Tax Administration:

Nonfiling Among U.S. Citizens Abroad

GGD-98-106: Published: May 11, 1998. Publicly Released: Jun 10, 1998.

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Pursuant to a congressional request, GAO provided information on the tax compliance of U.S. citizens residing in foreign countries, focusing on: (1) whether it is possible, given available data, to estimate the prevalence and revenue impact of nonfiling among U.S. citizens residing abroad; (2) factors that may limit the Internal Revenue Service's (IRS) enforcement of the filing requirement or otherwise contribute to nonfiling abroad; (3) IRS' recent initiatives to improve the filing compliance in this population; and (4) the Department of the Treasury's study on the income tax compliance of U.S. taxpayers residing abroad.

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

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS reviewed a limited random sample of passport applications to determine the usefulness of collecting country of residence and occupation data. The review disclosed that for a majority of the applications, information on country of residence/addresses and occupation was generally identical to the information currently on file with IRS. As a result, IRS concluded that further extraction of country of residence and occupation data from passport applications was not useful for tax enforcement purposes.

    Recommendation: To obtain better data on the filing compliance of the U.S. population residing abroad and to promote their understanding of their filing requirements, the Commissioner of Internal Revenue should ensure that IRS assesses the usefulness of country of residence and occupation data, in addition to data IRS currently receives from passport applicants, as a means of identifying potential nonfilers abroad and supplementing IRS' other sources of demographic data on U.S. citizens abroad. The assessment might include reviewing a limited random sample of currently available information.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS worked with the Department of State to develop cost estimates for routinely obtaining additional data from passport applicants residing abroad. According to the Department of State officials, extracting such data directly from applications would cost about $700,000 annually. This estimate would not include the costs involved in redesigning the passport application, rewriting computer programs, and training personnel. Given the high costs involved and the low direct benefits from obtaining the additional information, IRS and the Department of State decided not to pursue this recommendation further. GAO concurs and has agreed to close out the recommendation.

    Recommendation: To obtain better data on the filing compliance of the U.S. population residing abroad and to promote their understanding of their filing requirements, the Commissioner of Internal Revenue should ensure that IRS estimates the cost of obtaining the additional data routinely for passport applicants residing abroad, including those who apply in the United States. If the estimated costs appear to be justified, IRS should: (1) prescribe that passport applicants provide the additional items; and (2) routinely obtain and analyze the additional data elements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS developed and mailed a letter to individuals who failed to provide SSNs on passport applications submitted during the period October through December 1997. Of the 1,029 letters mailed, 640 responses were received with about 70% providing SSNs. Based on its analysis of the responses, IRS determined that it already had the information in related taxpayer databases. Thus, IRS believed that further solicitation of such data from taxpayers was not cost beneficial nor useful for tax enforcement purposes.

    Recommendation: To obtain better data on the filing compliance of the U.S. population residing abroad and to promote their understanding of their filing requirements, the Commissioner of Internal Revenue should ensure that IRS undertakes additional efforts to enforce the information requirements of Internal Revenue Code section 6039E, including the requirement for applicants to provide their SSNs. One potential effort would be to contact a random sample of adult applicants who did not provide a SSN, using the mailing address provided on their passport application.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS included, in the 1998 Form 1040 instructions, a statement similar to the one in Publication 54, "Tax Guide for U.S. Citizens and Resident Aliens Abroad." IRS does not believe that Publication 17 should be revised further since it specifically refers to U.S. citizens living outside the country to Publication 54 for special rules that apply to them. GAO believes that IRS has been responsive to this recommendation and that it can now be closed.

    Recommendation: To obtain better data on the filing compliance of the U.S. population residing abroad and to promote their understanding of their filing requirements, the Commissioner of Internal Revenue should ensure that IRS revises the instructions for form 1040 and related guidance, such as Publication 17, to clarify that income that qualifies for foreign earned income exclusions must be considered in determining whether one's gross income exceeds the filing threshold.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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