Senators Slam IRS On Foreign Income Reporting

by Leroy Baker, Tax-News.com, New York

22 May 2006

US Senators Charles Grassley (R-Iowa) and Max Baucus (D-Mont.), Chairman and Ranking Member of the Senate Finance Committee, yesterday requested more information on IRS handling of foreign-source income information documents received from foreign countries.

American taxpayers generally are taxed on their worldwide income and these reports are a good way for the IRS to find out if they are paying everything they owe. However, a Treasury Inspector General for Tax Administration (TIGTA) report recently found that the IRS fails to make good use of these reports to identify income earned overseas by American taxpayers.

The Finance Committee subsequently learned that most of the older, paper documents have been destroyed and the IRS does not have procedures in place to make use of newer, electronic data.

In a letter dated May 17, the Senators asked IRS Commissioner Mark W. Everson to explain why the agency is letting this valuable information go to waste.

"After consultation with TIGTA and several meetings with IRS personnel about this matter, it appears to us that the IRS is not using this information effectively, or actually, at all," the Senators wrote.

Congress urged the IRS to begin a systemic use of foreign source information documents as far back as 1976, but the IRS has done little to tackle the issue.

Until recently, most of these information documents were received in paper format at the IRS Philadelphia Service Center. TIGTA found that these forms were stored in boxes, but the IRS never did anything with them. These documents have subsequently been destroyed.

"The IRS has several excuses for this, including incompatible currency and reporting formats and the extensive labor resources that would be needed to analyze the reports," they wrote.

While almost all of this data is now collected and stored in electronic form, albeit in a format used by the OECD, Grassley and Baucus noted that the IRS has no specific process to use this data to detect unreported foreign income, meaning the IRS Criminal Investigation Division has been unable to access the data for use in connection with its investigations.

Between 1999 and 2003, foreign investments by United States (US) residents nearly tripled, from $2.6 trillion to $7.2 trillion.

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