United States Government Accountability Office GAO Report to the Committee on Finance, U.S. Senate April 2012 FOREIGN ACCOUNT REPORTING REQUIREMENTS IRS Needs to Further Develop Risk, Compliance, and Cost Plans GAO-12-484 Contents Letter 1 Scope and Methodology 2 Background 3 Summary of Findings 6 Conclusions 7 Recommendations for Executive Action 8 Agency Comments 8 Appendix I Briefing Slides 10 Appendix II Comments from the Internal Revenue Service 16 Appendix III GAO Contact and Staff Acknowledgments 20 Figure Figure 1: Timeline of FATCA Requirements 5 Abbreviations FATCA Foreign Account Tax Compliance Act FBAR Report of Foreign Bank and Financial Accounts FFI foreign financial institution IRS Internal Revenue Service IT information technology LB&I Large Business & International This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page i GAO-12-484 Foreign Account Reporting Requirements United States Government Accountability Office Washington, DC 20548 April 16, 2012 The Honorable Max Baucus Chairman The Honorable Orrin G. Hatch Ranking Member Committee on Finance United States Senate Given the mobility of money and proliferation of foreign financial institutions (FFI), the potential for U.S. taxpayers to evade taxes on funds held in offshore accounts is greater than ever. To improve tax compliance for foreign accounts and entities, and cross-border transactions, Congress passed the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentives to Restore Employment Act of 2010. 1 FATCA requires certain U.S. taxpayers to report to the Internal Revenue Service (IRS) their overseas assets and requires U.S. entities to withhold a portion of certain payments made to FFIs that have not entered into an agreement with IRS to report certain information with respect to the FFI’s U.S. accounts. FATCA is an effort to reduce tax evasion by creating greater transparency and accountability with respect to offshore accounts and entities held by U.S. taxpayers and by providing IRS with tools to further enforce tax laws. IRS believes that implementing these new requirements will increase tax compliance, which will help close the gap between taxes owed and taxes paid. IRS recently estimated a net tax gap of $385 billion for tax year 2006, though IRS has not estimated the percentage of the tax gap specifically attributable to offshore accounts. Implementing FATCA will provide IRS with a substantial amount of new information. However, that new information could be challenging to manage. You asked us to review IRS’s FATCA implementation plans. Our objectives were to (1) assess IRS’s approach for implementing the FATCA requirements, (2) assess the extent to which IRS has developed plans to use the information from FATCA to improve tax compliance, and (3) determine the extent to which IRS is incorporating leading practices to develop its resource estimate for implementing FATCA. 1 Pub. L. No. 111-147, Title V, subtitle A, 124 Stat. 97 (2010). Page 1 GAO-12-484 Foreign Account Reporting Requirements To assess IRS’s approach for implementing FATCA, we reviewed the Scope and statutory requirements for FATCA. 2 We reviewed IRS documents related Methodology to FATCA, including its data flow map and communication strategy, relevant notices, and temporary and proposed regulations. 3 To further assess IRS’s approach, we identified leading practices on implementing new programs using past GAO reports and GAO’s internal control standards. 4 Those practices include identifying an implementation team, communicating with external stakeholders, issuing guidance, communicating with staff, and assessing risk. To assess the extent to which IRS has developed plans to use the information from FATCA to improve tax compliance, we reviewed IRS documents on the use of FATCA information, including prepared presentations and documents outlining planned program design. We compared IRS’s plans to leading practices identified in past GAO reports on IRS implementation of new programs, which establish the importance of a documented strategy that includes developing a timeline and performance measures. 5 To determine the extent to which IRS is incorporating leading practices to develop its resource estimate for implementing FATCA, we identified and reviewed existing IRS information on cost estimates for FATCA, such as Ibid. 2 IRS uses notices to relate what regulations will say in situations where the regulations 3 may not be published in the immediate future. 4 GAO, Patient Protection and Affordable Care Act: IRS Should Expand Its Strategic Approach to Implementation, GAO-11-719 (Washington, D.C.: June 29, 2011); Results- Oriented Cultures: Implementation Steps to Assist Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003); Tax Administration: Planning for IRS’s Enforcement Process Changes Included Many Key Steps but Can Be Improved, GAO-04-287 (Washington, D.C.: Jan. 20, 2004); Financial Derivatives: Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse, GAO-11-750 (Washington, D.C.: Sept. 20, 2011); Risk Management: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure, GAO-06-91 (Washington, D.C.: Dec. 15, 2005); Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1. (Washington, D.C.: November 1999); and Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001). 