    Taxpayer Information: Data Sharing and Analysis May Enhance Tax
    Compliance and Improve Immigration Eligibility Decisions
    (21-JUL-04, GAO-04-972T).

    Data sharing can be a valuable tool for federal agencies. The
    Internal Revenue Service (IRS) can use data from taxpayers and
    third parties to better ensure taxpayers meet their obligations.
    Likewise, Congress has authorized certain agencies access to
    taxpayer information collected by IRS to better determine
    eligibility for benefit programs. GAO determined (1) the extent
    to which the IRS and Citizenship and Immigration Services (CIS)
    within the Department of Homeland Security share and verify data
    and (2) the benefits and challenges, if any, of increasing such
    activities. GAO also studied IRS's Offshore Voluntary Compliance
    Initiative (OVCI) to provide information on (1) the
    characteristics of the taxpayers who came forward under OVCI and
    (2) how those taxpayers became noncompliant.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-972T
        ACCNO:   A11074
      TITLE:     Taxpayer Information: Data Sharing and Analysis May
    Enhance Tax Compliance and Improve Immigration Eligibility
    Decisions
         DATE:   07/21/2004
      SUBJECT:   Data bases
    	     Data integrity
    	     Immigrants
    	     Immigration information systems
    	     Immigration or emigration
    	     Income taxes
    	     Interagency relations
    	     Noncompliance
    	     Tax administration
    	     Tax return audits
    	     Tax returns
    	     Tax violations
    	     Taxpayers
    	     Voluntary compliance
    	     CIS Computer Linked Application
    	     Information Management System, Version
    	     3.0

    	     IRS Business Master File
    	     IRS Individual Master File
    	     IRS Offshore Voluntary Compliance
    	     Initiative

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-04-972T

                     United States Government Accountability Office

    GAO Testimony

    Before the Committee on Finance,

                                      U.S. Senate

    For Release on Delivery Expected at 10:00 a.m. EDT Wednesday, July 21,
    2004

    TAXPAYER INFORMATION

      Data Sharing and Analysis May Enhance Tax Compliance and Improve Immigration
                                 Eligibility Decisions

    Statement of Michael Brostek Director, Strategic Issues

    GAO-04-972T

    Highlights of GAO-04-972T, a testimony before the Committee on Finance,
    U.S. Senate

    Data sharing can be a valuable tool for federal agencies. The Internal
    Revenue Service (IRS) can use data from taxpayers and third parties to
    better ensure taxpayers meet their obligations. Likewise, Congress has
    authorized certain agencies access to taxpayer information collected by
    IRS to better determine eligibility for benefit programs.

    GAO determined (1) the extent to which the IRS and Citizenship and
    Immigration Services (CIS) within the Department of Homeland Security
    share and verify data and (2) the benefits and challenges, if any, of
    increasing such activities. GAO also studied IRS's Offshore Voluntary
    Compliance Initiative (OVCI) to provide information on (1) the
    characteristics of the taxpayers who came forward under OVCI and (2) how
    those taxpayers became noncompliant.

    GAO is making a recommendation to the Secretary of Homeland Security and
    the Commissioner of Internal Revenue to assess the benefits and costs of
    data sharing to enhance tax compliance and improve immigration eligibility
    decisions. IRS and CIS officials generally agreed with GAO's
    recommendation.

    GAO is not making recommendations on the OVCI program.

    www.gao.gov/cgi-bin/getrpt?GAO-04-972T.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Michael Brostek at (202)
    512-9110 or brostekm@gao.gov.

    July 21, 2004

    TAXPAYER INFORMATION

    Data Sharing and Analysis May Enhance Tax Compliance and Improve Immigration
    Eligibility Decisions

    IRS and CIS do not share data with each other to ensure taxpayers meet
    their tax obligations or to determine immigration eligibility. IRS
    officials believe that data on taxpayers' income they currently use are
    more accurate and useful for enforcing tax law than CIS data. In a
    nationwide selection of 413,723 businesses applying to sponsor immigrant
    workers from 1997 through 2004, GAO found 19,972 (5 percent) businesses
    and organizations that were unknown to IRS. Information like this can be
    used to select taxpayers for audit or other enforcement efforts. Further,
    CIS officials believe IRS taxpayer data would useful for immigration
    decisions. In our nationwide selection, GAO found that 67,949 (16 percent)
    businesses applying to sponsor immigrant workers from 1997 through 2004
    did not file one or more tax returns. Failure to file a return could be
    relevant to a CIS adjudicator's decision about whether a business meets
    the financial feasibility (ability to pay wages) and legitimacy (proof of
    existence) tests for sponsoring an immigrant. For data sharing to occur,
    challenges must be overcome, including I.R.C. Section 6103's limitation on
    IRS's ability to share data with CIS and technological problems like the
    lack of automated financial data at CIS. Because the confidentiality of
    tax data is considered crucial to voluntary compliance, executive branch
    policy calls for a business case to support sharing tax data. IRS and CIS
    have not analyzed data sharing benefits and costs.

    Businesses Sponsoring Immigrant Workers That May Not Have Met CIS
    Financial Feasibility or Legitimacy Requirements, 1997-2004

    Number of Sponsors

    80,000

    67,949

    60,000

    40,000

    20,000

    0 Nationwide selection

    Unpaid assessments Nonfilers Source: GAO analysis

    The OVCI program attempted to quickly bring taxpayers who held funds
    offshore illegally back into compliance while simultaneously gathering
    more information about them and the promoters of offshore schemes. Under
    OVCI, 861 taxpayers came forward and IRS received more than $200 million
    in unpaid taxes, penalties, and interest. According to IRS data, OVCI
    applicants are a diverse group, with wide variations in income, geographic
    location, and occupation. Some applicants' noncompliance appears to be
    intentional, while others' appears to be inadvertent. Given this
    diversity, multiple compliance strategies may be needed to bring taxpayers
    holding money offshore back into compliance.

    Mr. Chairman and Members of the Committee:

    I am pleased to participate in the committee's hearing today on issues
    related to the tax gap, the difference between what taxpayers annually
    report and pay and what they should have reported and paid in taxes. In
    addressing the tax gap the Internal Revenue Service (IRS) uses many
    strategies, two of which are obtaining corroborating information on
    taxpayers' circumstances from third parties and analyzing data obtained
    from taxpayers themselves. Just as IRS sometimes obtains corroborating
    information from others, some federal agencies obtain tax data from IRS to
    use in ensuring that benefits are properly awarded to applicants. Related
    to obtaining corroborating information from others, as requested, my
    testimony covers (1) the extent to which the IRS and Citizenship and
    Immigration Services1 (CIS), within the Department of Homeland Security
    (DHS), share and verify data and (2) the benefits and challenges, if any,
    of increasing data sharing and verifying activities. Related to analyzing
    information obtained from taxpayers, and also as requested, my testimony
    provides information on (1) the characteristics of the taxpayers who came
    forward under IRS's Offshore Voluntary Compliance Initiative (OVCI) and
    (2) how those taxpayers became noncompliant.

    My statement today will address each of these topics in turn. Our scope
    and methodology for each of the topics is briefly summarized early in each
    section of the testimony, and more detailed explanations of our scope and
    methodology are presented in appendix I for data sharing analysis and
    appendix II for our analyses related to OVCI. We conducted our work from
    July 2003 through June 2004 in accordance with generally accepted
    government auditing standards.

    Regarding data sharing, in summary we found that IRS and CIS are not
    sharing data with each other to ensure taxpayers are meeting their tax
    obligations or to determine immigration eligibility but that data sharing
    appears to have the potential to assist IRS in identifying noncompliant
    taxpayers and to improve CIS eligibility decisions in granting

    immigration benefits. For example, IRS may be able to use immigration
    information to help identify taxpayers with no record of recent filing
    activity and that are not easily identified via current compliance
    efforts, such as self-employed and small business taxpayers. In our
    nationwide selection of 413,723 businesses applying to sponsor immigrant
    workers from 1997 through 2004, we found 19,972 businesses and
    organizations that were unknown to IRS. Although IRS does not currently
    use CIS data, information like this can be used to select taxpayers for
    audit or other enforcement efforts. IRS officials believe that data on
    taxpayers' income they currently use are more accurate and useful for
    enforcing tax law than CIS data. Similarly, CIS may benefit from obtaining
    IRS data. For example, in our nationwide selection, 67,949 businesses and
    organizations applying to sponsor immigrant workers did not file one or
    more tax returns. Failure to file a return could be relevant to a CIS
    adjudicator's decision about whether a business meets the financial
    feasibility (ability to pay wages) and legitimacy (proof of existence)
    tests for sponsoring an immigrant. Although CIS officials believe IRS
    taxpayer data would be useful, CIS does not obtain data from IRS primarily
    because, under Internal Revenue Code (I.R.C.) Section 6103, CIS is not
    authorized to directly receive information from IRS. To enable data
    sharing between IRS and CIS, several challenges must be first overcome,
    including the limitations of I.R.C. Section 6103 and technological
    problems such as the lack of automated financial data at CIS. Because the
    confidentiality of tax data is considered crucial to voluntary compliance,
    executive branch policy calls for a business case to support sharing tax
    data. IRS and CIS have not analyzed data sharing benefits and costs.

