The intent of section 6039E was that IRS would use this information to identify nonfilers residing abroad. However, the data we obtained on the U.S. population residing abroad—from State Department and foreign government estimates—and the number of returns they filed are too uncertain to support such estimates. Estimating revenue impact would require reliable information concerning the number of U.S. citizens residing abroad, the number who would be required to file tax returns, the extent of nonfiling, and the amount of tax nonfilers would owe if they were to file. In general, IRS has found much higher rates of noncompliance among individuals not covered by these systems. Factors Limiting IRS’ Enforcement of the Filing Requirement or Otherwise Contributing to Nonfiling Abroad

IRS’ enforcement of the filing requirement abroad is impeded by the limited reach of U.S. law in foreign countries. Also, IRS’ filing instructions for individuals may lead some U.S. citizens residing abroad to erroneously conclude that they do not need to file tax returns. Limited Information Reporting and Tax Withholding on U.S. Citizens Abroad

Information reporting and tax withholding from employers and other income providers are the key tools available to IRS for identifying nonfilers and reducing the resulting lost revenue, but they have limited applicability to U.S. citizens residing abroad who are employed by foreign companies or derive investment income from foreign sources. As a result, IRS generally cannot collect unpaid taxes from assets that have been transferred to a foreign country, except for the five countries that have entered into mutual collection assistance agreements as part of tax treaties with the United States—Canada, France, Denmark, Sweden, and the Netherlands. Passport application forms include a statement noting that an SSN must be provided if the applicant has received one, subject to a $500 penalty. Whether it could do so is unclear. IRS’ Recent Initiatives to Address Nonfiling Abroad

IRS has initiated some actions in recent years to improve filing compliance abroad, but has not yet developed global information on the prevalence or impact of the problem or the countries where the problem may be particularly severe. In particular, IRS initiated a multiyear compliance project in 1991 aimed at U.S. citizens working in the Middle East. IRS believes that the project resulted in the recovery of a substantial amount of tax revenue, and is now attempting to gather foreign census and other demographic data that might reveal other concentrations of nonfilers abroad with tax liabilities. The seminars were focused on companies employing a large number of U.S. citizens, which IRS identified through the financial news media and information obtained from the Department of State, the Department of Labor, and other sources. Early in fiscal year 1997, IRS began a project to identify countries or regions where additional compliance projects similar to the Mideast project might be warranted. The Treasury study cited several factors beyond IRS’ control as inhibiting its efforts to improve compliance levels in the U.S. population abroad. Recommendations

To obtain better data on the filing compliance of the U.S. population residing abroad and to promote their understanding of their filing requirements, the Commissioner of Internal Revenue should ensure that assesses the usefulness of country of residence and occupation data, in addition to data IRS currently receives from passport applicants, as a means of identifying potential nonfilers abroad and supplementing IRS’ other sources of demographic data on U.S. citizens abroad.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the tax compliance of U.S. citizens residing in foreign countries, focusing on: (1) whether it is possible, given available data, to estimate the prevalence and revenue impact of nonfiling among U.S. citizens residing abroad; (2) factors that may limit the Internal Revenue Service's (IRS) enforcement of the filing requirement or otherwise contribute to nonfiling abroad; (3) IRS' recent initiatives to improve the filing compliance in this population; and (4) the Department of the Treasury's study on the income tax compliance of U.S. taxpayers residing abroad.

What GAO Found

GAO noted that: (1) IRS has not estimated the overall prevalence of nonfiling abroad or the resulting loss of tax revenue, and the data GAO identified in its review were inadequate to support reliable quantified estimates; (2) data on the number of U.S. taxpayers residing abroad and the number of returns they file are of uncertain reliability, and the amount of taxes that nonfilers would owe if they were to file is unknown; (3) one recent IRS initiative, however, focused on certain Mideast countries and identified enough nonfilers and additional tax revenue that IRS believes there may be benefits to looking for concentrations of nonfilers in other foreign countries; (4) GAO was able to identify several factors that may limit IRS' enforcement of the filing requirement or otherwise contribute to nonfiling abroad; (5) some of these factors are beyond IRS' control; (6) the income of U.S. citizens residing abroad is generally not subject to U.S. tax withholding or information reporting if it is derived from foreign employers or foreign financial investments; (7) IRS data show that tax withholding and information reporting by employers or other income providers resulted in much higher rates of tax compliance than when neither system is in place; (8) IRS generally cannot collect unpaid taxes from assets that have been transferred to a foreign country; (9) the enforcement actions that IRS uses in the United States have no legal standing in most foreign countries; (10) although IRS obtains passport data from the Department of State, it has made little use of these data; and in recent years, IRS has not attempted to penalize the large number of applicants who fail to furnish a social security number (SSN), as the law provides; (11) IRS has no systematic way of capturing a passport applicant's country of residence and occupation, which could provide demographic data on foreign concentrations of U.S. citizens and help IRS distinguish them from tourists; (12) the instructions for filing form 1040 are potentially misleading and may cause some taxpayers residing abroad to erroneously conclude that they have no obligation to file; (13) IRS' recent initiatives concerning nonfiling abroad include a special project in the Middle East that was initiated as a result of events related to the Desert Storm War and a data-gathering effort to identify other potential concentrations of nonfilers residing abroad; and (14) in fiscal year 1997, IRS began to gather foreign census and other demographic information on U.S. citizens residing abroad to identify other countries where similar compliance efforts may be beneficial.