than $2,000 over the years
covered by OVCI. The taxpayer paid taxes on all other domestic income
during this time and appeared to have overlooked the interest income.
* A young taxpayer got a job overseas. The taxpayer did not believe he/
she needed to file tax returns in the United States because he/she was
paying income taxes in the country in which he/she was working. When
the taxpayer found out that he/she was required to file in the United
States, the taxpayer contacted IRS. The taxpayer was eligible for the
Foreign Tax Credit, which offsets some or all U.S. taxes owed. As a
result, the U.S. tax obligation was less than $10,000 for all of the
years covered by the OVCI program.
An IRS official told us that detecting offshore income would be
particularly difficult without many of these taxpayers applying to the
OVCI program. Typically, IRS compares taxpayers' information returns,
such as the W-2 forms for wages or forms 1099 for interest or
dividends, to their income tax returns to identify underrreported
income or nonfilers. An IRS official said that since offshore entities,
such as foreign banks, are generally not subject to U.S. information
reporting requirements, identifying underreported foreign income would
be difficult. For IRS to investigate the taxpayer's return beyond the
documentation provided on income and various information returns would
require investigating those entities and the accuracy of the
transactions reported. Such investigations could be very labor
intensive.
Concluding Observations:
The diversity of the OVCI population indicates that multiple compliance
strategies may be appropriate for addressing those taxpayers holding
money offshore. For example, increased educational efforts might be
effective for those who became noncompliant inadvertently or those who
were unaware of the need to report their offshore holdings to IRS. For
those taxpayers who deliberately held money offshore illegally to avoid
paying taxes, investigation of promoters or others who may have
assisted taxpayers may both help reduce the spread of evasion to other
taxpayers and identify those already out of compliance for corrective
action. However, because the median AGIs for OVCI participants were
relatively modest and the additional tax, interest, and penalties
collected to date have also been relatively modest, personnel-intensive
investigations of individual cases who have hidden substantial amounts
offshore could significantly reduce the net gain to Treasury from these
cases. This puts a premium on IRS developing means to identify those
cases that should be subjected to such investigations and, if possible,
alternative compliance strategies for others.
Messrs. Chairman, this concludes my prepared statement. I would be
happy to respond to any questions you or other Members of the committee
may have at this time. For further information on this testimony,
please contact Michael Brostek at (202 512-9110) or [brostekm@gao.gov].
Individuals making key contributions to this testimony include Susan
Baker, Tom Bloom, Michelle Bowsky, Laura Czohara, Michele Fejfar, Jyoti
Gupta, Signora May, Karen O'Conor, Amy Rosewarne, Jeff Schmerling, Tina
Smith, Jonda Vanpelt, and Jim Ungvarsky.
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to determine (1) the extent to which IRS and CIS
share and verify data for immigration eligibility decisions or taxpayer
compliance purposes and (2) the benefits and challenges, if any, of
increasing data sharing and verifying activities.
We performed our work at various IRS offices, including the Office of
Governmental Liaison and Disclosure, the Office of Safeguards; the
Office of Program, Evaluation, and Risk Analysis; and the Privacy
Advocate's Office. Our work also included interviews with employees in
IRS's Wage and Investment Operating Division and Small Business/Self
Employed Operating Division, the Department of the Treasury's Office of
Tax Policy and Office of Inspector General for Tax Administration, and
program offices at CIS, and with CIS officials in selected service
centers and district offices. We collected and analyzed information on
the extent of data sharing and verifying activities between IRS and CIS
from January 1997 through March 2004. To respond to your initial
request on data sharing and verifying between IRS and selected
agencies, we also interviewed Social Security Administration (SSA)
officials and collected and analyzed information on data sharing and
verifying between IRS and SSA. To illustrate a long-standing data
sharing relationship, we summarized the IRS and SSA data sharing
relationship in the background section.
To determine the extent to which IRS and CIS share and verify data for
benefit decisions or taxpayer compliance, we interviewed IRS and CIS
officials about the existence of a data sharing relationship. We
identified the legislative and regulatory authorities that govern
disclosure of personal and taxpayer information. Additionally, we
identified the types of personal and financial information CIS and IRS
maintain for immigration decisions and tax compliance, respectively.
To determine the benefits of increasing data sharing and verification
activities, we collected and analyzed immigration and taxpayer
information. We interviewed IRS and CIS officials to obtain views on
possible impediments or missed opportunities to verify information to
make better programmatic decisions, and reviewed existing studies or
reports on data verification activities. We determined what personal
and financial information IRS collects but does not verify with CIS and
why, and whether officials believe verification with immigration would
be useful for tax compliance purposes. We determined what personal and
financial information CIS receives but does not verify with IRS and
why, and whether immigration officials believe verification with IRS
would be useful for immigration eligibility decisions.
We used two sets of immigration data from CIS to match with IRS
taxpayer data to determine the potential value for increased data
sharing and matching. First, we used a nationwide selection of
automated data on certain immigration applications: I-129 (Petition for
a Nonimmigrant Worker), I-140 (Immigrant Petition for Alien Worker),
and I-360 (Petition for Amerasian, Widow(er), or Special
Immigrant[Footnote 31]) submitted from January 1, 1997, through March
5, 2004, to CIS service centers for immigration benefits. We used only
those applications in CIS's Computer Linked Application Information
Management System, Version 3.0 (CLAIMS 3), a database containing
nationwide data, that contained an individual's Social Security Number
(SSN) or a business's Employer Identification Number (EIN) --3.4
million out of 4.5 million had usable SSNs or EINs--for the matching
process. We obtained automated data for those years because CIS's
automated system had historical data not readily available in hard copy
files. Because the nationwide selection did not include any financial
information, we could not use it to determine whether CIS applicants
reported the same income amounts to IRS as to CIS.