    We are making a recommendation to IRS and CIS to assess the benefits and
    costs of data sharing to enhance tax compliance and improve immigration
    eligibility decisions. IRS and CIS generally agreed with our
    recommendation.

    Regarding the OVCI program, in summary, IRS's database shows that 861
    taxpayers voluntarily came forward, and IRS officials say they have
    received more than $200 million in previously unpaid taxes, penalties, and
    interest during this attempt to quickly

     1 The U.S. Citizenship and Immigration Services (CIS) was formerly called the
                               Bureau of Citizenship and

    bring taxpayers who held funds offshore illegally back into compliance
    while simultaneously gathering more information about them and the
    promoters of offshore arrangements.2 Under the OVCI program, IRS did not
    impose certain penalties for those taxpayers who voluntarily come forward,
    admitted they illegally held money offshore, and provided amended returns
    and complete information about their offshore arrangements for tax years
    after 1998. IRS used information provided by the taxpayers to build a
    database containing information such as the taxpayers' income, additional
    taxes owed, and use of promoters of offshore tax schemes. Since the data
    are limited to taxpayers who voluntarily admitted they illegally held
    offshore assets, they are not necessarily representative of any larger
    population of taxpayers who used offshore arrangements to avoid paying
    U.S. taxes. The taxpayers who applied for inclusion in the OVCI program
    were a diverse group, with wide variations in income, geographic location,
    and occupation, although some commonalities emerged for certain of these
    characteristics. In addition, some applicants' noncompliance appears to be
    intentional, such as those who used fairly elaborate schemes, while
    others' noncompliance appears to be inadvertent. Further, more than half
    of the OVCI applicants in each year we examined generally had reported
    their offshore income and paid taxes but had failed to file a Report of
    Foreign Bank and Financial Accounts (FBAR), and less than 16 percent said
    that they used promoters. Given this diversity, multiple compliance
    strategies may be needed to bring taxpayers holding money offshore back
    into compliance. Because additional tax, interest, and penalties collected
    to date from OVCI applicants who owed tax have been relatively modest-a
    median of about $5,400-personnel-intensive investigations of individual
    taxpayers who have hidden money offshore could significantly reduce the
    net gain to Treasury from these cases.

    The next section describes in more detail our analyses related to data
    sharing between IRS and CIS. It is followed by detailed information about
    the participants in IRS's OVCI.

    Immigrations Services when established in 2002.
    2 Illegal offshore arrangements are those that are used to avoid paying
    U.S. taxes. These could include
    arrangements to shelter unreported domestic income or any income earned
    offshore, such as interest
    income, investment returns, or ordinary business income. Promoters are
    those who market such illegal
    offshore schemes and cause some taxpayers to become noncompliant.

    Data Sharing Between IRS and CIS

    Our key findings resulting from our look at data sharing between IRS and
    CIS are as follows:

    o  	IRS may benefit from immigration information to select taxpayers who
    appear to be noncompliant for enforcement actions and, if immigration
    applicants were required to be current on their tax obligations before
    applying for immigration benefits, from taxpayers coming to IRS to resolve
    tax issues. Regarding improving IRS's selection of potentially
    noncompliant taxpayers, IRS could benefit if CIS data helped it identify
    taxpayers who fail to file tax returns or who file but underreport their
    income. For nonfiling, we matched a nationwide selection of automated
    immigration applications from 1997 through 20043 with IRS taxpayer
    information and found that of the 413,723 businesses with Employer
    Indentification Numbers (EINs) or Social Security Numbers (SSNs)4 in CIS's
    database that applied to sponsor immigrant workers, 19,972 businesses and
    organizations were unknown to IRS. For underreporting, we found 10
    business/organization sponsors in our nonprobability sample of hard copy
    immigration applications5 that reported more taxable income to CIS than to
    IRS. One business reported approximately $162,000 in taxable income to CIS
    in 2001 and no taxable income to IRS for the same period. Although we do
    not know whether these businesses reported accurately to either CIS or
    IRS, discrepancies like these often are considered by IRS in selecting
    firms or individuals to audit. Regarding the potential numbers of
    taxpayers who would need to resolve their tax situations if CIS applicants
    were required to be current on their tax obligations

    3 In order to study the nationwide implications of data sharing, we used
    data from CIS's nationwide
    Computer Linked Application Information Management System (CLAIMS 3)
    database. Although this
    database did not include financial information, it included EINs and SSNs
    that we could use to determine
    whether IRS had received a tax return and, if so, the status of the
    taxpayer's account.
    4 Individuals who operate a business and report income and losses on a
    Schedule C attached to their
    individual income tax return use their SSN.
    5 Results from nonprobability samples cannot be used to make inferences
    about a population, because in a
    nonprobability sample some elements of the population being studied have
    no chance or an unknown
    chance of being selected as part of the sample. We selected hard copy
    application files because CIS's

    before applying for benefits, we found, that 18,942 businesses in our
    nationwide selection sponsoring immigrants from 1997 through 2004 had
    unpaid tax assessments at the time of application; the assessments totaled
    $5.6 billion as of December 2003. Further, in addition to the 19,972
    businesses unknown to IRS mentioned above, all of the taxpayers that IRS
    already knew had not filed one or more tax returns but that applied for
    immigration benefits-67,949 according to our match of a nationwide
    selection of immigration applications-also would need to resolve their tax
    issues.

    o  	At the same time, CIS may also benefit from having access to IRS
    taxpayer information when making immigration eligibility decisions. For
    example, IRS taxpayer data can help CIS officials identify those
    businesses and organizations that may not have met the requirements for
    financial feasibility (ability to pay wages) or legitimacy (proof of
    existence) when they apply to sponsor immigrants. We found that 67,949 of
    413,723 (16 percent) of business sponsors in our nationwide selection were
    in IRS's nonfiler database at the time of their application to sponsor an
    immigrant worker. These business sponsors had not filed one or more income
    or Federal Insurance Contribution Act (FICA)/Federal Unemployment Tax Act
    (FUTA) employment returns between 1997 and 2004. Additionally, 19,972
    business sponsors (5 percent) were unknown to IRS. Especially for smaller
    businesses, failure to file a return may indicate the business is
    struggling financially. CIS officials told us that access to IRS taxpayer
    data could also improve the efficiency of making eligibility decisions by
    reducing decision-making time and decreasing rework/follow-up work, which,
    in turn, could help CIS address its backlog for processing immigration
    applications.

    o  	CIS and, to a lesser extent, IRS face significant challenges for
    establishing a data sharing relationship. CIS faces several technology
    challenges, including CIS does not automate any financial data, such as
    the applicant's income, and both agencies use different tracking
    numbers-that is, CIS uses alien registration

      automated systems did not have income or other tax related information that
                              could be used to match with

    numbers, which CIS assigns to individuals and businesses, while IRS uses
    SSNs or EINs for individuals and businesses. Given CIS's data limitations,
    IRS would need to determine whether and how it could efficiently access
    and use CIS data to identify potentially noncompliant taxpayers. In
    addition, since I.R.C. Section 6103 does not authorize IRS to disclose
    taxpayer information for immigration eligibility decisions, CIS would need
    to seek a legislative change to I.R.C. Section 6103 or ask taxpayers for
    consent to obtain tax data directly from IRS. However, because the
    confidentiality of tax data is considered crucial to voluntary compliance,
    executive branch policy calls for a business case to support sharing tax
    data. Further, the Computer Matching and Privacy Protection Act of 1988
    generally requires that no matching program between agencies can be
    approved unless the agencies have performed a cost-benefit analysis for
    the proposed matching program that demonstrates the program is likely to
    be cost effective. IRS and CIS have not analyzed and do not currently have
    plans to analyze data sharing benefits and costs.

    Our findings related to data sharing are based on interviews, reviews of
    agency documents and various publications, and matching of immigration and
    IRS taxpayer data. We used two sets of CIS data to match with IRS taxpayer
    data to determine the potential value for increased data sharing and
    matching. First, we used nationwide selection of automated CIS
    applications that included SSNs and EINs from immigration applications
    submitted to CIS service centers from 1997 through 2004. Approximately 3.4
    million of 4.5 million automated immigration records had SSNs or EINs that
    could be used to match with SSNs and EINs in IRS databases. We used this
    data to determine whether businesses and others that had applied to
    sponsor immigrant workers or immigrants applying to change their
    immigration status had filed a tax return with IRS and, if so, whether
    they owed taxes to IRS. Because the nationwide selection did not include
    any financial information, we could not use it to determine whether CIS
    applicants reported the same income amounts to IRS as well as to CIS.
    Therefore, we also selected a nonprobability sample of about 1,000
    immigration hard copy applications

    IRS databases. We transcribed personal and financial information from
    CIS's paper files. GAO-04-972T 6

    for citizenship, employment, and family-related immigration and change of
    immigration status filed by businesses and individuals from 2001 through
    2003 at 4 immigration locations.6 We used the hard copy applications to
    build a database of personal and financial information. We used this
    sample to determine whether CIS applicants reported the same income
    information to IRS as to CIS and also as a second source of information on
    the extent to which CIS applicants may not have filed tax returns and may
    have owed taxes to IRS. We assessed the reliability of IRS's Individual
    Master File (IMF) and Business Master File (BMF) data and the CIS's
    Computer Linked Application Information Management System, Version 3.0
    (CLAIMS 3), which is a database containing nationwide immigration data. We
    determined that the data were sufficiently reliable for the purposes of
    this testimony.

