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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.