However, the IRS hopes that the reorganisation of its Large Business and International Division (LB&I) will allow it to focus on high-risk issues and cases with greater consistency and efficiency. In August, the Service announced the appointment of Sam Maruca as its first transfer pricing director in LB&I and that the division, rather than the Office of Chief Counsel, would now be responsible for its advance pricing agreement and mutual agreement procedure programmes.
“The scope, complexity, and magnitude of the international financial system present significant enforcement challenges for the IRS,” Russell George, the Treasury Inspector General for Tax Administration (TIGTA), wrote in his annual memorandum to the secretary of the Treasury detailing the management and performance challenges facing the Internal Revenue Service for Fiscal Year 2012, said.
“The varying legal requirements imposed by different jurisdictions result in complex business structures that make it difficult to determine the full scope and effect of cross-border transactions,” the memorandum added.
The report noted that the IRS’s strategic plan for international tax issues had two principal aims:
· enforce the law to ensure all taxpayers meet their obligation to pay taxes; and
· improve service to make voluntary compliance less burdensome.
Obtaining complete and timely compliance data in the first place and then interpreting that information continued to be significant challenges for the IRS, the report said.
“Even with improved data collection, however, the IRS needs broader strategies and more research to determine what actions are most effective in addressing taxpayer noncompliance. The IRS’s strategy for reducing the Tax Gap is largely dependent on funding for additional compliance resources and legislative changes,” the inspector-general concluded.
Tax gap in the billions
The IRS defines the Tax Gap as the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely paid for a tax year. For 2001, which is the most up-to-date year, it was estimated to be about $345 billion.
The TIGTA memo says that the underreporting of, principally, individual income tax, employment tax, corporate income tax, and estate and excise taxes makes up $285 billion, or 80%, of this, and goes on to say that no laws to prevent the government, including the IRS, from awarding contracts to businesses that have not paid all their taxes is contributing to the Tax Gap.
As well as discussing the IRS’s other efforts at combating tax evasion, including its Voluntary Disclosure Program, the memo identified the implementation of the Foreign Account Tax Compliance Act (Fatca) as one of the Service’s biggest challenges.
This legislation means that US taxpayers will have to report to the IRS any financial assets held outside the US and, by June 30 2013, foreign financial institutions (FFI) must agree to report to the American authorities certain information about financial accounts held by US taxpayers, or by foreign entities, in which US taxpayers hold a substantial ownership interest. If FFIs do not agree to report this information, they will be subject to 30% withholding tax from January 1 2015 on certain types of payments, including US source interest and dividends, gross proceeds from the disposition of US securities, and pass-through payments.
“Based on the initial feedback from foreign financial institutions as well as foreign governments, the IRS will continue to face significant opposition from abroad in implementation of this Act,” the TIGTA memorandum says.
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