    Background

    As we have previously found, federal agencies are increasingly using data
    sharing to help

                                           7

    verify applicant-provided information. To facilitate this, Congress has
    authorized a number of agencies to access federal taxpayer information
    collected by IRS to improve the accuracy of eligibility decisions. The
    Social Security Administration (SSA) is one agency, for example, that has
    an extensive data sharing relationship with IRS, which aids in
    administering Social Security benefit programs and ensuring taxpayer
    compliance. Overall, SSA is responsible for paying approximately $42
    billion monthly in benefits to more than 50 million people. This
    relationship, which has been in place for almost 30 years, provides the
    basis for matching of employee earnings reported to SSA and IRS; allows
    for the disclosure of taxpayer mailing address information for the
    Personal Earnings and Benefit Estimate Statement program; and helps SSA
    determine the eligibility of applicants and recipients of Supplemental
    Security Income. IRS, on the

    6 CIS has four service centers nationwide established to handle the
    filing, data entry, and adjudication of
    certain applications for immigration services and benefits. District
    offices are responsible for providing
    certain immigration services and benefits to residents in their service
    area, and for enforcing immigration
    laws in that jurisdiction.
    7 As used in this testimony, "data sharing" means obtaining and disclosing
    information on individuals
    between federal agencies, such as IRS and CIS, to determine eligibility
    for benefits and to ensure taxpayers
    have met their tax obligations. U.S. General Accounting Office, The
    Challenge of Data Sharing: Results of
    a GAO-Sponsored Symposium on Benefit and Loan Programs, GAO-01-67
    (Washington, D.C.: October 20,
    2000).

    other hand, uses SSA-processed wage and earnings information to ensure tax
    compliance by verifying individuals' income tax return information against
    that reported by their employers. SSA officials say that sharing and
    verifying taxpayer information is cost and time efficient, reduces waste
    and fraud, and is mutually beneficial for both agencies.

    Although such data sharing arrangements can be useful, privacy advocates,
    lawmakers, and others are concerned about the extent to which the
    government can disclose and share citizens' personal information,
    including sharing with other government agencies. Historically, lawmakers
    and policymakers have created legislation to address these concerns. For
    example, the Privacy Act of 19748 regulates the federal government's use
    of personal information by limiting the collection, disclosure, and use of
    personal information maintained in an agency's system of records. The
    Computer Matching and Privacy Protection Act of 19889 further protects
    personal information by requiring agencies to enter into written
    agreements, referred to as matching agreements, when they share
    information that is protected by the Privacy Act of 1974 for the purpose
    of conducting computer matches.

    As one of the largest repositories of personal information in the United
    States, IRS is often at the center of these concerns. IRS receives tax
    returns from about 116 million individual taxpayers who have wage and
    investment income and from approximately 45 million small business and
    self-employed taxpayers each year. IRS performs a variety of checks to
    ensure the accuracy of information reported by these taxpayers on their
    tax returns. These checks include verifying computations on returns,
    requesting more information about items on a tax return, and matching
    information reported by third parties to income reported by taxpayers on
    returns (i.e., document matching). IRS's document matching program has
    proven to be a highly cost-effective way of identifying underreported
    income and thereby bringing in billions of dollars of tax revenue while
    boosting voluntary compliance.

                        8 Pub. L. No. 93-579, December 31, 1974.

    I.R.C. Section 6103, amended significantly by the Tax Reform Act of
    1976,10 is the primary law used to restrict IRS's data-sharing capacity.
    The law provides that tax returns and return information are confidential
    and may not be disclosed by IRS, other federal employees, state employees,
    and certain others having access to the information except as provided in
    I.R.C. Section 6103. I.R.C. Section 6103 allows IRS to disclose taxpayer
    information to federal agencies and authorized employees of those agencies
    for certain specified purposes. Accordingly, I.R.C. Section 6103 controls
    whether and how tax information submitted to IRS on federal tax returns
    can be shared. I.R.C. Section 6103 specifies which agencies (or other
    entities) may have access to tax return information, the type of
    information they may access, for what purposes such access may be granted,
    and under what conditions the information will be received. For example,
    I.R.C. Section 6103 has exceptions allowing federal benefit and loan
    programs to use taxpayer information for eligibility decisions. Because
    the confidentiality of tax data is considered crucial to voluntary
    compliance, if agencies want to establish new efforts to use taxpayer
    information, executive branch policy calls for a business case to support
    sharing tax data.

    CIS is part of DHS, which was established by the Homeland Security Act of
    2002.11 CIS is responsible for administering several immigration benefits
    and services transferred from the former Immigration Services Division of
    the Immigration and Naturalization Service. Included among the immigration
    benefits and services CIS's offices oversee are citizenship, asylum,
    lawful permanent residency, employment authorization, refugee status,
    intercountry adoptions, replacement immigration documents, family- and
    employment- related immigration, and foreign student authorization. CIS's
    functions include adjudicating and processing applications for U.S.
    citizenship and naturalization, administering work authorizations and
    other petitions, and providing services for new residents and citizens.
    CIS's employees for reviewing immigration benefit applications and
    determining if they should be approved are its adjudicators, while CIS's
    Fraud Detection Units (FDU) investigate cases in which there are trends or
    patterns that

    9 Pub. L. No. 100-503, October 18, 1988. 10 Pub. L. No. 94-455, October 4,
    1976. 11 Pub. L. No. 107-296, S: 451, 116 Stat. 2195.

    suggest potential fraud. CIS staff work with applicants through the
    adjudicatory process beginning with initial contact when an application or
    petition is filed, through the stages of gathering information on which to
    base a decision. This contact continues to the point of an approval or
    denial, the production of a final document or oath ceremony, and the
    retirement of case records.

    IRS and CIS Do Not Share and Verify Data for Tax Compliance or Eligibility
    Decisions

    IRS does not use personal information collected and maintained by CIS to
    ensure that taxpayers meet their tax obligations because IRS officials
    believe that data on taxpayers' income they already receive from taxpayers
    and third parties is more accurate and useful for enforcing tax
    obligations than CIS data. IRS officials cite a previous data sharing
    effort with CIS that was ultimately ended due to incomplete data and
    increased costs. In the mid-1980s, CIS and IRS entered into a
    cost-reimbursable data sharing agreement that enabled CIS to share
    immigrant data with IRS by completing IRS Form 9003.12 According to IRS
    officials, IRS used form 9003 to help identify whether individuals who
    filed for U.S. permanent residency had filed tax returns and properly
    reported their income. CIS and IRS shared form 9003 data for about 10
    years but ended this arrangement in 1996, according to an IRS official.
    Much of the form 9003 immigrant data received from CIS lacked SSNs-a
    primary mechanism IRS uses for tracking individual taxpayers, which made
    it increasingly difficult for IRS to use the data to determine whether
    individuals had filed taxes and properly reported income, according to IRS
    officials. Additionally, the costs associated with the data sharing
    agreement escalated each year, to the point that, in IRS's opinion, it was
    no longer cost effective.

    Under I.R.C. Section 6103, CIS is not authorized to receive taxpayer
    information from IRS directly. Although CIS officials would like to use
    IRS taxpayer data to help make

    12 CIS completed Form 9003 whenever an immigrant filed for lawful
    permanent residency status. The form contained personal identifying
    information on the immigrant such as name and SSN as well as financial
    information on an individual's income. CIS provided a contractor with the
    Form 9003s, and the contractor then transcribed the Form 9003 immigrant
    data onto tape and sent it to IRS's Martinsburg Computing Center (MCC).
    IRS conducted matches of the Form 9003 immigrant data against its own
    databases to determine whether the individuals had filed taxes and
    properly reported their income.

    immigration eligibility decisions, they have not sought it due to
    perceived difficulty in overcoming the I.R.C. Section 6103 limitation. CIS
    obtains self-reported personal and financial information provided by (1)
    businesses and individuals applying to sponsor immigrant workers, (2)
    individuals applying to sponsor relatives, and (3) individuals applying to
    enter the country, extend their stay or obtain citizenship. CIS also
    obtains information from third parties, not including IRS, to verify
    applicants' self-reported data. Although CIS adjudicators sometimes ask
    businesses and individuals to provide them with either official income tax
    returns from IRS or unofficial copies to verify financial information
    reported on immigration forms, immigration officials we spoke with in five
    field locations said applicants could alter or falsify those documents.
    Figure 1 illustrates the current lack of data verification activities
    between CIS and IRS during the immigration application process.

    Figure 1: Illustration of the Current Lack of Data Verification between
    CIS and IRS

    Source: GAO.

    Increased Data Sharing May Benefit IRS's Tax Compliance Efforts and CIS's
    Immigration Eligibility Decisions

    Increased data sharing and verification between IRS and CIS may result in
    IRS increasing tax compliance and CIS making better immigration
    eligibility decisions. CIS data may be useful to IRS in identifying
    businesses and organizations unknown to IRS and those that may not have
    reported the same income to both agencies. Further, IRS data may enable
    CIS to (1) better identify businesses or individuals that may not have met
    immigration eligibility criteria because they had unpaid assessments or
    did not file tax returns and (2) improve the efficiency of adjudicators'
    eligibility decision making.