Second, we visited five CIS field locations and selected a
nonprobability sample of 984 immigration files covering the period of
2001---2003 at four of the locations because they contained personal as
well as financial information. These hard copy files were applications
for citizenship, employment, and family-related immigration and change
of immigration status applications. We used the hard copy immigration
files to build an automated database of certain personal information,
such as the individual's SSN or business's EIN and income reported to
CIS. We obtained hard copy files for those years because the CIS
offices we visited had immigration applications for those years onsite.
Immigration offices send older files to storage. Since each district
and service center organized and stored its applications in a different
way and immigration officials could not always provide an updated count
of applications by form number, we developed an approach to selecting
applications that included pulling approximately every 50TH file in
immigration file rooms. We generally selected approximately 50-75 files
at each field location for the following forms: I-129 (Petition for a
Nonimmigrant Worker); I-140 (Immigrant Petition for Alien Worker); N-
400 (Application for Naturalization); I-751 (Petition to Remove the
Conditions on Residence); I-360 (Petition for Amerasian, Widow(er), or
Special Immigrant); and I-864 (Affidavit of Financial Support). We
planned to select 50 files for Form I-829 (Petition by Entrepreneur to
Remove Conditions) but only reviewed 12 files due to resource
constraints and the voluminous nature of the application files. The
matching results for our nonprobability sample included Form I-829s for
a small number of individual immigrants who had unpaid assessments or
were nonfilers and none for business or individual sponsors.
We matched the SSNs/EINs in our nationwide selection of immigration
applications and our nonprobability sample of immigration applications
with IRS's Business Master File (BMF) and Individual Master File (IMF)
and other subsets such as the Revenue and Refunds Database. We
identified immigration applicants/taxpayers that (1) matched with the
IRS master files, (2) had unpaid assessments, (3) were nonfilers, (4)
were businesses/organizations that had no record of tax activity in the
last 5 years, and (5) did not match IRS master files. Additionally, to
ensure we identified only business and organization sponsors whose EINs
were unknown to IRS, we had IRS perform three additional matches using
its BMF Taxpayer Identification Number Cross-Reference File, the BMF
Entity File and the IMF Entity File.
We assessed the reliability of IRS's BMF and IMF data and the CIS's
CLAIMS 3, a database containing nationwide data, by (1) performing
electronic testing of required data elements, (2) reviewing existing
information about the data and the system that produced them, and (3)
interviewing agency officials knowledgeable about the data. We
determined that the data were sufficiently reliable for the purposes of
this testimony.
Our review was subject to some limitations. We relied on IRS officials
to identify offices that use personal information because there is no
central, coordinating point within IRS for receipt of this type of
information. We relied on CIS officials to identify immigration forms
they believed would most benefit from data sharing with IRS, and we
relied on IRS and CIS officials' views on possible impediments or
missed opportunities to verify information, any additional data sharing
and verification needs, and the benefits of increased disclosure of
taxpayer information. Because our sample of 984 hard copy applications
at selected CIS field locations was not a probability sample, we cannot
make inferences about the population of applications. In addition,
because EINs/SSNs were only available for 3.4 million of the 4.5
million applications in our nationwide selection of automated
applications, our findings from these records are not representative of
the entire population. IRS identified the limitations of its database
that affect our results. Immigration applicants/taxpayers who were in
IRS's nonfiler database could include individuals who did not meet IRS
filing requirements. Immigration applicants/taxpayers in IRS's unpaid
assessment database may include taxpayers that have entered into an
installment agreement, have proposed an offer-in-compromise or are in
litigation with IRS about amounts due. Since IRS searched its tax data
for the last 5 years (1999-2004) and we collected 7 years of
immigration data (1997-2004), a small percentage of the businesses that
submitted applications during 1997 and 1998 but are unknown to IRS
could no longer be in operation.
We conducted our work from July 2003 through June 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Objectives, Scope, and Methodology for OVCI Program:
Our two objectives were to provide information on (1) the
characteristics of taxpayers who came forward under IRS's Offshore
Voluntary Compliance Initiative (OVCI) program and (2) how those
taxpayers became noncompliant.
To develop information on the characteristics of OVCI taxpayers, we
relied on IRS's OVCI database. We used data from the applicants'
original and amended federal tax returns, including adjusted gross
income (AGI), taxes, penalties, and interest owed; the applicants'
state and country of residence; and the applicants' occupational
information. We also obtained information on applicants' use of
promoters. Our information is limited to those taxpayers who
voluntarily admitted they held offshore assets, so the information
provided is not necessarily representative of any larger population of
taxpayers who used offshore arrangements to avoid paying U.S. taxes. Of
the 1,321 taxpayers who came forward under the OVCI program, 16 did not
apply for relief for 1999, 2000, or 2001. An additional 400 were
entities that were set up by and associated with applicants to handle
the taxpayers' offshore funds. The tax liabilities, if any, of these
entities would be reflected in the additional taxes, penalties, and
interest of the individual taxpayers in IRS's OVCI database. In
addition, IRS rejected 49 applicants for not divulging the entirety of
their schemes. Therefore, the numbers we reported here were limited to
the 861 applicants for whom we had data for 1 or more of the years
1999, 2000, and 2001.
To assess the reliability of the IRS data we present in this testimony,
we reviewed IRS's data verification procedures. For example, according
to a senior manager, all financial data entered into the OVCI database
was compared to the taxpayer's account on IRS's Individual Master File.
