Tax Law Center Blog

The Internal Revenue Service’s collection efforts need to be improved to make sure that delinquent taxpayers residing in foreign countries comply with their U.S. tax obligations, according to a new government report. The report, from the Treasury Inspector General for Tax Administration (TIGTA), comes amid the implementation of many of the requirements of the Foreign Account Tax Compliance Act, or FATCA, which will require foreign financial institutions to begin reporting on the holdings of U.S. taxpayers to the IRS or else face stiff penalties of up to 30 percent on their income from U.S. sources.

TIGTA’s review found that ineffective management oversight has contributed to a number of control weaknesses in the IRS’s International Collection program. The review also discovered that the IRS does not have reliable statistics on the rate of noncompliance of taxpayers with their U.S. tax obligations.

In addition, there is no process to measure the value of the so-called “Customs Hold” as an enforcement tool against delinquent international taxpayers. International revenue officers at the IRS can request that a customs hold be input into the Treasury Enforcement Communication System for delinquent taxpayers, and the U.S. Department of Homeland Security will then notify the IRS whenever the taxpayer travels into the U.S. During TIGTA’s interviews with a sample of 15 international revenue officers and all five group managers, many identified the Customs Hold as one of the most effective enforcement tools available to them in dealing with delinquent international taxpayers. International revenue officers use information obtained through a Customs Hold to attempt to contact the taxpayers while they are in the U.S. or to locate the taxpayers’ assets.

In addition, there are over 78,000 global financial institutions that have entered into direct information exchange agreements with the IRS. These institutions will be issuing FATCA letters to U.S. taxpayers asking them to provide information required under FATCA. The failure to provide the information will result in the taxpayers being place on a FATCA “recalcitrant” list. The financial institutions will also withhold 30% of the U.S. taxpayers account earnings and remit those earning to the IRS.

Our firm expects that the Customs Hold will be used on a more now that the Swiss bank non-prosecution program participation deadline of September 15, 2014 has passed. U.S. taxpayers who have been placed on the “recalcitrant” list should expect tax audit letters and FBAR “willfulness” based assessments.

For those taxpayers who would like to come forward, the IRS has two solutions: First, for those taxpayers who qualify there are the Streamline Procedures (non-resident SFOP and domestic SDOP). For those taxpayers who do not meet the eligibility requirements of the Streamline Procedures there is the offshore voluntary disclosure program (OVDP 2014).