    IRS May Benefit From Using CIS Information to Identify Taxpayers with No
    Recent Filing Activity or That Report Different Incomes to Both Agencies

    IRS may be able to use immigration information to help identify taxpayers
    with no record of recent filing activity and that are not easily
    identified via current compliance efforts, such as self-employed and small
    business taxpayers. IRS shares with and receives from other agencies, such
    as SSA, personal and financial information via document matching to help
    identify individuals and businesses with tax obligations. However,
    document matching is not very effective for taxpayers that have sources of
    income not subject to such reporting. For example, the income of
    self-employed taxpayers and others that receive income directly from
    clients is not always subject to third party reporting. Both GAO and the
    Treasury Inspector General for Tax Administration (TIGTA) have previously
    reported on these document-matching limitations and stated that certain
    taxpayers, such as those who are self-employed, are much less compliant in
    fulfilling their tax obligations than those whose income is subject

    13

    to information reporting. IRS has also acknowledged that those taxpayers
    that are not well covered by document matching programs represent the
    biggest portion of taxpayers that do not voluntarily and timely pay their
    full taxes. IRS reports taxpayers served by

    13 U.S. General Accounting Office, Reducing the Tax Gap: Results of a
    GAO-Sponsored Symposium, GAO/GGD-95-157 (Washington, D.C.: June 2, 1995).
    U.S. Department of the Treasury, Inspector General for Tax Administration,
    Management Advisory Report: Comparing the Internal Revenue Service's
    Verification of Income for Wage Earners and Business Taxpayers
    (Washington, D.C.: September 2001).

    IRS's Small Business and Self-Employed Division are among those least
    covered by their document-matching programs. As of March 2001, these
    taxpayers accounted for 64 percent of IRS's accounts receivable
    database-which contains taxes assessed but not paid.

    Immigration information may be potentially useful to IRS in identifying
    taxpayers required to file but that have not and that may be applying to
    (1) sponsor immigrants, (2) seek citizenship, or (3) extend their stay in
    the country. We matched a nationwide selection of automated applications
    of 413,723 business and organizations applying to sponsor temporary,
    permanent and religious workers between 1997 and 2004 and found 19,972
    businesses and organizations that were unknown to IRS. We matched a
    nonprobability sample of hard copy immigration applications submitted
    between 2001 and 2003 and found 20 of 475 business/organization sponsors
    had established an identity with IRS at some time in the past but had no
    record of tax activity in the past 5 years. An additional 13
    businesses/organizations in our nonprobability sample were unknown to IRS.
    For example, one company sponsoring a temporary worker reported a gross
    annual income of $156 million on its CIS application, but the EIN listed
    on its application does not match any of IRS's master file databases. Five
    business sponsors in our nonprobability sample submitted income tax
    returns to CIS with their applications, but IRS had no record of receiving
    these returns.

    In order to determine whether these businesses/organizations were
    operating, and thus, likely to have had filing requirements, we searched
    the business/organizations' web sites, "LexisNexis,"14and the online
    yellow pages. We found 31 of the 33 total business/organization sponsors
    that had established an identity or were unknown to IRS appeared to be in
    operation. For example, one business sponsoring a permanent worker had a
    website, a listing on LexisNexis, and on the online yellow pages, all with
    the same address.

    14 LexisNexis is an information/research tool that, among other things,
    maintains public records on businesses and individuals.

    Although the majority of businesses and organizations applying to sponsor
    immigrant workers in our nonprobability sample reported the same income to
    both agencies, we identified 10 business/organization sponsors that had
    submitted tax return information to CIS with significantly different
    income than they reported to IRS. As a group, the 10 business sponsors
    reported over half a million dollars more to CIS in taxable income than to
    IRS for the period from 2001 through 2002. For example, one business
    reported a little over $162,000 in taxable income to CIS in 2001 and no
    taxable income to IRS for the same period. Although we do not know whether
    these businesses reported accurately to either CIS or IRS, discrepancies
    like these often are considered by IRS in selecting firms or individuals
    to audit.

    IRS Might Also Benefit if Applicants for Immigration Benefits Were
    Required to Be Current on Their Taxes

    IRS might gain an additional benefit from establishing a data sharing
    relationship with CIS if immigration applicants were required to be
    current on their taxes before they could apply for immigration benefits.
    That is, if sponsors or immigrants were required to provide CIS with
    evidence from IRS that they had no outstanding tax obligation before any
    immigration benefit application could be processed, sponsors and
    immigrants would need to have filed returns and paid taxes due. IRS
    officials said that such a requirement would likely help with tax
    compliance and would be similar to procedures IRS currently follows in
    certain other situations.

    Although the information sharing to help target IRS enforcement efforts,
    as previously discussed, would help IRS identify and follow up on some
    sponsors and immigrants that may not be fully compliant, a requirement
    that all immigration benefit applicants be current on their tax
    obligations has the potential to increase the total number of noncompliant
    taxpayers that would be brought into compliance. For example, requiring
    all immigration benefit applicants to be current on their tax obligations
    would mean that delinquent taxpayers IRS knows about but that have not yet
    settled their tax debts would need to do so. Based on our nationwide
    selection, we found that 18,942 of 413,723 (5

    percent) businesses applying to sponsor workers entering the country from
    1997 through 2004 had unpaid assessments of $5.6 billion at the time they
    applied to CIS, and 67,949 business sponsors had not filed one or more
    required income or employment tax forms. Finally, the 19,972 business
    sponsors in our nationwide selection that applied to CIS for which IRS had
    no record of receiving a tax return would need to resolve their tax status
    with IRS. Figure 2 shows our results on business sponsors that have unpaid
    assessments or are nonfilers for both our nationwide selection and
    nonprobability sample of immigration applications.

    Figure 2: Businesses Who Owed IRS Taxes or Nonfilers Known to IRS When
    They Applied to Sponsor Workers to Enter the Country, 1997 to 2004

    Percentage

    40

    30

    20

    10

    0 Unpaid Nonfilers assessments

    GAO nonprobability sample

    Selected nationwide data

    Source: GAO analysis.

    IRS has established a process for taxpayers that need to demonstrate clean
    tax records before they can apply for benefits. Taxpayers can obtain a
    "fact of filing" or "fact of payment" document to demonstrate that they
    have been filing required tax returns and paying their taxes. For example,
    the state of Nevada requires casino employees to be current on their
    federal taxes, and applicants must sign taxpayer consent forms allowing
    the state to verify tax information with IRS via the "fact of filing" or
    "fact of payment."

    CIS May Benefit from Using IRS Taxpayer Data to Make More Accurate
    Immigration Eligibility Decisions

    CIS headquarters officials told us immigration adjudicators use two basic
    criteria for evaluating the eligibility of businesses and individuals to
    sponsor immigrants: (1) the sponsor's financial feasibility and (2) the
    legitimacy of the sponsor's existence. Financial feasibility refers to the
    sponsor's ability to pay wages to or financially support the individual
    being sponsored. For example, if a company is sponsoring an immigrant for
    employment, that company must show that it has sufficient ability to pay
    the worker. IRS information on a taxpayer's income and the status of a
    taxpayer's account is relevant and useful to the adjudicator's decision on
    the ability to pay, according to CIS officials. In the case of a nonworker
    petition (e.g. a relative), such as with the Affidavit of Support (I864)
    that accompanies forms such as the Application to Register Permanent
    Status or Adjust Status (I-485)15, the sponsor must provide evidence that
    his or her household income equals or exceeds 125 percent of the federal
    poverty line. Information on tax returns filed with IRS would show income
    levels and could be used to validate applicantprovided information.
    Legitimacy, in the case of worker petitions, refers to whether a
    sponsoring business or organization actually exists, has employees, and
    has real assets. IRS tax data could be used to verify these facts,
    according to CIS officials. In the case of nonworker petitions, legitimacy
    refers to the relationship between the sponsor and immigrant as being
    entered into in "good faith." For example, with the Petition to Remove the
    Conditions on Residence (I-751), which is based on an immigrant's marriage
    to a U.S. citizen or permanent resident, the immigrant must show evidence
    of that relationship through documents such as financial records including
    tax returns. IRS tax data could be used to help verify the marital status
    of individuals.

    In the case of immigrants applying for citizenship, adjudicators also use
    a test of "good moral character" as one of the criteria in determining an
    immigrant's eligibility for citizenship. In testing for "good moral
    character," CIS asks such things as whether the applicant was ever
    imprisoned or failed to file a federal, state, or local tax return.

    15 The Application to Register Permanent Residence or Adjust Status form
    is used by a person in the U.S. to adjust their temporary immigration
    status to a permanent status or register for permanent residence.

    Adjudicators said that having evidence directly from IRS on whether an
    immigrant answered the tax-related questions accurately would be very
    useful in their decisionmaking process.

    Our analysis identified sponsors and immigrants that IRS classified as
    nonfilers and therefore may not meet immigration financial feasibility and
    legitimacy tests. In our nationwide selection submitted between 1997 and
    2004, we found 67,949 of 413,723 (16 percent) businesses applying to
    sponsor immigrant workers did not file one or more tax

                                           16

    returns, such as income or employment tax forms. In addition, knowing that
    IRS had no record of receiving a tax return from 19,972 businesses that
    applied to CIS to sponsor immigrants would be relevant to adjudicators'
    decisions. Similarly, 112 of 475 (24 percent) businesses in our
    nonprobability sample for sponsorship of temporary, permanent, and
    religious workers from 2001 through 2003 did not file one or more tax
    returns, such as income or employment tax forms.