IRS also told us that after all data were entered, a manager rechecked
each entry for errors. We reviewed a judgmental sample of 35 cases
files based on factors such as particularly high or low AGIs, high or
low adjustments to original AGI, or high or low taxes, penalties, or
interest owed at IRS's campus in Philadelphia to compare the data in
the applicant's files to what was transcribed in the OVCI database. In
addition, we analyzed IRS's data reliability processes and conducted
our own limited data verification. We believe the data we used are
sufficiently reliable and useful for reporting on the characteristics
of those who came forward under the OVCI program.
To determine how OVCI applicants became noncompliant, we talked to IRS
officials and obtained information on the taxpayers' circumstances
while reviewing the 35 cases in Philadelphia, such as their reasons for
noncompliance and their experiences with promoters, if any. To better
understand taxpayers' use of promoters, we also visited 25 Web sites
maintained by individuals or companies promoting offshore investments
to gain a better understanding of the type and cost of the services
they provide. The Web sites were judgmentally selected to ensure the
sample included a variety of geographic locations. We also reviewed
examples of intricate schemes employed by some OVCI applicants to avoid
paying taxes by holding money offshore illegally to develop a
hypothetical illustration of such schemes.
We did our work at IRS's campus in Philadelphia and its National Office
in Washington, D.C. We conducted our fieldwork from January 2004
through June 2004 in accordance with generally accepted government
auditing standards.
[End of section]
Appendix III: OVCI Applicant Income Information by Tax Year for 1999,
2000, and 2001:
As shown in tables 5, 6, and 7, there are yearly variations in OVCI
applicants' median original AGI; adjustment to original AGI; and the
taxes, penalties, and interest.
In the tables, the nonfilers' median original AGI is shown as zero
because they did not file tax returns, although according to an IRS
official, they did illegally hide money offshore and incurred taxes,
penalties, and interest. According to another IRS official, for those
applying to the program for relief from Report of Foreign Bank and
Financial Accounts (FBAR) penalties, the data show original AGIs
because they generally reported all of their income and paid taxes due,
but had failed to disclose the existence of their foreign bank
accounts. There is no adjustment to original AGIs because they had
already reported their offshore holdings on their original federal tax
returns and, consequently, incurred no additional taxes or interest
owed. In addition, the Department of the Treasury waived the FBAR
penalties.
Table 5: OVCI Applicants' Income and Amounts Owed for Tax Year 1999:
Population: Filers;
Number: 323;
Median original AGI: $79,394;
Median adjustment to original AGI: $24,914;
Median additional tax owed[A]: $5,685;
Median penalties assessed: $800;
Median interest owed: $1,116.
Population: Nonfilers;
Number: 21;
Median original AGI: $0;
Median adjustment to original AGI: $67,086;
Median additional tax owed[A]: $3,011;
Median penalties assessed: $1,178;
Median interest owed: $1,243.
Population: FBAR;
Number: 462;
Median original AGI: $34,722;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Population: Total;
Number: 806;
Median original AGI: $49,469;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Source: GAO analysis of IRS data.
[A] These figures represent the median for the amount IRS has verified
through audits that taxpayers owed IRS. As IRS continues to conduct
audits of OVCI taxpayers, the median may rise or fall somewhat.
[End of table]
Table 6: OVCI Applicants' Income and Amounts Owed for Tax Year 2000:
Population: Filers;
Number: 331;
Median original AGI: $87,530;
Median adjustment to original AGI: $25,664;
Median additional tax owed[A]: $5,591;
Median penalties assessed: $674;
Median interest owed: $655.
Population: Nonfilers;
Number: 27;
Median original AGI: $0;
Median adjustment to original AGI: $71,782;
Median additional tax owed[A]: $7,288;
Median penalties assessed: $1,810;
Median interest owed: $1,295.
Population: FBAR;
Number: 459;
Median original AGI: $41,448;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Population: Total;
Number: 817;
Median original AGI: $51,663;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Source: GAO analysis of IRS data.
[A] These figures represent the median for the amount IRS has verified
through audits that taxpayers owed IRS. As IRS continues to conduct
audits of OVCI taxpayers, the median may rise or fall somewhat.
[End of table]
Table 7: OVCI Applicants' Income and Amounts Owed for Tax Year 2001:
Population: Filers;
Number: 326;
Median original AGI: $55,869;
Median adjustment to original AGI: $20,460;
Median additional tax owed[A]: $4,289;
Median penalties assessed: $523;
Median interest owed: $263.
Population: Nonfilers;
Number: 24;
Median original AGI: $0;
Median adjustment to original AGI: $82,561;
Median additional tax owed[A]: $7,573;
Median penalties assessed: $2,431;
Median interest owed: $860.
Population: FBAR;
Number: 458;
Median original AGI: $31,667;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Population: Total;
Number: 808;
Median original AGI: $38,761;
Median adjustment to original AGI: $0;
Median additional tax owed[A]: $0;
Median penalties assessed: $0;
Median interest owed: $0.
Source: GAO analysis of IRS data.
[A] These figures represent the median for the amount IRS has verified
through audits that taxpayers owed IRS. As IRS continues to conduct
audits of OVCI taxpayers, the median may rise or fall somewhat.
[End of table]
[End of section]
Appendix IV: OVCI Applicant Geographical Information by Tax Year for
1999, 2000, and 2001:
Tables 8, 9, and 10 show the number and median original AGI of
applicants to the OVCI program by state. In all 3 of the years shown,
applicants from Florida, California, Connecticut, Texas, and New York
make up half of all applicants to the OVCI program. In all 3 years,
seven states had only one applicant to the OVCI program and at least
three states had no applicants.
