oversight

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)

             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



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               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 whitej@gao.gov. 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 whitej@gao.gov
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.




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                  Page 20                               GAO-12-484 Foreign Account Reporting Requirements
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