International Issues Highlighted in U.S. Taxpayer Advocate's Annual Report

This is an article posted on today's Worldwide Tax Daily that I would like to share with my blog readers, especially those who are US taxpayers.

National Taxpayer Advocate Nina Olson identified six serious problem areas regarding international taxpayers in her annual report to the U.S. Congress released on January 11, 2012.

The recommendations follow several years of IRS efforts to prioritize international enforcement and represent a significant expansion of the international recommendations in Olson's report compared with prior years.  

1.    Foreign Taxpayers

The report from the Taxpayer Advocate Service (TAS) says the IRS is missing opportunities to educate foreign taxpayers. In particular, the report notes that many tax forms and publications are not available in languages other than English. The TAS encouraged the IRS to expand its language services branch, a group of bilingual IRS employees who have been working to improve products and services in Chinese, Korean, Vietnamese, and Russian since August 2010. The report also recommends making focused outreach efforts for specific groups of nonresident alien taxpayers, for example, foreign students and scholars; foreign professors and researchers; and foreign athletes, artists, and entertainers. Introducing electronic filing of Form 1040NR, "U.S. Nonresident Alien Income Tax Return," and accepting payments from foreign-issued credit cards or wire transfers from foreign banks were also among the TAS recommendations regarding foreign taxpayers.

In response to the TAS report, the IRS said it agrees with the notion that providing assistance to taxpayers enhances compliance. The IRS wrote that it would consider whether to work more directly with the State Department or the Department of Homeland Security to distribute tax information to people obtaining some types of visas.

2.    U.S. Taxpayers Abroad

U.S. taxpayers living abroad need more services to help them deal with the higher compliance costs that they face compared with their domestic counterparts. The TAS suggested that the IRS expand service to that group of taxpayers by partnering with the State Department to train embassy and consulate staff to provide taxpayer services, using webcasts to reach taxpayers abroad and implementing virtual service delivery for international taxpayers.

The U.S. tax code is so complicated and onerous that it has become near impossible to expect tax advisers who do not specialize in international matters to understand all the reporting and taxation rules that apply to U.S. taxpayers living abroad.

3. Small Businesses 

The third problem area that the TAS identified was small businesses involved in international transactions. Those businesses need comprehensive industry- and country-specific outreach, said the TAS. The report recommends developing a Web page and materials that address the needs of small businesses engaging in international transactions, simplifying the information reporting required of small businesses, and giving small businesses improved access to pre-filing and advance pricing agreement programs.

The IRS response questioned the feasibility of a pre-filing program with reduced fees for small businesses, citing budgetary and staffing constraints. The IRS said it will continue to consider a reduced fee for the APA program.

4. International Taxpayer Service

The TAS said the IRS’s recent strategy has focused on stepped-up international enforcement “without adequate coordination or a corresponding increase in service to international taxpayers.” International taxpayers must cope with greater complexity, which creates a heightened need for IRS services, the report says. The TAS recommended reinstating the International Planning and Operations Council as an IRS-wide forum for international taxpayer service and enforcement.

The IRS explained in response that improving services to U.S. taxpayers abroad was a strategic goal and that it would be conducting in fiscal 2012 a review of specific problems faced by those taxpayers.

5. Penalties

U.S. taxpayers who are not in compliance with information reporting requirements face steep penalties, and Olson explained in the report that she is “concerned about an apparent shift in the IRS’s approach to the application of these civil penalties.” Drawing a connection between the IRS’s strict application of penalties to taxpayers coming into compliance and a potential decrease in voluntary compliance, the report says there are indications that the IRS may have used penalties as leverage against taxpayers who entered voluntary disclosure programs.

The IRS disputed the TAS’s assertions that there had been a shift in approach to the application of civil penalties and that penalties were used as leverage in voluntary disclosure programs.

6. Voluntary Disclosure Problems

The TAS report also addressed the problems encountered by taxpayers who entered the 2009 OVDP under the impression that they would be able to advance reasonable cause arguments for their noncompliance. In March 2011 the IRS issued a memorandum to examiners that directed them to stop agreeing to penalties below the 20 percent rate prescribed by the terms of the program.  

The IRS responded that it "strongly disagrees with the inaccurate 'bait and switch' characterizations" in the report. The agency explained that it never intended to allow mitigation of penalties in the OVDP because the program was a certification process, not an examination process.