Table 8: State, Number of Applicants, and Original Median AGI for Tax
Year 1999:
State: Florida;
Applicants: 114;
Median AGI: $51,318.
State: California;
Applicants: 101;
Median AGI: $64,590.
State: Connecticut;
Applicants: 87;
Median AGI: $30,354.
State: Texas;
Applicants: 58;
Median AGI: $45,868.
State: New York;
Applicants: 45;
Median AGI: $96,648.
State: Pennsylvania;
Applicants: 37;
Median AGI: $36,480.
State: Ohio;
Applicants: 22;
Median AGI: $41,891.
State: Massachusetts;
Applicants: 21;
Median AGI: $93,187.
State: Michigan;
Applicants: 20;
Median AGI: $63,212.
State: Maryland;
Applicants: 19;
Median AGI: $52,964.
State: New Jersey;
Applicants: 19;
Median AGI: $95,994.
State: Arizona;
Applicants: 18;
Median AGI: $66,831.
State: Virginia;
Applicants: 17;
Median AGI: $24,097.
State: Illinois;
Applicants: 16;
Median AGI: $118,621.
State: South Carolina;
Applicants: 15;
Median AGI: $79,394.
State: Georgia;
Applicants: 14;
Median AGI: $107,968.
State: Colorado;
Applicants: 12;
Median AGI: $46,407.
State: North Carolina;
Applicants: 12;
Median AGI: $59,901.
State: Nevada;
Applicants: 10;
Median AGI: $24,615.
State: Oklahoma;
Applicants: 10;
Median AGI: $770.
State: Washington;
Applicants: 9;
Median AGI: $26,546.
State: Minnesota;
Applicants: 8;
Median AGI: $119,810.
State: Alabama;
Applicants: 5;
Median AGI: $5,343.
State: Indiana;
Applicants: 5;
Median AGI: $86,853.
State: Iowa;
Applicants: 5;
Median AGI: $57,964.
State: New Hampshire;
Applicants: 5;
Median AGI: $17,699.
State: Total[A];
Applicants: 806;
Median AGI: $49,469.
Source: GAO analysis of IRS data.
[A] BECAUSE FEW OVCI APPLICANTS RESIDED IN THE FOLLOWING STATES, WE
ARE NOT disclosing specific information about them due to concerns
that the information could be used to identify the taxpayers: Alaska,
Arkansas, Delaware, District of Columbia, Hawaii, Idaho, Kansas,
Kentucky, Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska,
New Mexico, North Dakota, Oregon, Puerto Rico, Rhode Island, South
Dakota, Tennessee, Utah, Vermont, West Virginia, Wisconsin, and
Wyoming. Therefore, the totals do not reflect only numbers shown in
the table.
[End of table]
Table 9: State, Number of Applicants, and Original Median AGI for Tax
Year 2000:
State: Florida;
Applicants: 115;
Median AGI: $55,831.
State: California;
Applicants: 97;
Median AGI: $73,330.
State: Connecticut;
Applicants: 89;
Median AGI: $35,706.
State: Texas;
Applicants: 58;
Median AGI: $50,965.
State: New York;
Applicants: 47;
Median AGI: $132,642.
State: Pennsylvania;
Applicants: 39;
Median AGI: $37,332.
State: Ohio;
Applicants: 25;
Median AGI: $44,635.
State: Massachusetts;
Applicants: 22;
Median AGI: $95,317.
State: Michigan;
Applicants: 22;
Median AGI: $45,786.
State: Arizona;
Applicants: 19;
Median AGI: $93,711.
State: New Jersey;
Applicants: 19;
Median AGI: $101,675.
State: Maryland;
Applicants: 18;
Median AGI: $93,894.
State: Illinois;
Applicants: 16;
Median AGI: $82,666.
State: South Carolina;
Applicants: 16;
Median AGI: $81,730.
State: Virginia;
Applicants: 16;
Median AGI: $28,273.
State: Georgia;
Applicants: 14;
Median AGI: $155,554.
State: North Carolina;
Applicants: 13;
Median AGI: $51,123.
State: Colorado;
Applicants: 12;
Median AGI: $47,051.
State: Oklahoma;
Applicants: 11;
Median AGI: $8,570.
State: Nevada;
Applicants: 10;
Median AGI: $64,896.
State: Washington;
Applicants: 9;
Median AGI: $28,412.
State: Minnesota;
Applicants: 8;
Median AGI: $133,935.
State: Alabama;
Applicants: 5;
Median AGI: $42,908.
State: Indiana;
Applicants: 5;
Median AGI: $11,928.
State: Iowa;
Applicants: 5;
Median AGI: $84,034.
State: New Hampshire;
Applicants: 5;
Median AGI: $15,587.
State: Total[A];
Applicants: 817;
Median AGI: $51,663.
Source: GAO analysis of IRS data.
[A] Because few OVCI applicants resided in the following states, we are
not disclosing specific information about them due to concerns that the
information could be used to identify the taxpayers: Alaska, Arkansas,
Delaware, District of Columbia, Hawaii, Idaho, Kansas, Kentucky,
Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska, New Mexico,
North Dakota, Oregon, Puerto Rico, Rhode Island, South Dakota,
Tennessee, Utah, Vermont, West Virginia, Wisconsin, and Wyoming.
Therefore, the totals do not reflect only numbers shown in the table.
