TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Planned Improvements Have Not Been Made to Manage and Track Correspondence
With International Taxpayers
September 8, 2015
Reference Number: 2015-30-072
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
1 = Tax Return/Return Information
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / http://www.treasury.gov/tigta
HIGHLIGHTS
PLANNED IMPROVEMENTS HAVE NOT BEEN MADE TO MANAGE AND TRACK CORRESPONDENCE
WITH INTERNATIONAL TAXPAYERS
Highlights
Final Report issued on September 8, 2015
Highlights of Reference Number: 2015-30-072 to the Internal Revenue Service Commissioner for the Wage and Investment Division.
IMPACT ON TAXPAYERS
As of May 2014, the U.S. State Department estimated that approximately 7.6 million U.S. citizens live in a foreign country. The rules for filing income, estate, and gift tax returns, as well as paying income taxes, are generally the same for international taxpayers as for those taxpayers living in the United States. The IRS heavily relies upon its many notices and letters as its primary means of communication with taxpayers.
WHY TIGTA DID THE AUDIT
As globalization trends continue, so too do the challenges to the IRS’s ability to provide services to and enhance the tax compliance of U.S. taxpayers living in other countries. This audit was initiated to evaluate the process for sending tax correspondence (notices and letters) to business and individual taxpayers who reside outside the United States, analyze how the taxpayers responded, and determine whether the correspondence resulted in improved compliance.
WHAT TIGTA FOUND
Even though the IRS sent approximately 855,000 notices and letters to U.S. taxpayers living in other countries during Calendar Year 2014, it cannot determine taxpayer response rates. The lack of data on response rates for international taxpayers is problematic because this information is needed to determine the effectiveness of international correspondence on increasing taxpayer compliance and to make program improvements.
IRS data systems are not designed to accommodate the different styles of international addresses, which can cause notices to be undeliverable. Other factors complicate the delivery of international mail, making its delivery less certain than domestic correspondence.
In addition, the IRS generally does not know if international taxpayers receive the tax correspondence sent to them. Without specific controls to monitor and metrics to measure international tax correspondence, the IRS cannot determine the impact of its international tax correspondence on taxpayer compliance.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS: 1) develop a systemic process that identifies undelivered international mail volumes, as well as tracks international tax correspondence and receipt trends;2) develop specific performance measures to monitor the compliance impact of sending international tax correspondence to taxpayers residing outside the United States; 3) use the Postal Service Form 2865, Return Receipt for International Mail, for the countries that currently support return receipts for registered foreign mail; 4) expand the International Submission Processing Individual Master File Foreign Address Job Aid to include abbreviated address formats for all foreign countries as needed; and 5) coordinate with the other business operating divisions to make the job aid available to all IRS employees who are responsible for the input of addresses into IRS computer systems.
The IRS disagreed with four of the five recommendations. While the IRS generally agreed that TIGTA’s recommendations could provide additional insight into the factors contributing to undeliverable international mail, it does not believe this information would permit the IRS to overcome budgetary, statutory, and operational constraints as needed to achieve appreciable improvement in its current processes. TIGTA does not believe that the IRS’s response is adequate because current IRS processes for addressing international mail issues are ineffective or nonexistent.
September 8, 2015
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You can read the full report at https://www.treasury.gov/tigta/auditreports/2015reports/201530072fr.html
Thanks to bubblebustin for providing the content for this post.
Barbara, please submit forms to the post offices of Hong Kong and Singapore to request traces of registered mail that you sent from each of those places to the US. Bring your receipts. If those really were fully registered, but the originating post offices handled them as a lesser relative of registered, then the mistakes were theirs instead of USPS, and I’d expect those two post offices to admit it if the mistakes were theirs.
Furthermore, if a registered letter is delivered (shown on usps.com as delivered) but the A.R. card doesn’t come back within about two weeks, or if the A.R. card does come back without the recipient’s signature and date, please go to your post office to request a trace. Bring your receipts, and if an uncompleted A.R. card came back bring that too. You’ll write your part of a new A.R. card and it will be sent to the US along with your inquiry. Several times I’ve also added a photocopy of an A.R. card with my comments added to the photocopy, “This part must be completed by the recipient and returned. See IMM 753.1.”
http://pe.usps.com/text/Imm/immc7_016.htm
“appeared to be a systemic issue due to a decision the USPS made about how to handle the incoming registered mail from Canada.”
Yikes. Here is a notice in 2009 that is consistent with that, and I very much doubt that it really complies with treaty obligations under the UPU:
http://about.usps.com/postal-bulletin/2009/pb22259/html/updt_004.htm
Here’s the IMM section.
http://pe.usps.com/text/Imm/immc7_015.htm
I guess EMS becomes a necessity (except to Canada where EMS doesn’t work right).