5 GAO, Tax Preparer Regulation: IRS Needs a Documented Framework to Achieve Goal of Improving Taxpayer Compliance, GAO-11-336 (Washington, D.C.: Mar. 31, 2011), and GAO-11-719. Page 2 GAO-12-484 Foreign Account Reporting Requirements a work breakdown structure and an investment summary report. These documents primarily discuss cost estimation for the information technology (IT) components of FATCA. We interviewed officials from IRS’s Modernization and Information Technology Services to discuss the IT cost estimate for FATCA and FATCA program officials to discuss future cost estimation plans. We compared this information with leading practices that agencies should follow when developing cost estimates, including ensuring that estimates are well documented and comprehensive. 6 For all objectives, the leading practices we identified do not represent the universe of practices that agencies could employ when implementing a new initiative. We selected examples of leading practices that we judged to be important for IRS to consider during the early stages of FATCA implementation. We shared with IRS the practices on which we based our descriptions and assessments in our three objectives during the course of our audit work, and IRS agreed with our approach. We discuss these practices in greater detail in appendix I. For all objectives, we interviewed IRS and Department of the Treasury officials to discuss existing and future plans related to FATCA implementation. We conducted this performance audit from June 2011 to April 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. FATCA requirements for U.S. taxpayers and FFIs will be phased in over Background the next few years. Starting in 2012 for calendar year 2011, U.S. individual taxpayers with total overseas assets in excess of $50,000 generally are required to report the assets to IRS on Form 8938 6 GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009). Page 3 GAO-12-484 Foreign Account Reporting Requirements (Statement of Specified Foreign Financial Assets). 7 Taxpayers may be subject to penalties for failure to disclose overseas assets and for underpayments related to such undisclosed assets. Beginning on January 1, 2014, U.S. entities will be required to withhold 30 percent on certain payments to FFIs 8 unless the FFIs have entered into an agreement with IRS. IRS has announced that FFIs must enter into an agreement by June 30, 2013, in order to ensure that they will be identified as participating FFIs in sufficient time to allow U.S. withholding agents to refrain from withholding beginning on January 1, 2014. FFIs that enter into an agreement after this deadline may experience withholding on some payments until U.S. entities have added the FFIs to the list of participating FFIs. By entering into an agreement with IRS, the FFIs agree to employ due diligence procedures to identify and report details on U.S. account holders to IRS and withhold a percentage of payments under certain circumstances. Figure 1 illustrates the timeline of when FATCA requirements are to take effect. 9 7 An unmarried taxpayer living in the United States or married taxpayers filing separate income tax returns living in the United States must file if the total value of his or her specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Married taxpayers filing a joint income tax return and living in the United States must file if the total value of their specified foreign financial assets is more than $100,000 on the last day of the year or more than $150,000 at any time during the tax year. Taxpayers living abroad must file if the total value of their specified foreign financial assets is more than $200,000 total on the last day of the tax year or more than $300,000 at any time during the year. For married taxpayers living abroad filing a joint income tax return, they must file if the total value of all specified foreign financial assets that one spouse owns is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. 8 An FFI is defined as a financial institution that is a foreign entity. An entity is a financial institution if (1) it accepts deposits in the ordinary course of a banking or similar business; (2) as a substantial portion of its business, it holds financial assets for the account of others; or (3) it is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities. 