[End of table]
Table 10: State, Number of Applicants, and Original Median AGI for Tax
Year 2001:
State: Florida;
Applicants: 115;
Median AGI: $42,589.
State: California;
Applicants: 98;
Median AGI: $40,123.
State: Connecticut;
Applicants: 87;
Median AGI: $30,895.
State: Texas;
Applicants: 57;
Median AGI: $49,892.
State: New York;
Applicants: 47;
Median AGI: $112,299.
State: Pennsylvania;
Applicants: 39;
Median AGI: $19,880.
State: Ohio;
Applicants: 25;
Median AGI: $41,013.
State: Massachusetts;
Applicants: 21;
Median AGI: $112,460.
State: New Jersey;
Applicants: 20;
Median AGI: $55,463.
State: Michigan;
Applicants: 19;
Median AGI: $46,662.
State: Illinois;
Applicants: 18;
Median AGI: $76,783.
State: Maryland;
Applicants: 18;
Median AGI: $83,913.
State: Arizona;
Applicants: 17;
Median AGI: $48,917.
State: Virginia;
Applicants: 17;
Median AGI: $0.
State: South Carolina;
Applicants: 16;
Median AGI: $77,732.
State: Georgia;
Applicants: 13;
Median AGI: $83,423.
State: North Carolina;
Applicants: 13;
Median AGI: $50,509.
State: Colorado;
Applicants: 12;
Median AGI: $35,278.
State: Oklahoma;
Applicants: 11;
Median AGI: $1,232.
State: Washington;
Applicants: 10;
Median AGI: $33,495.
State: Nevada;
Applicants: 9;
Median AGI: $292.
State: Minnesota;
Applicants: 8;
Median AGI: $121,779.
State: Alabama;
Applicants: 5;
Median AGI: $30,130.
State: Indiana;
Applicants: 5;
Median AGI: $39,036.
State: Iowa;
Applicants: 5;
Median AGI: $68,655.
State: New Hampshire;
Applicants: 5;
Median AGI: $18,456.
Total [A];
Applicants: 808;
Median AGI: $38,761.
Source: GAO analysis of IRS data.
[A]BECAUSE FEW OVCI APPLICANTS RESIDED IN THE FOLLOWING STATES, WE ARE
NOT disclosing specific information about them due to concerns that the
information could be used to identify the taxpayers: Alaska, Arkansas,
Delaware, District of Columbia, Hawaii, Idaho, Kansas, Kentucky,
Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska, New Mexico,
North Dakota, Oregon, Puerto Rico, Rhode Island, South Dakota,
Tennessee, Utah, Vermont, West Virginia, Wisconsin, and Wyoming.
Therefore, the totals do not reflect only numbers shown in the table.
[End of table]
[End of section]
Appendix V: OVCI Applicant Occupational Information by Tax Year for
1999, 2000, and 2001:
As shown in tables 11, 12, and 13, retired individuals account for the
most applications in each year. The three most common occupations for
each year are executives, business/self-employed individuals, and
those involved in banking/finance/insurance.
Table 11: Individual OVCI Applicants' Professions, Numbers, Median
Original AGIs, and Median Adjustments to Original AGI for Tax Year
1999 (Filers and Nonfilers but not FBAR applicants):
Profession: Retired;
Number of applicants: 52;
Median original AGI: $61,543;
Median adjustment to original AGI: $24,894.
Profession: Executive;
Number of applicants: 47;
Median original AGI: $236,031;
Median adjustment to original AGI: $40,614.
Profession: Business/self Employed;
Number of applicants: 31;
Median original AGI: $49,443;
Median adjustment to original AGI: $36,795.
Profession: Banking/finance/insurance;
Number of applicants: 26;
Median original AGI: $48,778;
Median adjustment to original AGI: $37,748.
Profession: Sales;
Number of applicants: 22;
Median original AGI: $105,251;
Median adjustment to original AGI: $40,586.
Profession: Engineer;
Number of applicants: 21;
Median original AGI: $83,695;
Median adjustment to original AGI: $8,685.
Profession: Medical profession;
Number of applicants: 18;
Median original AGI: $84,952;
Median adjustment to original AGI: $14,847.
Profession: Analyst/consultant;
Number of applicants: 12;
Median original AGI: $44,699;
Median adjustment to original AGI: $6,852.
Profession: Computer/technology;
Number of applicants: 10;
Median original AGI: $53,118;
Median adjustment to original AGI: $6,887.
Profession: Attorney;
Number of applicants: 8;
Median original AGI: $116,753;
Median adjustment to original AGI: $5,381.
Profession: Administrative[A];
Number of applicants: 8;
Median original AGI: $77,292;
Median adjustment to original AGI: $27,356.
Profession: Scientist;
Number of applicants: 5;
Median original AGI: $12,832;
Median adjustment to original AGI: $7,801.
Profession: Education[C];
Number of applicants: 5;
Median original AGI: $0;
Median adjustment to original AGI: $9,266.
Profession: Real estate;
Number of applicants: 4;
Median original AGI: $892,885;
Median adjustment to original AGI: $239,931.
Profession: Pilot;
Number of applicants: 4;
Median original AGI: $115,778;
Median adjustment to original AGI: $75,128.
Profession: Building trades;
Number of applicants: 4;
Median original AGI: $16,974;
Median adjustment to original AGI: $55,203.
Profession: Arts;
Number of applicants: 4;
Median original AGI: $178,432;
Median adjustment to original AGI: $90,998.
Profession: Other;
Number of applicants: 19;
Median original AGI: $13,515;
Median adjustment to original AGI: $28,245.