@calgary411
“Switching to RBT would involve some common sense, which doesn’t seem in the IRS / U.S. legislators’ vocabularies.”
Since they lack common sense, they will launch Fatca v2 with a clause stating that “every foreign postal service worldwide, whether a public or private entity, will be required to accept bulk mail (whatever the size) from the IRS, have it sorted, distributed, delivered and confirmed by signature for the purposes of enforcing Fatca to identify “US Persons;” with the foreign postal service bearing responsibility for all additional staff costs as well as a penalty of an additional 30% postal levy on all incoming post from the country in question for non-compliance.
I sent in my first tax return in years yesterday, from the EU. I used, per my preparer’s advice, registered mail, but without an “accusé de réception”. Since I’m claiming a tax credit (which should cover my preparer’s fees) I guess I will find out if they receive something. We shall see.
Does anybody know what income a tax credit covers? Meaning if I claim x taxes paid in my country of residence, and x is way higher than US taxes, could that tax credit be carried over to, for instance, capital gains from sail of a house, or investment income? Truly CBT is an aberration. I’m ready to financially support that cause too, by the way.
@ Fred (5:37am)
In all seriousness, the answer to ALL your questions is: maybe yes, maybe no, or just maybe.
If you’re using tax credits (1116), you’ll need to understand “baskets”. Credits are not interchangeable between baskets. Credits taken on 1116 generally cannot be used elsewhere within the tax return. There are “carry over” and “carry back” options on the baskets, but these refer to tax years.
The “safest” option for acknowledgement of delivery to Austin is tracking and confirmation via a commercial service such as FedEx.
Welcome to the world of compliance.
There are so many kinds of tax credits that I doubt whether any IRS employee even knows how many there are. Most of them are not refundable.
If Fred’s tax credit is Foreign Tax Credit (reported on Form 1116) it is not refundable. If Fred’s tax preparer told Fred that it’s refundable, Fred is going to be in trouble. By coincidence (or maybe not coincidence), embezzler(s) in the IRS altered IRS records of my returns to allege that I claimed refundable credits for foreign tax credits, so they could frame me for fraud and I would not know what’s going on.
There are usually two categories of foreign tax credits.
One category is “general” which includes earned income. Some amount of earned income from working outside of the US can be claimed as an exclusion on Form 2555, and if there’s any earned income left over after that then the remaining portion can be included in the “general” Form 1116. The amount of tax paid to the country where earned is supposed to be divided into two portions; the portion of tax attributable to excluded income isn’t supposed to get a foreign tax credit, but the portion of tax attributable to the rest of the earned income that’s included in Form 1116 gets included in a later section of Form 1116. So essentially you’re supposed to get a credit against the portion of tax you paid to the country where you had that portion of the income.
The other category is “passive” which includes interest, dividends, and capital gains. There is no foreign earned income exclusion for this, so all of your passive income goes on this Form 1116 and all of the tax you paid to the country where that income was sourced goes on a later section of Form 1116. So the credit against this source-based tax is easier to compute.
But in both cases, the credits are not refundable. They reduce your amount of US tax payable. But if your US tax payable was already zero before that, foreign tax credits will not reduce your US tax below zero. Again, this is what IRS embezzlers did to records of my returns in order to frame me.
There’s another complication too. Lawyers for both the IRS and DOJ complained in court that I obeyed instructions to exclude from Form 1116 the amount of earned income that was excluded by the foreign earned income exclusion. The instructions are there to prevent double-dipping, so you’re not supposed to get two benefits on the same portion of income. But the US’s lawyers complained that I failed to double-dip. If you want to try double-dipping I think you can base it on one of the Court of Federal Claims rulings against me, but you’ll have to be brave in order to try it. But it still won’t make the credit refundable.
By the way, if Fred’s preparer said that foreign tax credits are refundable credits, Fred had better prepare for an audit.
If the IRS doesn’t audit Fred, the results will be worse. I’ve gone through 12 years of hell so far, 9 of them before the IRS accidentally let enough information slip out for me to start figuring out why. I tried to compel the IRS to audit me but courts rejected my motions, gee I wonder why.
Duality: “Okay, so switch to residence-based taxation. Mammoth problem, simple solution.” Exactly! Why do all of us here see this so clearly and those who actually have the power to do something about it are blinder than bats?!
“those who actually have the power to do something about it are blinder than bats”
No, they see it. They get brownie points by labelling us all as tax evaders. And they get money by penalizing us.
