• Data Sharing: IRS and CIS
  • February 1, 2005 | Author: Marla Waiss
  • Law Firm: Hodgson Russ LLP - Buffalo Office
  • On July 21, 2004, the US Government Accounting Office (GAO) released testimony before the Senate Finance Committee regarding the practice of data sharing between the US Citizenship and Immigration Services (CIS) and the IRS, with a view to enhancing US tax compliance and improving immigration eligibility decisions. Specifically, the GAO determined the extent to which the IRS and the CIS (within the Department of Homeland Security) share and verify data and the benefits and challenges, if any, of increased sharing.

    Currently, the two agencies do not share data to ensure that taxpayers meet their tax obligations or to determine immigration eligibility. Some IRS officials believe that the information on taxpayers' income that is currently used is more accurate and useful for enforcing tax laws than CIS data. However, the GAO says that the IRS might benefit from the use of CIS immigration information to identify non-compliant taxpayers. In addition, the testimony indicated that the IRS may use CIS data to identify taxpayers who fail to file tax returns or who underreport income. For instance, in a nationwide selection of 413,723 businesses and organizations that applied to sponsor immigrant workers from 1997 to 2004, the GAO found that 5 percent were unknown to the IRS: such information can be used to select taxpayers for audit and to enhance enforcement efforts. One such business reported $162,000 in taxable income for 2001 to the CIS and none to the IRS. Nearly 20,000 businesses had cumulative unpaid tax of $5.6 billion at December 2003.

    The testimony also indicated that CIS information may enable the IRS to identify less visible taxpayers, such as small businesses and self-employed individuals, and the CIS may benefit from access to IRS information when making immigration eligibility decisions (for example, whether to allow a business to sponsor an immigrant). Nearly 68,000 of the businesses in the GAO study failed to file an income tax return, which could affect a sponsorship decision by the CIS; the GAO suggested that sponsorship applicants be required to prove that they have met their US tax obligations.

    The CIS (and to a lesser extent the IRS) face significant challenges to data sharing. Code section 6103 generally guarantees that the IRS will maintain the confidentiality of taxpayer information in order to buttress voluntary compliance; thus, a strong business case must support information sharing. Technological problems could stymie data sharing: the CIS does not automate financial data (such as the applicant's income), and both agencies use different tracking numbers (the CIS uses alien registration numbers, and the IRS uses social security numbers [SSNs] or employer identification numbers [EINs]).

    The GAO also studied the IRS offshore voluntary compliance initiative (OVCI) to learn more about taxpayers who came forward and how they became non-compliant. The OVCI, introduced in January 2003, attempted to bring back into compliance taxpayers who illegally held funds offshore and to gather more information about them and about promoters of offshore structures. (It is not illegal to hold money offshore, but a taxpayer must disclose substantial holdings.) Under the OVCI, 861 taxpayers came forward, netting over $200 million in unpaid taxes, penalties, and interest. OVCI applicants displayed diversity in income, geographic location, and occupation. Non-compliance was sometimes apparently intentional and sometimes inadvertent. More than half the applicants in each year had reported their offshore income and paid taxes but had failed to file a Report of Foreign Bank and Financial Accounts, which must be filed by any US person with a financial interest in or authority over any foreign financial account valued at more than $10,000 in the calendar year. The form must be filed annually with the Treasury by June 30. The study suggests that multiple compliance strategies may be needed to ensure compliance regarding offshore accounts.

    The proposed expatriation legislation also contemplates greater information sharing between the US tax and immigration authorities to identify non-compliant taxpayers. An individual who renounces US citizenship and is determined by the US attorney general (AG) to have expatriated with a tax-avoidance purpose is an inadmissible alien and may be denied entry into the United States. One of the current proposals denies a former citizen re-entry if he is not in compliance with his tax obligations under the expatriation tax rules, regardless of the motive for expatriation; on the AG's request, the IRS may disclose information such as any items of non-compliance.

    In summary, the GAO testimony recommended that the IRS and the CIS assess the benefits and costs of information sharing to enhance tax compliance and to improve immigration eligibility decisions; such sharing may significantly affect US citizens who live in Canada, green-card holders who spend substantial time in Canada, and Canadians who frequently travel to the United States on business. Failure to file US tax returns could affect an individual's immigration status. Individuals could also be asked about their US tax returns when crossing the US-Canada border. Data sharing may thus lead to more audits and enforcement actions against Canadians who must file US tax returns.