Profession: Missing;
Number of applicants: 44;
Median original AGI: $28,562;
Median adjustment to original AGI: $42,663.
Profession: Total[E];
Number of applicants: 344;
Median original AGI: $68,626;
Median adjustment to original AGI: $28,432.
Source: GAO analysis of IRS data.
[A] A small number of taxpayers who applied to the OVCI program listed
their occupations as secretary but their incomes were each in excess
of $1 million for each of the years 1999, 2000, and 2001.
[B] Although a large number of applicants were from the banking/
finance/insurance sector, a large number of these applicants reported
large losses on their tax returns. As a result, the median original
AGI was relatively low.
[C] Some occupations had more nonfilers apply to the OVCI program than
filers, so for these cases the median original AGI was zero.
[D] Seven applicants were identified as "deceased," and we included
these people in the "other" category.
[E] We did not include FBAR applicants in this table because, according
to IRS officials, there is no adjustment to the FBAR applicants'
original AGI. These applicants generally reported their offshore
holdings on their original federal tax returns and incurred no
additional taxes or interest owed. Because these applicants made up
more than half of all applicants, if we included them in the table,
the median adjustment to original AGI, taxes, and interest would all
be zero.
[End of table]
Table 12: Individual OVCI Applicants' Professions, Numbers, Median
Original AGIs, and Median Adjustments to Original AGI for Tax Year
2000 (Filers and Nonfilers but not FBAR applicants):
Profession: Retired;
Number of applicants: 57;
Median original AGI: $71,939;
Median adjustment to original AGI: $19,192.
Profession: Executive;
Number of applicants: 48;
Median original AGI: $258,665;
Median adjustment to original AGI: $42,943.
Profession: Business/self employed;
Number of applicants: 33;
Median original AGI: $74,387;
Median adjustment to original AGI: $38,576.
Profession: Banking/finance/insurance;
Number of applicants: 24;
Median original AGI: $104,129;
Median adjustment to original AGI: $81,372.
Profession: Sales;
Number of applicants: 23;
Median original AGI: $123,315;
Median adjustment to original AGI: $48,587.
Profession: Medical profession;
Number of applicants: 22;
Median original AGI: $108,723;
Median adjustment to original AGI: $20,948.
Profession: Engineer;
Number of applicants: 21;
Median original AGI: $66,765;
Median adjustment to original AGI: $7,529.
Profession: Analyst/consultant;
Number of applicants: 11;
Median original AGI: $134,351;
Median adjustment to original AGI: $20,210.
Profession: Computer/technology;
Number of applicants: 10;
Median original AGI: $53,427;
Median adjustment to original AGI: $3,721.
Profession: Administrative[A];
Number of applicants: 8;
Median original AGI: $113,736;
Median adjustment to original AGI: $29,043.
Profession: Attorney;
Number of applicants: 8;
Median original AGI: $161,341;
Median adjustment to original AGI: $13,095.
Profession: Other;
Number of applicants: 19;
Median original AGI: $27,074;
Median adjustment to original AGI: $24,133.
Profession: Education;
Number of applicants: 6;
Median original AGI: $20,945;
Median adjustment to original AGI: $23,886.
Profession: Arts;
Number of applicants: 5;
Median original AGI: $62,631;
Median adjustment to original AGI: $59,230.
Profession: Scientist;
Number of applicants: 5;
Median original AGI: $23,946;
Median adjustment to original AGI: $41,127.
Profession: Building trades;
Number of applicants: 4;
Median original AGI: $15,689;
Median adjustment to original AGI: $32,313.
Profession: Pilot;
Number of applicants: 4;
Median original AGI: $98,423;
Median adjustment to original AGI: $33,955.
Profession: Real estate;
Number of applicants: 4;
Median original AGI: $1,133,868;
Median adjustment to original AGI: $198,818.
Profession: Missing;
Number of applicants: 46;
Median original AGI: $735;
Median adjustment to original AGI: $36,873.
Profession: Total[E];
Number of applicants: 358;
Median original AGI: $41,448;
Median adjustment to original AGI: $27,033.
Source: GAO analysis of IRS data:
[A] A small number of taxpayers who applied to the OVCI program listed
their occupations as secretary but their incomes were each in excess of
$1 million for each of the years 1999, 2000, and 2001.
[B] Although a large number of applicants were from the banking/
finance/insurance sector, a large number of these applicants reported
large losses on their tax returns. As a result, the median original
AGI was relatively low.
[C] Some occupations had more nonfilers apply to the OVCI program than
filers, so for these cases the median original AGI was zero.
[D] Seven applicants were identified as "deceased," and we included
these people in the "other" category.
[E] We did not include FBAR applicants in this table because,
according to IRS officials, there is no adjustment to the FBAR
applicants' original AGI. These applicants generally reported their
offshore holdings on their original federal tax returns and incurred
no additional taxes or interest owed. Because these applicants made up
more than half of all applicants, if we included them in the table,
the median adjustment to original AGI, taxes, and interest would all
be zero.
[End of table]
Table 13: Individual OVCI Applicants' Professions, Numbers, Median
Original AGIs, and Median Adjustments to Original AGI for Tax Year
2001 (Filers and Nonfilers but not FBAR applicants):
Profession: Retired;
Number of applicants: 52;
Median original AGI: $43,881;
Median adjustment to original AGI: $25,074.
Profession: Executive;
Number of applicants: 47;
Median original AGI: $158,183;
Median adjustment to original AGI: $23,302.
Profession: Business/self employed;
Number of applicants: 32;
Median original AGI: $73,134;
Median adjustment to original AGI: $22,006.