RE: Fred’s refundable tax credit
There is a third basket in addition to the two mentioned by Norman, the “Resourced by Treaty” basket. If Fred had US source income with tax withheld, an option “may” be available to have that refunded. Other than that, the only other real option for a refund are possibly EITC, (maybe) dependent on income.
Hat tip to Neill who brought this to attention on another site:
https://www.treasury.gov/tigta/auditreports/2015reports/201530052fr.html
Yes, another TIGTA report, this time on the many form 1116’s which have been filed incorrectly ( and quite often by professional tax preparers).
‘If Fred had US source income with tax withheld, an option “may” be available to have that refunded.’
No treaty is needed for that, and I don’t know the meaning of “Resourced by Treaty.” US withholding can always be declared as US withholding, and US withholding is refundable. Though again, if Monica Hernandez and cohorts stole it, Fred will have a hard time proving that he had the withholding.
By maybe or maybe not coincidence, in some tax years the IRS labelled my US withholding as a refundable credit, but in other years they labelled it correctly as withholding (and of course in some years they refused to record it at all). Refundable credits exist but they’re kind of like welfare payments for low income US residents, things that the US diaspora will never see. Withholding is withholding.
“WHY TIGTA DID THE AUDIT
Due to its complexity and a lack of third-party reporting information, there is a risk of some taxpayers claiming an incorrect FTC amount.”
Oh yeah? Plus there’s a risk of the IRS’s embezzlers creating IRS records framing taxpayers for claims of incorrect FTC amounts. Now why would TIGTA neglect to mention that? Any connection between that and the IRS’s refusal to audit me? Any connection between that and courts rejecting my motions to compel audits?
“WHAT TIGTA FOUND
· Allowed taxpayers to file 16,058 tax returns that claimed nearly $2.9 million in FTCs as a deduction, as well as a credit on the same foreign taxes paid.”
Oh yeah, no kidding. After IRS lawyers and DOJ lawyers both blasted me for obeying instructions to avoid double-dipping, no kidding that maybe some taxpayers double-dip to avoid getting penalized for obeying the law.
Who’s going to clean TIGTA’s house?
My god, it’s full of stars. Did TIGTA think this was 2001 instead of 2015?
Hey TIGTA, here’s some stars for you.
http://i.imgur.com/tvkEunL.jpg
@Duality
Pretty much my thoughts exactly:
http://isaacbrocksociety.ca/2015/10/01/the-roundup-begins/comment-page-2/#comment-6642702
It’s interesting that the weak links in the taxing of US non-residents would be foreign postal delivery services, and the disproportionate amount of scarce resources the IRS must spend in making it an effective means of reaching us. Next step is to determine just how much/little tax revenue the IRS is missing out on by lax enforcement and whether the resources necessary to make it worthwhile.
The bean counters may be our salvation!
‘a. Matched the Taxpayer Identification Number (TIN) and tax years identified from Step I.E.4. to the Information Return Master File for the following forms:
· Form 1099-INT, Interest Income, with amount in Box 6.
· Form 1099-DIV, Dividends and Distributions, with amount in Box 6.
· Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions, Credits, etc., with amount in Box 14 Coded “B.”’
Wow, still neglecting to mention Form 1099-B. Even the agency that reported about Monica Hernandez still keeps 1099-B a secret. Who’s going to investigate TIGTA?
@Bubblebustin: Like minds can see through this madness 🙂
Now, the toxic alphabet soup has gotten longer: CBTFBARFATCATIGTA
TIGTA is on a separate line from CBTFBARFATCA. TIGTA is Treasury Inspector General for Tax Administration, which spends part of its time investigating the IRS, finding IRS employees who participate in crimes. Sort of like an internal investigations unit in the FBI or in a police department. Now it looks like TIGTA themselves have been infiltrated, like a criminal working in the internal investigations unit of the FBI. Anyway TIGTA isn’t a law like CBTFBARFATCA.
Many thanks, Norman and OAP.
My preparer used the foreign tax paid to negate the US income tax due. He said I can carry this over from year to year. But this does not give me a refund (sounds obvious). It was interesting to me that the foreign tax credit appeared to be usable on tax on interest. I.e. income tax used to offset tax on passive income. I preferred not to use the FIEI because I live in a very high income tax country.
The refund he said I will get is for dependent children in a low-income year of mine (2014).
OK, will use trackable mail for future mailings.
@Fred (4:38am)
Yes, that all sounds correct. I believe using FEIE would not have allowed the credit for dependent children, so you’ve made the right choice. Earnings in the general basket and passive income, such as interest, in the passive basket. Two form 1116’s should have been filed, one for each basket.