    Of the individuals applying to sponsor family members' or workers' entry
    into or stay in the country, 791 of 51,169 individuals in our nationwide
    selection were in IRS's nonfiler database, meaning these sponsors did not
    file one or more returns during the period from 1997 through 2004.
    According to IRS, these individual sponsors are classified as nonfilers
    but may not be required to file for a variety of reasons, including
    insufficient income. This reason, however, may raise questions about
    whether the sponsor is able to meet CIS's financial feasibility and
    legitimacy tests. We also found that some individual immigrants applying
    to extend their stay were classified as nonfilers. We found that 25,662 of
    2,009,046 individuals in our nationwide selection applying to CIS from
    1997 through 2004 did not file income tax returns. Some of these
    individuals may not have been required to file.

    Our analysis also identified business and individual sponsors that had
    unpaid assessments with IRS and therefore may not have met immigration's
    financial feasibility and legitimacy tests. Our nationwide results showed
    that 18,942 of 413,723 business (5

    16 IRS knows about these business nonfilers because of previously filed
    returns.

    percent) sponsors applying to sponsor immigrants from 1997 through 2004
    had unpaid assessments at the time of application; the assessments totaled
    $5.6 billion as of December 2003. We found that 94 of 475 (20 percent)
    businesses in our nonprobability sample applying to sponsor immigrants
    from 2001 through 2003 collectively had unpaid assessments at the time of
    application. The assessments totaled $39 million as of December 2003. CIS
    officials said IRS information on small businesses would be especially
    helpful in assessing whether small businesses have the necessary income or
    financial feasibility to support the workers. We identified instances in
    which businesses sponsored a number of workers over several years but had
    unpaid assessments to IRS and failed to file numerous tax forms. For
    example, one company sponsored more than 600 workers from 1997 through
    2004 but is currently delinquent on 12 tax returns for $8 million and
    failed to file 3 income tax returns, employment tax returns, or both. We
    found that 6,894 business sponsors in our nationwide selection of
    immigration applications matched on IRS databases containing both
    information on unpaid assessments and nonfilers. Figures 3 and 4 show
    matching results identifying nonfilers and those with unpaid assessments
    from our nationwide selection and nonprobability sample.

    Figure 3: Business Sponsors in GAO's Nonprobability Sample and the
    Nationwide Selection That May Not Have Met Financial Feasibility or
    Legitimacy Requirements

    Number of sponsors

                                   Number of sponsors

    120 67,949 70,000

    100 60,000

    50,000 80

    40,000 60

    30,000

    40 20,000

    20 10,000

    00 Nonprobabilty sample Nationwide selection

    Unpaid assessments Nonfilers

    Source: GAO analysis.

    Note: Data from immigration files was matched with IRS's Business Master
    File including the Accounts Receivable
    Database, which contains IRS data on unpaid assessments and the Nonfiler
    Database, which contains IRS data on
    businesses that should have filed a tax return but did not.
    Source: GAO Analysis

    Some individuals applying to sponsor immigrants also had unpaid
    assessments when they submitted applications to CIS. Of 51,169 individual
    sponsors in our nationwide selection for which CIS included SSNs, 889 had
    unpaid assessments when they applied to CIS and the assessments totaled
    $49.8 million as of December 2003. Fourteen of 273 individual sponsors in
    our nonprobability sample had unpaid assessments when they applied to CIS;
    the assessments totaled $84,761 as of December 2003. We also found
    individual immigrants applying to extend their stay had unpaid assessments
    at the time they applied to CIS. We found 38,877 of 2,009,046 individuals
    immigrants from our nationwide selection that applied to CIS from 1997
    through 2004 had unpaid assessments at the time of application; the
    assessments totaled $328 million. Similarly, 20 of 804 individuals
    immigrants in our nonprobability sample applying to CIS from 2001 through
    2003 had unpaid assessments at the time of application.

    Immigration officials we spoke with at five field locations told us
    receiving and using IRS taxpayer information would be very valuable in
    helping them make better decisions for immigration requests and in
    investigating potential benefit fraud cases. Adjudicators expressed
    concerns about the legitimacy of tax returns they review when making
    immigration eligibility decisions and stated they would like to verify
    applicant/sponsor provided data-including copies of tax returns-against
    what is maintained in IRS's databases. They told us they have no way to
    check tax return information when they suspect applicants have submitted
    (1) bogus returns that can be printed from home computers using readily
    available tax preparation software and (2) returns that falsify socalled
    "IRS-certified tax returns." For example, adjudicators in the Vermont
    service center told us about an instance in which a company sponsoring
    multiple immigrants provided copies of tax returns that contained the same
    company name and EIN but reported differing income and assets for the same
    year (see fig. 5). Additionally, this company submitted the income tax
    return for U.S. corporations (IRS Form 1120) with one application and the
    short-form income tax return for U.S. corporations (IRS Form 1120-A) with
    the other application for the same tax year, even though it did not meet
    the IRS Form 1120-A's filing requirement of having gross receipts under
    $500,000.

    Figure 5: One Business Sponsor Submits Different Tax Returns to CIS

    Note: We used a fictitious business name and EIN to protect the identity
    of the CIS applicant.

    CIS Fraud Detection Unit (FDU) officials begin an investigation when they
    notice significant trends among a certain class of sponsors, immigrants,
    or both, such as certain temporary worker sponsors submitting inflated tax
    returns to demonstrate financial feasibility.17 Currently, FDUs verify
    self-reported data through third party sources, such as a private sector
    company that taps into state-level data to verify the legitimacy of a
    company, and state data on company balance sheets. Obtaining these types
    of data is a time-consuming process for CIS fraud staff and the results
    are questionable, according to officials we spoke with at the California
    and Texas Service Centers. FDU officials said that IRS taxpayer
    information would be more helpful for verification purposes because (1)
    they could determine directly if the sponsor and immigrant provided the
    same information to IRS that they did to CIS and that it was accurate, (2)
    they believed they

    17 An alien convicted of an "aggravated felony" such as tax evasion in
    which the revenue loss to the government exceeds $200,000 as defined in 8
    U.S.C.1101(a)(43), is deportable.

    would be able to obtain IRS data quicker, and (3) IRS data would be more
    reliable than the self-reported and third-party data. However, FDU
    officials explained they have not pursued obtaining this information from
    IRS due to I.R.C. Section 6103's restrictions.

    CIS May Benefit from Using IRS Data to Make More Timely Immigration
    Eligibility Decisions

    Both the adjudicator and fraud staff at the five locations we visited said
    that access to IRS taxpayer data could also improve the efficiency of
    making benefit decisions because it would result in reduced
    decision-making time and decreased rework/follow-up work. More efficient
    benefit decisions have the potential to help CIS address application
    backlogs. For example, adjudicators said that if they could match
    applicant data against IRS data early in the review process, they would
    spend less time researching and following up on the validity of those data
    (e.g., they would send fewer requests for evidence [RFE] to the
    applicant). According to adjudicators, it could take as long as 12 weeks
    to receive responses from applicants for a certified IRS tax return,
    during which time, the application file sits on a "suspense" shelf,
    thereby extending the application processing time. Due to this time gap,
    in certain cases, background checks must be redone, which further
    lengthens the application processing time. Additionally, as we reported in
    May 2001,19 CIS officials said that lengthy processing times have resulted
    in increased public inquiries on pending cases, which, in turn, has caused
    CIS to shift resources away from processing cases to responding to
    inquiries. As a result, the time to process applications have further
    increased.

    18 Additionally, we and other agencies have found, and staff at some of
    the field locations we visited agreed,
    that access to IRS taxpayer information may also tangentially aid CIS in
    its homeland security efforts.
    GAO and the Department of Justice's Office of Inspector General have
    identified weaknesses in CIS
    locator information for immigrants. For example, in November 2002, GAO
    reported that CIS investigators
    determined that CIS's address information was inaccurate for 45 immigrants
    who may have known some
    of the terrorists responsible for the September 11, 2001 terrorist attacks
    (GAO-03-188).
    19 U.S. General Accounting Office, Immigration Benefits: Several Factors
    Impede Timeliness of
    Application Processing, GAO-01-488 (Washington, D.C.: May 4, 2001).

    As we reported in January 2004,20 CIS used $80 million in appropriated
    funds annually in fiscal years 2002 and 2003 for the President's backlog
    initiative, a 5-year effort with a goal to achieve a 6-month average
    processing time per application, and will continue to use $80 million of
    its appropriations through fiscal year 2006 for the initiative. Figures 6
    and 7 show CIS's application processing times and its backlog of pending
    applications, respectively.

    Figure 6: CIS Application Processing Time Goals and Average Reported
    Processing Time for Fiscal Year 2003

    Time in months 60

    40

    20

    0 N-400 I-485 I-129 I-140 I-751 CIS application form

    Application processing time goal Average reported processing time

    Source: GAO.

    Notes: Average reported processing time projected as of October 30, 2003.
    Applications forms are described in appendix I.

    20 U.S. General Accounting Office, Immigration Application Fees: Current
    Fees Are Not Sufficient to Fund U.S. Citizenship and Immigration Services'
    Operations, GAO-04-309R (Washington, D.C: Jan. 5, 2004).