Profession: Banking/finance/insurance;
Number of applicants: 27;
Median original AGI: $3,596;
Median adjustment to original AGI: $22,951.
Profession: Sales;
Number of applicants: 22;
Median original AGI: $91,000;
Median adjustment to original AGI: $24,329.
Profession: Medical profession;
Number of applicants: 22;
Median original AGI: $95,928;
Median adjustment to original AGI: $8,397.
Profession: Engineer;
Number of applicants: 21;
Median original AGI: $55,941;
Median adjustment to original AGI: $5,722.
Profession: Other;
Number of applicants: 20;
Median original AGI: $23,286;
Median adjustment to original AGI: $15,197.
Profession: Analyst/consultant;
Number of applicants: 11;
Median original AGI: $49,892;
Median adjustment to original AGI: $20,277.
Profession: Computer/technology;
Number of applicants: 11;
Median original AGI: $39,348;
Median adjustment to original AGI: $6,461.
Profession: Attorney;
Number of applicants: 9;
Median original AGI: $137,661;
Median adjustment to original AGI: $23,302.
Profession: Administrative[A];
Number of applicants: 8;
Median original AGI: $105,804;
Median adjustment to original AGI: $11,028.
Profession: Building trades;
Number of applicants: 5;
Median original AGI: $22,684;
Median adjustment to original AGI: $6,569.
Profession: Education[C];
Number of applicants: 5;
Median original AGI: $0;
Median adjustment to original AGI: $36,364.
Profession: Scientist;
Number of applicants: 5;
Median original AGI: $26,599;
Median adjustment to original AGI: $8,538.
Profession: Real estate;
Number of applicants: 4;
Median original AGI: $1,100,241;
Median adjustment to original AGI: $291,871.
Profession: Pilot;
Number of applicants: 4;
Median original AGI: $123,705;
Median adjustment to original AGI: $14,566.
Profession: Arts;
Number of applicants: 3;
Median original AGI: $123,945;
Median adjustment to original AGI: $70,799.
Profession: Missing;
Number of applicants: 42;
Median original AGI: $0;
Median adjustment to original AGI: $54,094.
Profession: Total[E];
Number of applicants: 350;
Median original AGI: $49,598;
Median adjustment to original AGI: $23,124.
Source: GAO analysis of IRS data.
[A] A small number of taxpayers who applied to the OVCI program listed
their occupations as secretary but their incomes were each in excess of
$1 million for each of the years 1999, 2000, and 2001.
[B] Although a large number of applicants were from the banking/
finance/insurance sector, a large number of these applicants reported
large losses on their tax returns. As a result, the median original AGI
was relatively low.
[C] Some occupations had more nonfilers apply to the OVCI program than
filers, so for these cases the median original AGI was zero.
[D] Seven applicants were identified as "deceased," and we included
these people in the "other" category.
[E] We did not include FBAR applicants in this table because, according
to IRS officials, there is no adjustment to the FBAR applicants'
original AGI. These applicants generally reported their offshore
holdings on their original federal tax returns and incurred no
additional taxes or interest owed. Because these applicants made up
more than half of all applicants, if we included them in the table, the
median adjustment to original AGI, taxes, and interest would all be
zero.
[End of table]
[End of section]
(450237):
FOOTNOTES
[1] The U.S. Citizenship and Immigration Services (CIS) was formerly
called the Bureau of Citizenship and Immigrations Services when
established in 2002.
[2] Illegal offshore arrangements are those that are used to avoid
paying U.S. taxes. These could include arrangements to shelter
unreported domestic income or any income earned offshore, such as
interest income, investment returns, or ordinary business income.
Promoters are those who market such illegal offshore schemes and cause
some taxpayers to become noncompliant.
[3] In order to study the nationwide implications of data sharing, we
used data from CIS's nationwide Computer Linked Application Information
Management System (CLAIMS 3) database. Although this database did not
include financial information, it included EINs and SSNs that we could
use to determine whether IRS had received a tax return and, if so, the
status of the taxpayer's account.
[4] Individuals who operate a business and report income and losses on
a Schedule C attached to their individual income tax return use their
SSN.
[5] Results from nonprobability samples cannot be used to make
inferences about a population, because in a nonprobability sample some
elements of the population being studied have no chance or an unknown
chance of being selected as part of the sample. We selected hard copy
application files because CIS's automated systems did not have income
or other tax related information that could be used to match with IRS
databases. We transcribed personal and financial information from CIS's
paper files.
[6] CIS has four service centers nationwide established to handle the
filing, data entry, and adjudication of certain applications for
immigration services and benefits. District offices are responsible for
providing certain immigration services and benefits to residents in
their service area, and for enforcing immigration laws in that
jurisdiction.
[7] As used in this testimony, "data sharing" means obtaining and
disclosing information on individuals between federal agencies, such as
IRS and CIS, to determine eligibility for benefits and to ensure
taxpayers have met their tax obligations. U.S. General Accounting
Office, The Challenge of Data Sharing: Results of a GAO-Sponsored
Symposium on Benefit and Loan Programs, GAO-01-67 (Washington, D.C.:
October 20, 2000).
[8] Pub. L. No. 93-579, December 31, 1974.
[9] Pub. L. No. 100-503, October 18, 1988.
[10] Pub. L. No. 94-455, October 4, 1976.
[11] Pub. L. No. 107-296, § 451, 116 Stat. 2195.