9 FATCA gives the Secretary of the Treasury authority to prescribe regulation and guidance to carry out the purposes of, and prevent the avoidance of, the law. (This provision has been codified as 26 U.S.C. 1474(f).) Under that authority to prescribe regulations and guidance, IRS and the Department of the Treasury have chosen to implement a phased approach. Page 4 GAO-12-484 Foreign Account Reporting Requirements Figure 1: Timeline of FATCA Requirements FFIs excepted from FATCA include foreign governments (including a wholly owned agency or instrumentality), international organizations, foreign central banks, and institutions IRS deems to pose a low risk of tax evasion. 10 Separate from the FATCA requirements, the Bank Secrecy Act requires individuals and some businesses to file reports on foreign bank financial accounts with balances exceeding $10,000 during the year. 11 The 10 FATCA also provides for a category of FFIs deemed to be compliant. To be deemed compliant, an FFI must comply with procedures to ensure that it does not maintain U.S. accounts. The FFI must also meet other requirements that the Secretary of the Treasury may prescribe. The proposed regulations define the scope of deemed compliant entities to reduce or eliminate burdens on truly local FFIs and other FFIs that do not implicate the policy concerns of FATCA. 11 Pub. L. No. 91-508, titles I and II, 84 Stat. 1114 (Oct. 26, 1970) (codified as amended at 12 U.S.C. § § 1829b, 1951-1959; 31 U.S.C. § § 5311-5322). Page 5 GAO-12-484 Foreign Account Reporting Requirements information is filed on Treasury Form TD 90-22-1, known as the Report of Foreign Bank and Financial Accounts (FBAR), and is processed by IRS. Taxpayers required to file the FBAR form may also have to file Form 8938. We recently reported that some FATCA and FBAR reporting requirements overlap and recommended ways to address that overlap. 12 IRS has taken initial steps to implement FATCA requirements in line Summary of Findings • with leading implementation practices, including establishing a team to manage the implementation process and issuing guidance and proposed regulations. IRS has involved external stakeholders in the implementation process, which has helped inform IRS’s implementation plans and regulations. IRS has also communicated initial information to IRS staff. However, although IRS assessed the risks of some aspects of FATCA implementation, it has not consolidated existing risk assessment information or future risk assessment plans into an overall risk assessment. Without a consolidated assessment, there is less assurance that all risks have been comprehensively identified. FATCA officials told us they had not documented a consolidated risk assessment because they were awaiting the release of final regulations, which will increase their ability to develop an overall risk assessment. Officials also cited the challenge of conducting a full risk assessment for a multiphased program still in its early stages. While we recognize this difficulty, we believe it is still important to lay the foundation for these plans. GAO’s internal control standards suggest that risk assessments can and should evolve as short-term and long-term forecasting occur and therefore should be reviewed on an ongoing basis. • IRS plans to compare multiple sources of information to identify U.S. taxpayers and FFIs failing to comply with the FATCA requirements and, more broadly, taxpayers failing to report their overseas income. IRS has begun to discuss how it will use information to improve compliance, but it has not yet completed or fully documented a broader strategy for doing so, which we identified as a leading implementation practice in our prior work. For example, it has not developed key internal milestones for accomplishing the tasks necessary to enable it to use FATCA information to improve taxpayer 12 GAO, Reporting Foreign Accounts to IRS: Extent of Duplication Not Currently Known, but Requirements Can Be Clarified, GAO-12-403 (Washington, D.C.: Feb. 28, 2012). Page 6 GAO-12-484 Foreign Account Reporting Requirements compliance or performance measures to assess the cost and benefits of its compliance efforts. IRS officials told us that many of these decisions are contingent on areas of program design that have not yet been finalized. If IRS does not document a broad strategy, it risks negatively affecting FATCA implementation. Given that IRS’s implementation of FATCA is in its early stages, the strategy may be a high-level road map with timelines that could evolve over time. • IRS has developed its initial resource estimate for FATCA implementation, specifically for IT systems. For its IT resource estimate, IRS has taken steps to incorporate leading practices for a well-documented resource estimate, as identified in GAO’s Cost Estimating and Assessment Guide. However, IRS has not developed a comprehensive resource estimate for FATCA implementation. Comprehensiveness is another resource estimation leading practice. Without a timeline to develop the estimate, IRS