IRS Takes New Approach To International Tax Administration

by Mike Godfrey, Tax-News.com, Washington

21 April 2009

The US Internal Revenue Service has announced a new service-wide approach to tax administration that it says will deal more effectively with the increase of globalization of individual and business taxpayers.

The IRS said that its priority will be to improve voluntary compliance with the international tax provisions and to reduce the ‘tax gap’ attributable to international transactions. It intends to achieve this by placing a higher emphasis on compliance, information reporting and cooperation with tax treaty partners.

“As globalization continues to grow, tax planning is increasingly focused on minimizing the worldwide effective tax rate. In this context, international/US territory non-compliance is a significant area of concern and focus,” the agency stated.

“We are challenged by a lack of information reporting on many cross-border transactions. The ease of utilizing complex international structures and cross-border transactions results in constantly evolving compliance issues. We will proactively enforce international tax law by expanding our approaches and tools, using a data driven approach to target new and emerging issues, expand workforce skills on international issues, and ensure adherence to professional standards by tax professionals,” the IRS explained.

This updated approach to international tax administration follows the IRS Strategic Plan for 2009-2013 and includes the following initiatives:

• Strengthen information reporting and withholding systems to ensure receipt of the appropriate information
• Identify emerging compliance issues and increase issue specialization to address complex transactions
• Assess system and resources devoted to referrals of international/US territory issues to ensure high risk issues are addressed in a timely manner
• Leverage partnerships with other government organizations to gather and share information that will assist in tax administration and compliance efforts
• Utilize alternative treatments (non-audit procedures) to address compliance issues as appropriate
• Identify and address the workforce skills needed to address emerging international/US territory issues
• Provide IRS employees with the tools needed to accurately and timely respond to taxpayer inquiries and do their work
• Improve cooperation with treaty partners and international community to address inappropriate tax arbitrage and abusive schemes, achieve greater transparency on cross border transactions, and implement process improvements in the mutual agreement program
• Improve examination coverage on international transactions
• Detect and deter financial criminal activity and abusive transactions that involve offshore entities and cross border transactions
• Provide targeted outreach to the tax-exempt sector to address current international compliance issues

The agency intends to make voluntary compliance easier for taxpayers on the other hand by providing them with “clear and accurate information” before they file their tax returns.

“To achieve this, we will incorporate taxpayer perspectives as we improve service options, provide targeted guidance and outreach on international issues, and strengthen our partnership with tax professionals and third parties to ensure effective international tax administration,” the IRS pledged.

However, IRS Commissioner Doug Shulman has made it clear that this strategy will go hand-in-hand with a tougher program of compliance in the international tax sphere.

"I have made international issues a major focus for the IRS, and it’s not just because the business world around us has become more international,” he told the National Press Club in a recent speech. “In today’s economic environment, it’s more important than ever that the American public feels confident that individuals and corporations are playing by the rules and paying the taxes that they owe.”

Shulman added that the agency will “confront areas of complexity where there are opportunities for some to push the envelope,” but conceded that there is no “silver bullet” that will solve compliance issues.

“Rather, an integrated approach is needed, made up of separate but complementary programs that will tighten the net around those not paying what they owe,” he said.

According to Shulman, multinational enterprises increased from 3,000 in 1990 to more than 63,000 in 2007. Over the period form 2000 to 2007, the value of foreign tax credits claimed by corporations increased by more than 70%.

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