It wasn’t long ago that the IRS was completely in the dark as to what information taxpayers and others were reporting to foreign governments. The IRS would never show up on U.S. audit with information obtained from foreign governments. We do see this on audits occasionally, but it is still a rare occurrence. A recent U.S. Treasury audit report confirms this and explains why this is the case.
The IRS’s Exchange of Information Program Office
As noted in the report, the IRS’s Exchange of Information Program Office is responsible for collecting and maintaining tax information provided by foreign countries. This information is provided by foreign countries that have entered into information sharing agreements and/or tax treaties with the U.S. These agreements can be found on the U.S. Treasury Department’s website. Most of the agreements follow a standard Model or have standard language that is then modified or changed slightly by the countries. To date, there are less than 140 such agreements (out of the approx. 200 countries in the world today).
What Information the IRS is Getting
The government’s recent IRS audit report groups the information that is being shared into the following categories:
- Automatic Exchange of Information (AEOI) Program
- Mutual Collection Assistance Request (MCAR) Program
- Spontaneous Exchange of Information Program
As the language suggests, the distinction is the frequency with which information is provided to the IRS. Automatic occurs regularly, mutual requires a request, and spontaneous requires judgement and a decision to act by the foreign country.
The automatic exchange of data in bulk is what many may fear the most. It is also the type of data that the few IRS auditors who have been showing up with on U.S. audits in the past ten years or so. As the IRS report notes however, it is this data source that the IRS is not effectively using.
Limited Information, Limited Access
Before getting into the weeds, it should be noted that this data is only foreign income data. It is not the full tax return type of data that one may be thinking of.
According to the IRS report, the IRS is not receiving this data from very many countries (a mere 28 countries) and when it does, it is not receiving the information in a consistent and easily accessible format. The IRS has made some of the records searchable, but as of late 2016, only 36 revenue agents and 25 revenue officers were approved to access the the search feature. The search feature was also noted to be woefully inadequate.
So as of today, the government has confirmed that the IRS’s information sharing capabilities are not providing the treasure trove of information that many of us would expect. If an IRS agent shows up with information from a foreign government, know that this is the exception and not the rule in most cases.