may not be able to develop a reliable cost estimate and therefore risks not communicating key cost information to Congress and IRS management in time for them to make decisions affecting the implementation of FATCA. Given that IRS is in the early stages of implementing the FATCA requirements, it would be difficult for IRS to develop a comprehensive cost estimate at this time. However, IRS can take steps that would help ensure that it produces a timely, comprehensive estimate, such as establishing a timeline for completing the estimate. IRS told us that it does not have a timeline for a comprehensive estimate because some design details will not be known until later in the implementation process. Appendix I provides more detail on each of our objectives and related findings. FATCA’s impact on improving taxpayer compliance will depend, in part, Conclusions on IRS’s effectiveness in implementing the requirements. IRS has made progress by taking initial implementation steps that align with some leading practices, such as identifying an implementation team and communicating with external stakeholders and staff. IRS needs to build on its initial progress and complete other steps that could help it effectively implement the requirements. As IRS is phasing in FATCA over multiple years, and some aspects of program design have not been finalized, IRS will not be able to complete detailed plans for all aspects of FATCA implementation in the near term. However, IRS can begin to document its broad strategies for assessing risk, using information it obtains from taxpayers and FFIs to improve taxpayer compliance and Page 7 GAO-12-484 Foreign Account Reporting Requirements developing a comprehensive resource estimate. Given that FATCA implementation is in its early stages, initially IRS’s documented strategies may not be detailed but may evolve as IRS further develops its FATCA program design. In order to improve FATCA implementation, but recognizing that IRS is Recommendations for phasing in implementation, we recommend that the Commissioner of Executive Action Internal Revenue take the following three actions, which may evolve over time: • develop a consolidated risk assessment; • complete a broad strategy, including a timeline and performance measures, for how IRS intends to use information collected based on the FATCA requirements to improve tax compliance; and • establish and document a timeline for completing a comprehensive FATCA cost estimate. We provided a draft of this report to the Commissioner of Internal Agency Comments Revenue and the Secretary of the Treasury for their review and comment. IRS’s Deputy Commissioner for Services and Enforcement provided written comments, which expressed appreciation to GAO for recognizing IRS’s achievements toward implementing FATCA and agreed with all of our recommendations. In response to the first recommendation, the Deputy Commissioner stated that IRS has started developing a risk management plan that will incorporate risks from all work streams that make up FATCA. In response to the second recommendation, IRS will continue to develop a strategy to improve tax compliance that will evolve as FATCA regulatory issues are resolved. In response to the third recommendation, IRS noted steps already taken and said it will develop a comprehensive estimate once the FATCA regulations are finalized. These comments are reprinted in appendix II. Treasury did not provide official comments. IRS and Treasury provided us with technical comments, which we incorporated into the report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. Page 8 GAO-12-484 Foreign Account Reporting Requirements If you or your staff have any questions about this report, please contact me at (202) 512-9110 or email@example.com. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. James R. White Director, Tax Issues Strategic Issues Page 9 GAO-12-484 Foreign Account Reporting Requirements Appendix I: Briefing Slides IRS Has Incorporated Leading Practices in Initial FATCA Implementation but Has Not Developed a Consolidated Risk Assessment The Internal Revenue Service (IRS) has established a Foreign Account Tax Compliance Act (FATCA) implementation team, which is a small office within IRS’s Large Business & International (LB&I) division. The implementation team includes representatives from divisions across IRS, and has engaged upper-level management as well. This includes a Objective senior executive group that was organized early on that consists of Assess IRS’s approach for executives from the Department of the Treasury (Treasury) and IRS. implementing the FATCA These executives analyzed policy choices, obtained and assessed requirements. internal and external stakeholder input, and obtained decisions on the Leading Practices key policy issues from the Commissioner, Chief Counsel, and Assistant • Identifying an implementation