              Figure 7: CIS Application Backlogs - End of Fiscal Year 2003

    Numbers in thousands 1,200

    1,000

    800

    600

    400

    200

    0 N-400 I-485 I-129 I-140 I-751

    CIS application form backlog

    Source: CIS's Performance Analysis System.

    Note: Applications forms are described in Appendix I.

    Sharing Data Presents Challenges

    While data sharing may be beneficial for IRS and CIS, CIS, and to a lesser
    extent, IRS, face significant challenges for establishing a data sharing
    relationship. CIS must address a number of technological challenges in
    order to lay the foundation that would enable data sharing to take place
    efficiently and effectively. For example, IRS and CIS currently use
    different identifiers to track individuals, so their systems may not
    interact with each other, automate different pieces of data, and face
    concerns regarding maintaining the confidentiality of electronically
    shared immigration and taxpayer data. IRS and CIS have two options for
    overcoming the legal challenge and accessing information for benefit
    determination purposes: use the existing I.R.C. Section 6103 taxpayer
    consent authority or seek a legislative change to I.R.C. Section 6103.
    Finally, both IRS and CIS need to further evaluate data-sharing options
    and their related costs to determine whether such a relationship could be
    cost beneficial.

    CIS Faces a Wide Range of Technological Challenges

    Although CIS and IRS may benefit from data sharing, CIS faces a wide range
    of technological challenges that must be overcome in order to lay the
    groundwork that would enable data sharing to take place between the two
    agencies.

    o  	CIS does not maintain any automated financial data on applicants.
    Although CIS automates certain personal information from benefit
    applications, such as an individual's name and alien registration number,
    it does not automate any financial data that are reported on the benefit
    application or in accompanying documents such as tax returns.

    o  	CIS locations automate data inconsistently. Although CIS service
    centers have servicewide automated case management and tracking systems
    for the applications they process, the CIS district offices do not.
    Instead, most applications are processed manually at the district offices.
    Plans are underway to have a nationwide system in place for the districts
    by the end of fiscal year 2006.

    o  	CIS systems contain inaccurate data. GAO and the Department of
    Justice's Justice's Office of Inspector General (OIG) have criticized CIS
    systems because they contain inaccurate data for identifying pieces of
    information (such as immigrants' addresses).

    o  	CIS databases could encounter interaction difficulties. CIS uses
    immigrant registration numbers as tracking identifiers whereas IRS uses
    SSNs or EINs. Although CIS's systems capture SSNs/EINs if they are
    provided on applications, CIS does not require them to be entered into its
    systems. A little over 1 million of 4.5 million nationwide immigration
    records did not have SSN or EIN identifiers that could be matched against
    IRS's databases.

    While I.R.C. Section 6103 Does Not Allow Data Sharing for Immigration
    Eligibility Decisions, CIS Has Options for Gaining Access to Taxpayer
    Information

    Information May Be Disclosed with Taxpayer Consent

    IRS cannot disclose taxpayer information to other federal agencies without
    specific statutory authorization. As previously mentioned, CIS is not
    authorized to directly receive taxpayer information for immigration
    decisions under I.R.C. Section 6103. However, individual taxpayers may
    authorize IRS to disclose their return information to agencies through
    written consent. Under I.R.C. Section 6103(c), a taxpayer may designate a
    third party to receive his or her tax return or return information from
    IRS. Examples of third-party entities to which IRS provides information
    pursuant to taxpayersigned waivers include financial institutions
    (including the mortgage banking industry); colleges and universities; and
    various federal, state, and local governmental entities.

    Using this authority however, CIS could require applicants to allow IRS to
    share personal and financial information with CIS. IRS already has a
    process in place to accomplish this through the use of several forms, such
    as IRS Form 4506, Request for Copy of Tax Return; IRS Form 4506-T, Request
    for Transcript of Tax Return; and IRS Form 8821, Tax Information
    Authorization. Form 4506 allows taxpayers to request that CIS receive
    copies of their tax returns (at a cost of $39 to the taxpayer per copy)
    directly from IRS. By signing form 4506-T, the taxpayer consents to
    another party, like CIS, receiving a tax return transcript, tax account
    transcript, information from Form W-2, Wage and Tax Statement, Form 1099
    series information,21 record of account, or verification of nonfiling
    directly from IRS, all at no charge to the taxpayer. Form 8821 allows a
    third party to inspect taxpayer information, receive taxpayer information,
    or both for specific tax matters listed on the form. This form is
    different from the others in that the authority expires upon written
    request from the taxpayer, whereas the other two authorities are one-time
    requests.

    21 One type Form 1099 is the Form 1099-R, Distributions From Pensions,
    Annuities, Retirement or Profitsharing Plans, IRAs, Insurance Contracts,
    etc.

    Treasury and IRS's National Taxpayer Advocate22 have expressed concern
    about the systematic use of taxpayer consent. Further, IRS's National
    Taxpayer Advocate suggests that taxpayer consents should be used in
    conjunction with pilot tests. A pilot test would help address whether the
    disclosure can result in substantial program benefits. For example, from
    October 2002 through March 2003, the Department of Education (Education)
    conducted a test in which the department electronically verified a select
    number of students' (or parents') tax returns instead of requesting hard
    copies of the returns. The students were asked to authorize IRS to release
    their tax information to their academic institutions via the Internet.
    After authorizing the release, IRS then sent the individuals' tax
    transcripts to the schools, which then resolved any inconsistencies
    between information on the tax transcripts and on financial aid
    applications. According to an Education official, the department received
    positive feedback from the participating schools and taxpayers.

    However, using taxpayer consent may affect the taxpayer's right to privacy
    and IRS's implementation of I.R.C. Section 6103. The Joint Committee on
    Taxation and Treasury's Office of Tax Policy warn that the use of consents
    for programmatic governmental purposes potentially circumvents the general
    rule of taxpayer confidentiality because the taxpayer waives certain
    restrictions on agencies' use of the data. In addition, recordkeeping,
    reporting, and safeguard requirements do not apply to agencies that use
    taxpayer consent. Furthermore, IRS is not required to track taxpayer
    consent disclosures and, as a result, cannot report on how the return
    information is used or what safeguards are in place to protect the
    information. Finally, according to IRS officials, taxpayer consents can be
    costly and resource intensive to implement, primarily because the
    information has to be retrieved manually unless the taxpayer makes a
    request via telephone. IRS estimates that it receives more than 800,000
    requests from taxpayers directing that their returns or return information
    be sent to a third party.

    Changes to I.R.C. Section 6103 Could Enable CIS to Access IRS Taxpayer
    Information

    22 Internal Revenue Service, National Taxpayer Advocate: 2003 Annual
    Report to Congress (Washington,

    Over the years a number of exceptions have gradually been added to I.R.C.
    Section 6103 that allow access to taxpayer information. In his March 10,
    2004, testimony before the Subcommittee on Oversight, House Committee on
    Ways and Means, IRS Commissioner Mark Everson noted that IRS is broadly
    restricted under I.R.C. Section 6103 from sharing taxpayer information
    with third parties, including other government agencies, except in very
    limited circumstances. According to Treasury, the burden of supporting an
    exception to I.R.C. Section 6103 should be on the requesting agency, which
    should make the case for disclosure and provide assurances that the
    information will be safeguarded appropriately. Table 1 lists the criteria
    Treasury and IRS have applied when evaluating specific legislative
    proposals to amend I.R.C. Section 6103 for governmental disclosures.

    Table 1: Criteria Applied by Treasury and IRS When Evaluating Specific
    Proposals for Governmental Disclosures

                                 Is the requesting information highly relevant to
                                 the program for which it is to be disclosed? Are
                                 there substantial program benefits to be derived
    Criteria to be addressed   from the requested information? Is the request
    by the requesting agency   narrowly tailored to the information actually
                                      necessary for the program? Is the same
                                  information reasonably available from another
                                                     source?
                                 Will the disclosure involve significant resource
                                 demands on IRS? Will the information continue to
    Criteria to be addressed   be treated confidentially within the agency to
    by the requesting agency    which it is disclosed, pursuant to standards
    and Treasury/IRS            prescribed by IRS? Other than I.R.C. Section
                                   6103, are there any statutory impediments to
                                         implementation of the proposal?
                                  Will the disclosure have an adverse impact on
    Criteria to be addressed   tax compliance or tax administration? Will the
            by Treasury/IRS        disclosure implicate other sensitive privacy
                                                    concerns?

               Source: Office of Tax Policy, Department of the Treasury.

    D.C.: Dec. 31, 2003). GAO-04-972T 28 Data-Sharing Costs Have Not Been
    Analyzed

    Although the results of our matching of IRS and CIS data indicate that IRS
    and CIS may benefit from data sharing and verification, not all of the
    potential benefits likely would be realized and determining whether and
    how those benefits should be pursued also would depend on the cost of any
    data-sharing arrangements. Neither IRS nor CIS has documented benefits
    that may be gained from additional data sharing nor have they considered
    the cost that would be associated with implementing a data sharing
    arrangement. The cost of data sharing would depend on a variety of
    factors, such as whether CIS would match data from all benefit
    applications or some subset and whether the matching processes would be
    primarily manual or automated.