@Norman Diamond
Given what I’m reading here, it seems to be virtually impossible to comply even if you wanted to, but why would anyone expose themselves and try to become “compliant”? You will get nothing back in return for all the hell you’ll be dragged through including financial loss even if you possibly maybe who knows “owe” the extortionists nothing. Given the difficulties in identifying “taxable US persons” and even greater difficulties with collecting, it seems to me that most people who have no ties to the US are planning to ignore all of this crap, lie on bank forms about birth place, and go about their lives. I can only see people who want to travel back to the US, or are afraid of being kidnapped while visiting, or have traceable investments in the US, may feel compelled to try and comply, but good luck with that. The madness would be really funny if it were not true.
‘it seems to be virtually impossible to comply even if you wanted to’
Yes, that’s why the IRS reported to Congress in 2011 that IRS practices forced thousands of honest taxpayers to renounce US citizenship.
‘but why would anyone expose themselves and try to become “compliant”?’
A combination of personal integrity and stupidity.
I did pay penalties for writing illegally honest declarations. I committed perjury on every return after the day the finally told me that honesty is illegal. 26 USC 7206(1) punishes willful perjury but not unwillful perjury, so I complied.
The IRS even told Tax Court that my honesty impeded administration of taxes. After I complied, the IRS even confirmed in writing that my perjury met their needs.
@OAP: yes, two 1116s (gee this is fun…)
@Middlefinger: you are right.
The reason I am going into compliance (in my own way, just starting to send in forms again, not through any program) is that I have a US birthplace and was thrown out (in June 2014) of a bank where I live and function as an EU citizen. This bank found my birthplace and told me to get out, not caring about my EU citizenship (a clear case of discrimination, if you ask me, but I have not pursued this for lack of time). I know for certain (from various sources) that my other banks actively look for US indicia, but for some reason I have remained off their radar. Perhaps they didn’t have “birthplace” data back when I opened the accounts, but I’m pretty sure they have copies of my ID documents.
My reasoning is coming into compliance (attempting to, at least) was that I would at one point be “found out” and have to either give my banks a CLN or a US taxpayer number or have them freeze or terminate my account. I also didn’t want to risk having them report my accounts before I did.
In Belgium they ask your for your ID card for everything, and even if you are an EU citizen your US birthplace is hard to hide. It would be impossible to open an account here with just a driver’s license, as some have described doing in Canada. Even very local banks seem to tout themselves as “FATCA-compliant”. If I need to open an account in the future I will be immediately known as a US person, and not being compliant is an additional risk I don’t want to take.
It very probably is possible to function for a long time by just telling banks who ask that you are a USP all the while not filing any US forms. However this is, should they all (the various intermediaries and the IRS) perchance get their act together, inviting the IRS to come after you. It is also quite possible that the IRS would have trouble coming after someone abroad. But I still travel to the US occasionally, and don’t want to risk another source of irritation, either in the form of threatening letters or border harassment.
In short FATCA has intimidated me into compliance. Which in the end is useless to the US because I owe no taxes, and they have to process my paperwork. Renunciation/relinquishment would be the next step, obviously (although in theory it is best to be compliant with filing returns to be fully free of tax obligations when you get your CLN). Of note, people without a US birthplace (and with another passport) have the potential for being undetectable.
@Norman: I agree that the forms and numbers fed to the authorities, especially the IRS, should be simple and easy to digest for them. It is a lesson my mother taught me early on back in the US, when every office, credit card company, and store seemed to be asking for our phone number, something my parents were paranoid about. She never ceased to amaze me by rattling off a new one every time, instead of wasting time saying she didn’t want to or have to tell them our phone #. The clerks were happy to write it down.
middlefingerx2 my point exactly ” it seems to me that most people who have no ties to the US are planning to ignore all of this crap, lie on bank forms about birth place, and go about their lives.”
i have zero reason ever to travel to amerika ever again so will never have any direct interaction with any u.s. official. given that amerika has no way of know that i was ever contacted and given that my big 5 bank does not know about my “americaness” (and were it ever to ask my last few remaining accounts would be closed immediatly) and my “local client base” credit union does not care i have no reason not to “just get on with my life”.
i will continue to support the legal challenge, to speak out to anyone who will listen to what our current canadian gov’t has entered into with the amerikans. in general anything i can do to bring more people to this site and our cause
what i will not do is live my life in fear of a bully. perhaps doing nothing and going about our lives (for those of us that can) and not worring about FATCA may be the best thing for us. only time will tell though eh?
i continue to feel sorry for those in europe and else where in the world that are having their lives turned upside down because of FATCA and CBT and are unable to burry their heads and get on with their lives.