Secretary. Team officials told us that for the past year, the team has team. Previous GAO work has worked toward developing the structure of the FATCA office, estimating emphasized the importance of resource needs and defining program goals. The team has requested identifying an implementation and received funding for contractors to support the development of the team—including representation foreign financial institution (FFI) registration project and other areas of high-level management—to related to FATCA implementation. The team also received approval to manage the process and define assign 15 full-time equivalent staff. This team manages the program goals. (GAO-03-669, implementation of outreach for, education on, and updates to the FATCA GAO-11-719) program. The team also led the development and rollout of Form 8938, which IRS began receiving from individual taxpayers in January 2012. • Communicating with external stakeholders. GAO internal control standards indicate that IRS has involved external stakeholders, such as industry groups, management should researchers and experts, law and accounting firms, foreign governments, communicate with and obtain and FFIs, in implementing FATCA. IRS initially communicated with information from external stakeholders through published notices, which IRS uses to relate what stakeholders. (GAO/AIMD-00- regulations will say in situations where the regulations may not be 21.3.1) published in the immediate future. IRS also communicated through draft reporting forms and other information posted on IRS’s website. IRS • Issuing guidance. As previous GAO work has reported, IRS obtained information from stakeholders through formal written comments, guidance can come in many receiving 278 public comments as of February 2012 from various sectors forms and can improve and industries, including banking, insurance, and mutual funds. In these taxpayer compliance. (GAO- comments, many entities expressed objections to the law itself, citing 11-750) adverse effects the law would have on their businesses. Other concerns included the time and costs needed to make significant modifications to • Communicating with staff. GAO the information management systems of FFIs and withholding agents has reported on the importance and the need for extensive coordination with foreign governments. IRS of keeping employees informed of decisions and maintaining designated a team to catalog, analyze, and share comments internally communication about the goals across various divisions. Further, as of February 2012, IRS and Treasury and progress of the effort. had held 45 meetings with stakeholders to address such comments. As a (GAO-04-287) result of stakeholder input, IRS and Treasury determined that a phased implementation for FATCA was reasonable. IRS and Treasury • Assessing risk. GAO’s internal subsequently released proposed regulations. Likewise, IRS and Treasury control standards state that are currently considering ways to collect needed information through management needs to comprehensively identify risks intergovernmental transfers of information, thus potentially reducing and should consider all reporting burden and addressing legal impediments some FFIs face in significant interactions between reporting directly to IRS. the entity and other parties. (GAO/AIMD-00-21.3.1) IRS and Treasury have issued some guidance on FATCA implementation, but regulations have not been finalized. Treasury and IRS released proposed regulations for public comment in February 2012. After considering public comments, they anticipate publishing final regulations in the summer of 2012. Page 10 GAO-12-484 Foreign Account Reporting Requirements Appendix I: Briefing Slides IRS has communicated preliminary FATCA implementation plans to IRS staff and additional guidance is pending. For staff involved in the execution of the Form 8938 rollout, officials told us that they provided more specific guidance, such as responses to frequently asked questions on the website and servicewide program updates. By highlighting press announcements and the Commissioner’s speeches on the agency’s intranet site and using internal employee e-mail and news channels, IRS officials have attempted to increase IRS employees’ awareness of FATCA. IRS is currently developing an advisory document for the workforce summarizing key aspects of FATCA and drawing attention to the information posted on the FATCA site. According to IRS’s draft communication strategy and LB&I officials, IRS will provide specific guidance for employees whose jobs are directly affected by FATCA. These include employees in taxpayer assistance, stakeholder liaison, media relations, and compliance. IRS has begun some FATCA risk assessment activities but has not yet developed a consolidated risk assessment approach. According to FATCA program officials, IRS has conducted an initial risk assessment based on