    Although our work shows potential benefits to IRS and CIS from sharing
    data to enhance tax compliance and improve immigration eligibility
    decisions, not all of those benefits likely would be realized. For
    example, IRS is unable to pursue all of the current leads that it receives
    from existing data corroboration efforts, like document matching.
    Therefore, to the extent that obtaining and analyzing additional data from
    CIS developed more leads for possible enforcement actions, IRS likely
    would only be able to pursue some portion of those cases. Further, some of
    the apparent noncompliance may not be substantiated. For example, some of
    those who appear not to have filed tax returns may actually have been
    provided inaccurate information to CIS or otherwise not have a filing
    obligation. Of the taxpayers with delinquent taxes, some portion may
    already have entered into arrangements with IRS to pay the taxes and no
    further IRS action may be needed. From CIS's perspective, although we
    found that many businesses and individuals may not have filed tax returns
    or may be delinquent in paying taxes, some of these situations may not be
    significant enough to affect a CIS adjudicator's decision about their
    financial feasibility or legitimacy. For instance, some of the businesses
    applying to sponsor immigrant workers that have delinquent taxes may not
    owe enough to raise doubts about their ability to pay the worker. This may
    be especially true for larger businesses.

    The Computer Matching and Privacy Protection Act of 1988 established
    requirements for agencies entering into routine data matching
    arrangements. In general, the act states that no matching program can be
    approved unless the agency has preformed a costbenefit analysis for the
    proposed matching program that demonstrates the program is likely to be
    cost effective. Similarly, Treasury's criteria for considering whether a
    statutory change should be made for the sharing of tax data stress the
    importance of documenting whether a substantial benefit is likely and what
    the resource demands on IRS would be to support sharing the data. In the
    case of using taxpayer consents, Treasury suggests that agencies conduct
    pilot tests to support a business case for routine use of such consents.

    Conclusions

    Data sharing and verification between IRS and CIS appears to have the
    potential to better guide IRS's efforts to identify and correct
    noncompliance by taxpayers and result in more informed, accurate, and
    timely eligibility decisions by CIS adjudicators. Although IRS terminated
    its previous data sharing relationship with CIS for individual taxpayers
    because it judged that relationship not to be cost effective, our matching
    results show a greater potential for improving tax compliance for
    businesses than individuals. Our analysis also shows the potential to
    improve thousands of eligibility decisions if CIS has access to IRS data.
    However, more needs to be known about the extent to which the potential
    benefits likely would be realized if greater data sharing and verification
    were to occur and about the costs that would be incurred to implement a
    data-sharing effort. The benefits and costs are key, since both Congress
    and executive branch policies stress that sharing of data, and especially
    tax data, be well justified given concerns about possible adverse effects
    on tax compliance if the confidentiality of taxpayer's data is
    compromised.

    Recommendation for Executive Action

    The Secretary of Homeland Security and the Commissioner of Internal
    Revenue should assess the benefits that may be obtained and the costs that
    may be incurred to share information to enhance tax compliance and improve
    immigration eligibility decisions.

    Agency Comments

    Agency officials provided official oral comments and generally agreed with
    our recommendation. We talked with knowledgeable agency officials in IRS
    and CIS about our findings and recommendation. They had no major concerns
    with doing a study on the potential benefits and costs of establishing a
    data sharing relationship. IRS officials said I.R.C. 6103 prevents them
    from sharing taxpayer data with CIS for immigration eligibility decisions.
    IRS officials said the use of taxpayer consents would be an alternative
    but IRS would need to evaluate resource implications associated with
    processing the potentially large number of requests to verify taxpayers'
    status that could be associated with this proposal. CIS officials said
    they want to have IRS data to assist with immigration eligibility
    decisions but have not pursued obtaining IRS data because of the challenge
    they would face in trying to change I.R.C. Section 6103.

    IRS's OVCI Program

    The major points arising from our review of the information available on
    the taxpayers who came forward under the OVCI program and how they became
    noncompliant are as follows:

    o  	Of the more than 1 million taxpayers that IRS estimated might be
    involved in an offshore scheme when it initiated the OVCI program, 861
    taxpayers came forward. IRS officials say they have received more than
    $200 million in previously unpaid taxes, penalties, and interest from
    them. The taxpayers that applied for inclusion in the OVCI program were a
    diverse group, with wide variations in income, geographic location, and
    occupations, but some commonalities emerged for certain of these
    characteristics.

    o  	OVCI applicants reported an annual original adjusted gross income
    (AGI)23 ranging from over well over $500,000 to substantial net losses.
    Because these large outliers tend to skew the distribution of the income
    data, we used the population's annual median income to describe the
    population's income levels. OVCI applicants' annual median original AGI
    ranged from about $39,000 to about $52,000 for tax years 1999, 2000, and
    2001. For 2001, the annual median adjustment to the original AGI of OVCI
    applicants who had not properly paid tax on money held offshore was about
    $23,000, and the median amount of tax, penalties, and interest was about
    $5,400. 24 The 81 applicants who composed the top 10 percent of originally
    reported AGIs in 2001 accounted for more than half of the total reported
    AGI amount.

    o  	For each year covered by the OVCI program, more than half of the
    applicants had generally reported all of their income and paid taxes
    due-even on their offshore income--but had failed to disclose the
    existence of their foreign bank accounts as is required by Treasury. Their
    applications sought relief from FBAR penalties. IRS assesses FBAR
    penalties at a rate of up to 100 percent of the value of the assets in the
    account. These penalties were waived for OVCI applicants.

    o  	OVCI applicants came from 47 states and the District of Columbia, but
    half of all applicants came from only 5 states: Florida, California,
    Connecticut, Texas, and New York.

    23 AGI is the amount of income the taxpayer reported minus certain income
    adjustments the taxpayer made
    on his or her tax return. The original AGI is the amount the taxpayer
    reported on his or her original federal
    tax return. In applying for the OVCI program, the taxpayer also supplied
    IRS with amended federal returns
    with an adjusted AGI.
    24 Taxpayers could apply for the OVCI program for any tax year after 1998
    and could apply for one or more
    years. The overwhelming majority of applications fell in tax years 1999
    through 2001, but some applicants
    applied for years prior to 1999 or subsequent to 2001. We only included
    those taxpayers who were
    noncompliant in 1999, 2000, or 2001, or in a combination of these years,
    in our analysis. We used the year
    2001 in this testimony for all tables because it is the most recent year
    for which we have data and because
    the data in 2001 were fairly representative of each of the 3 years that we
    are reporting.

    o  	OVCI applicants reported more than 200 occupations. We classified more
    than one-third of applicants' occupations as either retired individuals,
    business executives, or business/self-employed.

    o  	Less than 16 percent of OVCI applicants said they used a promoter in
    2001. Some promoters offered inexpensive, ready-made package deals that
    bundled a standardized set of services together while others offered more
    expensive, tailormade arrangements.

    o  	Some taxpayers appear to have deliberately hidden money offshore
    through fairly elaborate schemes involving, for instance, multiple
    offshore bank accounts. Other applicants appear have fallen into
    noncompliance inadvertently, for example, by inheriting money held in a
    foreign bank account.

    We used IRS's OVCI database to develop a profile of the characteristics of
    the taxpayers that came forward under OVCI. Our information is limited to
    those taxpayers who voluntarily admitted they held offshore assets, so the
    information we are providing is not necessarily representative of any
    larger population of taxpayers who used offshore arrangements to avoid
    paying U.S. taxes. We limited our analysis to tax years 1999, 2000, and
    2001 because the vast majority of the OVCI applicants applied for
    inclusion for these 3 tax years. IRS officials said they verified the
    accuracy of the data entered into the database, and we observed the
    verification process. We analyzed IRS's data reliability processes and
    verified some of the entry accuracy ourselves and as a result, we believe
    the data we are using are sufficiently reliable and useful for reporting
    on the characteristics of those who came forward under the OVCI program.
    In addition, we reviewed 35 case files judgmentally selected based on
    factors such as particularly high or low AGIs, high or low adjustments to
    original AGI, or high or low taxes, penalties, and interest owed to verify
    IRS's data entry and to obtain information about how taxpayers became
    noncompliant and about the promoters, if any, they used. In addition, we
    visited 25 promoter Web sites to gain a better understanding of the type
    and cost of the services they provide. The Web sites were judgmentally
    selected to ensure the sample included a

    variety of geographic locations. We did our work at IRS's campus in
    Philadelphia and its National Office in Washington, D.C. We conducted our
    fieldwork for this portion of the testimony from January 2004 through June
    2004. Appendix II provides more details on our methodology.

    Background

    Launched in January 2003, OVCI was an attempt to quickly bring taxpayers
    who were hiding funds offshore back into compliance while simultaneously
    gathering more information about those taxpayers as well as the promoters
    of these offshore arrangements. It is not illegal to hold money offshore.
    It is illegal, however, for a taxpayer to not disclose substantial
    offshore holdings including, if applicable, not reporting income earned in
    the U.S. and "hidden" through offshore arrangements and any income
    generated through them to IRS on a tax return. As an incentive to come
    forward, IRS said it would not impose the civil fraud penalty for filing a
    false tax return, the failure to file penalty, or any information return
    penalties for unreported or underreported income earned in 1 or more of
    the tax years ending after December 31, 1998. However, taxpayers were
    required to pay applicable back taxes, interest, and certain accuracy or
    delinquency penalties. In addition, Treasury agreed to waive the penalty
    associated with

    25

    the failure to file a Report of Foreign Bank and Financial Accounts (FBAR
    penalties). To be eligible for the OVCI program, applicants had to supply
    certain information about themselves, including

    o  	personal information, such as their names, taxpayer identification
    numbers, current addresses and telephone numbers;

    o  	copies of their original and amended federal income tax returns for
    tax periods ending after December 31, 1998; and

    25 Under the Bank Secrecy Act, U.S. residents or individuals in and doing
    business in the United States must file a report with Treasury if they
    have a financial account in a foreign country with a value of more than
    $10,000 at any time during the calendar year. Taxpayers comply with this
    requirement by noting the

    o  	information on any related entities that the applicants caused to be
    involved in offshore tax avoidance.

