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The IRS Gets Audited, Too

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By Orlando Gotay, Tax Attorney

The Treasury Department reviews how the IRS does—it’s an audit of the taxman. Is this perverse or cool? These reviews reveal where the IRS is falling short. In response to the report, one can expect renewed vigor.

A recent Inspector General report talked about international exchange of information or how the IRS uses tax information received from other countries. No rocket scientist is needed to understand how that helps to detect noncompliant taxpayers. The report covers exchanges apart from the FATCA law. For context, Mexico has information exchange obligations with the US from both its tax treaty and FATCA agreement, but no “collection assistance” provisions. Mexican SAT people will not come to your door collecting an IRS debt. In Canada, they could. But I digress.

The IG report explains how the IRS regularly receives data, “one shot” specific request reports initiated by the IRS plus the “hey, look at this” info sent by tax administrations of other countries on their own initiative. It’s supposed to work both ways, but we learn the IRS was very slow and eventually stopped sending anything much back. Nice.

Here’s where it gets interesting. As it turns out, the IRS does not seem to use much of what it gets in systems that are not easily searchable by agents. Worse, few IRS people are even authorized access. Never one for niceties, they do not even send letters to tax partners acknowledging received data! Lots of self-imposed red tape stands in the way of using this information to detect non-filers or audit returns or to locate assets to collect taxes. In short, it seems the IRS is almost flying blind, drowning in a sea of missed opportunities.

Besides the possible lack of sympathy one could have with the taxman’s self-inflicted predicament, it is also important to know that they are now on notice to correct deficiencies. Knowing the government mindset, I can also expect these initiatives to take off soon with oomph.

I mentioned these data exchanges are apart from FATCA. Given the recent bad report card, one can only wonder how that new data is being used. Are people’s hidden accounts being detected? The big ones seem to be.

To me, the important takeaways are: 1) There are agreements in place to exchange a wide variety of tax information. (Remember, it can be used to identify those who don’t file, to detect those who underreport tax obligations or omit income, or to find out where they stash their loot for collection). 2) There were several meaningful shortcomings, all of them solvable. 3) Timetables are being established for correction.

Now you know.

 

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.

 

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