scheduled deployment dates of the activities throughout the phased implementation, with the main focal point being the deliverables that are due earliest. For example, they explained that for the first year, Form 8938 was already delivered and the risks mitigated. The next deliverable is the FFI registration portal. IRS has begun to catalog and address risks for the information technology system deployment and the business processes needed to support it. IRS has developed a risk management plan that addresses risks and issues associated with establishing the FFI registration portal but, understandably, has not yet documented a detailed risk management plan for the latter stages of implementation. Officials stated that they have also identified high-level program, budgetary, legal, and legislative risks and are working to mitigate them. Further, they have created a tracking tool for issues that remain unresolved so that they can be addressed. However, IRS has not consolidated existing information or future plans into an overall risk framework. FATCA program officials told us they had not completed a consolidated risk assessment because they were awaiting the release of final regulations, which will increase their ability to develop an overall risk assessment. Without a consolidated assessment, IRS has less assurance that all risks have been comprehensively identified. Documenting an ongoing effort is key to ensuring that various stakeholders and contributors within IRS have a common understanding of program goals and progress. Officials also cited the challenge of conducting a full risk assessment for a multiphased program still in its early stages. While we recognize this difficulty, we believe it is still important to lay the foundation for these plans. Leading practices suggest that risk assessments can and should evolve as short-term and long-term forecasting occur and therefore should be reviewed on an ongoing basis. A consolidated risk assessment is key to identifying and evaluating potential risks to the program’s goals so that countermeasures can be designed and implemented to prevent or mitigate the risks. Page 11 GAO-12-484 Foreign Account Reporting Requirements Appendix I: Briefing Slides IRS Has Begun Developing a Strategy to Use FATCA Information but Has Not Completed It The Internal Revenue Service (IRS) has begun to discuss how it will use Foreign Account Tax Compliance Act (FATCA) information to improve compliance, but has not yet fully completed a broader strategy for doing so. FATCA program officials have identified the primary method for using FATCA information to improve tax compliance. According to the officials, Objective IRS will compare multiple information sources to identify U.S. taxpayers and foreign financial institutions (FFI) failing to comply with the FATCA Assess the extent to which IRS has requirements and, more broadly, taxpayers failing to report overseas developed plans to use the income. Specifically, IRS plans to match the following documents: information from FATCA to improve tax compliance. • from taxpayers, asset information from Forms 8938 and financial Leading Practices account information from Report of Foreign Bank and Financial Accounts (FBAR) forms; • Documented strategy. A documented strategy can • from registered FFIs, U.S. taxpayers’ foreign asset information on serve as a high-level road a yet-to-be-developed information return; and map to achieving taxpayer • from other third parties, information from Form 1042-S (Foreign compliance results sooner and Person’s U.S. Income Subject to Withholding) and international at a lower cost, and could third-party data. include information on IRS’s IRS has not developed a broader documented strategy to guide its strategies and tactics for efforts. For example, FATCA program officials told us that as IRS improving taxpayer receives Forms 8938 from taxpayers, it will conduct research to better compliance. (GAO-11-336) understand and prepare for the information it will receive as the GAO has identified areas that a implementation progresses. However, IRS has not included this work strategic document can address. within the framework of an overall strategy for FATCA. Documenting the These areas include the following: research within a strategic framework could identify the purposes of the • Timeline. Establishing a research and the potential uses of the research as implementation timeline that includes critical continues. Such research could be included in a broader discussion of phases and essential activities the methods and tactics IRS is considering to improve taxpayer that need to be completed by compliance results through FATCA. particular dates to achieve Although IRS has established a timeline for implementing the FATCA results is important for requirements, it has not developed a timeline for using this information to accountability and