[12] CIS completed Form 9003 whenever an immigrant filed for lawful
permanent residency status. The form contained personal identifying
information on the immigrant such as name and SSN as well as financial
information on an individual's income. CIS provided a contractor with
the Form 9003s, and the contractor then transcribed the Form 9003
immigrant data onto tape and sent it to IRS's Martinsburg Computing
Center (MCC). IRS conducted matches of the Form 9003 immigrant data
against its own databases to determine whether the individuals had
filed taxes and properly reported their income.
[13] U.S. General Accounting Office, Reducing the Tax Gap: Results of a
GAO-Sponsored Symposium, GAO/GGD-95-157 (Washington, D.C.: June 2,
1995). U.S. Department of the Treasury, Inspector General for Tax
Administration, Management Advisory Report: Comparing the Internal
Revenue Service's Verification of Income for Wage Earners and Business
Taxpayers (Washington, D.C.: September 2001).
[14] LexisNexis is an information/research tool that, among other
things, maintains public records on businesses and individuals.
[15] The Application to Register Permanent Residence or Adjust Status
form is used by a person in the U.S. to adjust their temporary
immigration status to a permanent status or register for permanent
residence.
[16] IRS knows about these business nonfilers because of previously
filed returns.
[17] An alien convicted of an "aggravated felony" such as tax evasion
in which the revenue loss to the government exceeds $200,000 as defined
in 8 U.S.C.1101(a)(43), is deportable.
[18] Additionally, we and other agencies have found, and staff at some
of the field locations we visited agreed, that access to IRS taxpayer
information may also tangentially aid CIS in its homeland security
efforts. GAO and the Department of Justice's Office of Inspector
General have identified weaknesses in CIS locator information for
immigrants. For example, in November 2002, GAO reported that CIS
investigators determined that CIS's address information was inaccurate
for 45 immigrants who may have known some of the terrorists responsible
for the September 11, 2001 terrorist attacks (GAO-03-188).
[19] U.S. General Accounting Office, Immigration Benefits: Several
Factors Impede Timeliness of Application Processing, GAO-01-488
(Washington, D.C.: May 4, 2001).
[20] U.S. General Accounting Office, Immigration Application Fees:
Current Fees Are Not Sufficient to Fund U.S. Citizenship and
Immigration Services' Operations, GAO-04-309R (Washington, D.C: Jan. 5,
2004).
[21] One type Form 1099 is the Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-sharing Plans, IRAs,
Insurance Contracts, etc.
[22] Internal Revenue Service, National Taxpayer Advocate: 2003 Annual
Report to Congress (Washington, D.C.: Dec. 31, 2003).
[23] AGI is the amount of income the taxpayer reported minus certain
income adjustments the taxpayer made on his or her tax return. The
original AGI is the amount the taxpayer reported on his or her original
federal tax return. In applying for the OVCI program, the taxpayer also
supplied IRS with amended federal returns with an adjusted AGI.
[24] Taxpayers could apply for the OVCI program for any tax year after
1998 and could apply for one or more years. The overwhelming majority
of applications fell in tax years 1999 through 2001, but some
applicants applied for years prior to 1999 or subsequent to 2001. We
only included those taxpayers who were noncompliant in 1999, 2000, or
2001, or in a combination of these years, in our analysis. We used the
year 2001 in this testimony for all tables because it is the most
recent year for which we have data and because the data in 2001 were
fairly representative of each of the 3 years that we are reporting.
[25] Under the Bank Secrecy Act, U.S. residents or individuals in and
doing business in the United States must file a report with Treasury if
they have a financial account in a foreign country with a value of more
than $10,000 at any time during the calendar year. Taxpayers comply
with this requirement by noting the account on their tax return and by
filing Form 90-22.1. Willfully failing to file an FBAR report can be
punished under both civil and criminal law.
[26] IRS has previously reported that 1,321 taxpayers applied to the
OVCI program. This figure includes 400 entities that were set up by
applicants to handle their offshore funds. To avoid double counting, we
excluded these cases from our audit. We also excluded 49 applicants
because they did not meet program requirements and 16 applicants that
applied for tax years outside the scope of our audit, that is either
before 1999 or after 200l. As a result, we identified 861 unique,
individual taxpayers who applied to the OVCI program. IRS has also
previously reported that it had received $200 million for all years
while the database showed that only $140 million had been collected.
IRS officials said it recorded in the database only those amounts that
it had finished auditing and will enter the additional money received
as it completes audits of more OVCI applicants. In addition, much of
the money IRS received from OVCI applicants was for tax years either
before 1999 or after 2001.
[27] A small number of taxpayers who applied to the OVCI program lived
outside of the United States or in Puerto Rico. We are not disclosing
any specific information about these taxpayers due to concerns over the
information being used to identify the taxpayers.
[28] These states accounted for about one-third of all individual
income tax returns filed in tax year 2003, indicating that they
accounted for a higher concentration of OVCI applicants than would be
explained by the number of tax returns filed from those states.
[29] We cannot be precise about the number of taxpayers who said they
used a promoter. IRS officials said that they had identified 269
potential promoters from 140 participants. IRS has opened
investigations into 53 but does not have sufficient information yet on
the remainder to conclude whether they are bona fide promoters. In
addition, IRS compiled its statistics on the number of taxpayers and
associated business entities that identified promoters--140--but not
the number of unique taxpayers who identified promoters.
[30] IRS rejected OVCI applicants who did not divulge the entirety of
their scheme to avoid paying U.S. taxes. IRS told us that 49 applicants
were rejected for that reason, and those cases were sent to IRS's
Criminal Investigation Unit.
[31] The I-360 applications in our sample were submitted by religious
organizations sponsoring religious workers.