success in improve tax compliance. A timeline would identify key internal milestones implementing a project. (GAO- 11-336) IRS needs to achieve to enable it to use this information to improve tax compliance. Without a timeline to help it manage implementation, it is • Performance measurement. less certain that IRS will be prepared to use the FATCA information GAO has highlighted the timely and effectively. importance of identifying potential program benefits Further, IRS has not yet identified performance measures for its FATCA early to help aid program efforts. IRS officials told us that performance measures are contingent on success, including the ability areas of program design that have not yet been finalized. For example, to monitor and evaluate the because it is not certain whether foreign governments or FFIs will program, as well as identifying transmit asset information to IRS, it is difficult to set up performance opportunities for improvement. goals for processing this information. Although challenging, it is still (GAO-11-336, GAO-11-719) important to lay the foundation for performance measurement early on, as a performance measurement plan could help IRS assess the costs and benefits of its compliance efforts. If IRS does not have a broad strategy, it risks negatively affecting FATCA implementation. First, without this strategy, IRS may not be able to effectively communicate to internal stakeholders the overall goals of FATCA and steps needed to achieve these goals. Second, because the program has already experienced implementation challenges because of program design uncertainty, a documented strategy would allow IRS management to make more informed resource and program decisions. Page 12 GAO-12-484 Foreign Account Reporting Requirements Appendix I: Briefing Slides An incomplete strategy hinders accountability. Given that FATCA implementation is in its early stages, the strategy may be a high-level road map with timelines and performance measures that could evolve over time. Page 13 GAO-12-484 Foreign Account Reporting Requirements Appendix I: Briefing Slides IRS’s Initial Resource Estimate Is Well Documented, but IRS Has Not Established a Timeline for Completing a Comprehensive Estimate The Internal Revenue Service (IRS) has developed an initial resource estimate for Foreign Account Tax Compliance Act (FATCA) implementation. Currently, its estimate includes the cost of two new information technology (IT) projects: developing the foreign financial institution (FFI) registration portal and developing the document matching Objective program described previously. 1 IRS has used a resource estimation team Determine the extent to which IRS and guidance from various sources, including GAO’s Cost Estimating is incorporating best practices to and Assessment Guide (Cost Guide) and lessons learned from past IRS develop its resource estimate for initiatives, in developing this estimate. IRS also submitted a budget implementing FATCA. request of $37.1 million for funding FATCA implementation for 2013, including the costs to staff examiners and agents dedicated to enforcing FATCA, along with IT development costs. This budget request does not Leading Practices identify the resources needed for implementation beyond fiscal year GAO’s Cost Guide identifies best 2013. 2 practices for cost estimation (GAO- 09-3SP). Among other functions, For its IT resource estimate, IRS has taken steps to incorporate best cost estimation supports the practices for a well-documented resource estimate. IRS identified the budget process by providing sources of the estimate and the methodology used to develop it. IRS has estimates of funding to efficiently identified the planned capabilities of the IT system—a technical execute the program. Congress baseline—with the known information. It also documented the steps and IRS need reliable cost taken to develop the estimate for the IT system. As IRS continues to estimates to make well-informed develop cost estimates for implementing FATCA, it will be important to decisions. According to the Cost continue incorporating the best practices of a well-documented estimate. Guide, cost estimates should be A well-documented estimate is essential for validating and defending a well documented, comprehensive, cost estimate. It will explain the methodology and the calculations accurate, and credible. Satisfying underlying the cost elements and provide a historic database that can be all four criteria is important, but in used to replicate or develop future estimates. the early stages of developing an estimate, the first two IRS has not identified all the components needed for a comprehensive characteristics—well documented resource estimate. Because the program design is not final, IRS has not and comprehensive—are key. been able to identify all of the work necessary to accomplish the program’s objectives. Consequently, it has been unable to ascertain all • Well-documented estimate. potential costs beyond those for IT resources. FATCA program Among other characteristics, the estimate tracks data to their managers told us that they plan to further develop their estimate as source documentation, additional information on program design becomes available. The includes a technical baseline officials told us that they plan to include estimates for other resources description, and documents all needed, including staffing, contractor needs, and training. A steps in its development. comprehensive estimate provides the basic framework necessary to facilitate resource tracking. • Comprehensive estimate. An estimate should be structured Without a comprehensive estimate, management may not have the in sufficient detail to ensure proper insight to successfully calculate resources needed or reliably that cost elements are neither estimate the cost of future similar efforts. Given that IRS is in the early omitted nor double counted. stages of implementing the FATCA requirements and the uncertainty Among other characteristics, about key features of the program, it would be difficult for IRS to develop the estimate identifies the a comprehensive cost estimate at this time. However, IRS can take steps assumptions and definitions to prepare for a comprehensive estimate, such as establishing a timeline used to produce the estimate, and includes the work 1 necessary to accomplish the In September 2011, IRS estimated that the total life cycle cost of developing program objectives. and maintaining the FFI registration portal will be $31.4 million and the total life cycle cost of developing and maintaining the document matching compliance program will be $12.8 million. 2 IRS also submitted a budget request for implementing FATCA in fiscal year 2012, but this request was unfunded. IRS officials told us they were able to reallocate funding to FATCA implementation during this year. Page 14 GAO-12-484 Foreign Account Reporting Requirements Appendix I: Briefing Slides for completing the estimate. IRS has told us that it does not have a timeline for a complete estimate because some design details will not be known until later in the implementation process. However, a timeline that identifies those key details and sets time frames for completing the estimate could be developed. Without such a timeline, IRS may not be able to timely develop a reliable, comprehensive cost estimate, and therefore risks not communicating key cost information to Congress and IRS management in time for them to make decisions affecting FATCA implementation. 3 Without the proper information, IRS decisions may not lead to the most efficient execution of the program. Furthermore, because reliable cost estimates inform budget requests, IRS may not be able to properly support budget requests to fund FATCA operations over time. 3 GAO recently recommended that IRS ensure that it is following best practices in its cost estimation for the new Information Reporting and Document Matching system. See GAO, IRS Management: Cost Estimate for New Information Reporting System Needs to be Made More Reliable, GAO-12-59 (Washington, D.C.: Jan. 31, 2012). Page 15 GAO-12-484 Foreign Account Reporting Requirements Appendix II: Comments from the Internal Appendix II: Comments from the Internal Revenue Service Revenue Service Page 16 GAO-12-484 Foreign Account Reporting Requirements Appendix II: Comments from the Internal Revenue Service Page 17 GAO-12-484 Foreign Account Reporting Requirements Appendix II: Comments from the Internal Revenue Service Page 18 GAO-12-484 Foreign Account Reporting Requirements Appendix II: Comments from the Internal Revenue Service Page 19 GAO-12-484 Foreign Account Reporting Requirements Appendix III: GAO Contact and Staff Appendix III: GAO Contact and Staff Acknowledgments Acknowledgments James R. White, (202) 512-9110 or firstname.lastname@example.org GAO Contact Michael Brostek (Director) and Jeffrey Arkin (Assistant Director) managed Staff this assignment. Sonya Phillips (Analyst-in-Charge) and Jeffrey Niblack Acknowledgments (Senior Analyst) made key contributions to all aspects of the work. Cynthia Saunders provided methodological assistance; Stacey Steele provided assistance with cost estimation best practices; Sabrina Streagle provided legal support; and Melanie Papasian provided key assistance with message development and writing. (450911) Page 20 GAO-12-484 Foreign Account Reporting Requirements GAO’s Mission The Government Accountability Office, the audit, evaluation, and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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Foreign Account Reporting Requirements: IRS Needs to Further Develop Risk, Compliance, and Cost Plans
Published by the Government Accountability Office on 2012-04-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)