    In addition, taxpayers had to provide details on those who promoted or
    solicited the offshore financial arrangement. IRS is using this
    information to pursue promoters and to identify other clients who did not
    come forward under OVCI. Taxpayers were required to provide

    o  	complete information about the promoter, including the promoter's
    name, address, and telephone number and any promotional materials that the
    taxpayer received;

    o  	descriptions of offshore payment cards, foreign and domestic accounts
    of any kind, and foreign assets; and

    o  	descriptions of any entities through which the taxpayer exercised
    control over foreign funds, assets, or investments.

    IRS used this documentation to build a database of descriptive information
    about the OVCI applicants and any promoters of offshore schemes that they
    used. IRS plans to eventually utilize the data to analyze taxpayer
    characteristics and then use this information to try to make taxpayer
    compliance programs more effective. Specifically the database contains
    information on (1) the taxpayer, such as income, citizenship status,
    occupation, and compliance history, and (2) the promoters of offshore tax
    schemes, such as how much the promoter charged the taxpayer and the
    country in which the promotion was located.

    account on their tax return and by filing Form 90-22.1. Willfully failing
    to file an FBAR report can be punished under both civil and criminal law.

    OVCI Applicants Were a Diverse Group, but Some Common Characteristics
    Emerged

    When it initiated the OVCI program, IRS estimated that 1 million taxpayers
    might be involved in offshore schemes covered by the program; 861
    taxpayers came forward

    26

    under OVCI. IRS required taxpayers to calculate the additional tax they
    owed and remit that amount with their OVCI application. IRS has received
    more than $200 million from taxpayers. IRS has verified through audits
    that $140 million of that amount was properly due and is continuing to
    audit the remainder. In some ways the taxpayers in the OVCI program were a
    diverse group. Applicants reported widely varying annual median original
    AGIs in 1999, 2000, and 2001. The applicants were geographically dispersed
    across the country and were involved in more than 200 occupations. Despite
    the diversity, OVCI applicants reported an annual median original AGI from
    approximately $39,000 in tax year 2001 to $52,000 in tax year 2000; half
    came from five states; and about a third were retired individuals,
    business executives, or business/self-employed. In addition, less than 16
    percent said they used a promoter to help them set up their offshore
    arrangements. Finally, more than half of OVCI applicants for each year
    generally had reported their income and paid taxes but had failed to
    disclose the existence of their foreign accounts.

    OVCI Applicants' Income

    For the 3 years of the OVCI program we reviewed, 1999 through 2001, OVCI
    applicants reported an annual original AGI ranging from well over $500,000
    to substantial net losses. Because these large outliers tend to skew the
    distribution of the income data, we believe

    26 IRS has previously reported that 1,321 taxpayers applied to the OVCI
    program. This figure includes 400 entities that were set up by applicants
    to handle their offshore funds. To avoid double counting, we excluded
    these cases from our audit. We also excluded 49 applicants because they
    did not meet program requirements and 16 applicants that applied for tax
    years outside the scope of our audit, that is either before 1999 or after
    200l. As a result, we identified 861 unique, individual taxpayers who
    applied to the OVCI program. IRS has also previously reported that it had
    received $200 million for all years while the database showed that only
    $140 million had been collected. IRS officials said it recorded in the
    database only those amounts that it had finished auditing and will enter
    the additional money received as it completes audits of more OVCI
    applicants. In addition, much of the money IRS received from OVCI
    applicants was for tax years either before 1999 or after 2001.

    the most representative method of describing the "average" applicant is by
    using the population's annual median income, that is, the point in the
    income distribution where half of the applicants fall above that point and
    half fall below that point, rather than the mean AGI. As shown in table 2,
    the median original AGI of applicants was from $38,761 in tax year 2001 to
    $51,663 in tax year 2000. Appendix III contains more taxpayer income
    information.

    Table 2: OVCI Applicants' Original AGI Statistics, Tax Years 1999-2001

                                                  Original AGI
                Number of                 10th                         90th
    Tax year applicants        Mean    percentilea     Median    percentileb
           1999             806  $332,443              $0 $49,469        $545,196
           2000             817 1,191,997               0  51,663         583,188
           2001             808   242,515               0  38,761         582,593

    Source: GAO analysis of IRS data.

    a The 10th percentile represents those taxpayers who were in the bottom
    ten percent of the distribution of
    the original AGI. Due to the number of taxpayers who reported negative
    original AGIs or were nonfilers,
    the value for the10th percentile was zero in all three years we reviewed.
    b The 90th percentile represents those taxpayers who were in the top ten
    percent of the distribution of the
    original AGI.

    Within the OVCI population, there were three distinct types of taxpayers:

    o  Those who had filed their tax returns but omitted their foreign
    financial assets.

    o  	Those who failed to file tax returns for 1 or more of the years
    covered by the OVCI program.

    o  	Those who filed returns each year and included their offshore holdings
    in their reported income but failed to meet their FBAR reporting
    requirements.

    As shown in table 3, the taxpayers in these groups varied in their
    reported median original AGI; adjustment to original AGI; and taxes,
    penalties, and interest assessed. In the table, the nonfilers' median
    original AGI is shown as zero because, according to an IRS official, they
    did not file tax returns, even though they had taxable income offshore. An
    IRS official said that for those applying to the program for relief from
    FBAR penalties,

    the data show an original AGI because they generally reported all of their
      income and paid taxes due, but had failed to disclose the existence of their
                                 foreign bank accounts.

    Table 3: OVCI Applicants' Income and Amount Owed for Tax Year 2001

                               Median   Median
                               original adjustment  Median      Median    Median
                               AGI for  to original additional penalties interest
          Population    Number 2001     AGI         tax oweda  assessed    owed
        Filed federal
    tax returns but     326  $55,869     $20,460     $4,289      $523     $263
    omitted foreign
            assets
          Nonfilers         24        0      82,561      7,573     2,431      860
          Filers and
          nonfilers        350  $49,303     $22,951     $4,401      $657     $301
           combined
        Filed returns
        but failed to      458  $31,667          $0         $0        $0       $0
          meet FBAR
         requirements
            Total          808  $38,761          $0         $0        $0       $0

    Source: GAO analysis of IRS data.
    a These figures represent the median for the amount IRS has verified
    through audits that taxpayers owed
    IRS. As IRS continues to conduct audits of OVCI taxpayers, the median may
    rise or fall somewhat.

    For each of the 3 years of the OVCI program that we reviewed, more than
    half of the applicants to the OVCI program applied to get relief from FBAR
    penalties. This is a substantial relief for taxpayers because an IRS
    official told us that IRS can assess FBAR penalties at a rate of up to 100
    percent of the value of the assets in the account.

    A few individuals with substantial offshore holdings accounted for a large
    percentage of the original AGI reported. For tax year 2001, the 81
    applicants with the top 10 percent of originally reported AGIs accounted
    for more than half of the total reported AGI amount.

    OVCI Applicants' Geographic Characteristics

    Taxpayers from 47 states and the District of Columbia applied for
    inclusion in the OVCI program in at least 1 of the 3 years of the program
    (see app. IV for more geographic information about the applicants to the
    OVCI program). In tax year 2001, applicants for whom we have data were
    most commonly from the South (43 percent), but about 22 percent of all
    applicants came from the Northeast and more than 26 percent came from the
    West. The Midwest accounted for the fewest number of applicants (about 9
    percent).27 However, half of all applicants came from only 5 states
    (Florida, California, Connecticut, Texas, and New York). 28 Three states
    had no taxpayers apply to the OVCI program. As shown in figure 8, median
    adjustment to original AGI for taxpayers who filed tax returns but omitted
    foreign assets or were nonfilers ranged from a low of about $15,000 in the
    West to a high of about $32,500 in the Northeast.

    27 A small number of taxpayers who applied to the OVCI program lived
    outside of the United States or in
    Puerto Rico. We are not disclosing any specific information about these
    taxpayers due to concerns over
    the information being used to identify the taxpayers.
    28 These states accounted for about one-third of all individual income tax
    returns filed in tax year 2003,
    indicating that they accounted for a higher concentration of OVCI
    applicants than would be explained by
    the number of tax returns filed from those states.

    Figure 8: OVCI Applicants' States of Residence and Regional Breakout of
    the Median Adjustment to Original AGI for Non-FBAR applicants, Tax Year
    2001

    OVCI Applicants' Occupations

    Applicants listed over 200 occupations on their federal tax returns,
    including accountants, members of the clergy, builders, physicians, and
    teachers, so we grouped the applicants' professions into 18 categories in
    order to better analyze them. For all 3 years, the most common professions
    of applicants to the OVCI program were retired individuals, business
    executives, and business/self-employed. Table 4 provides information on
    taxpayers' occupations and the associated AGI information for 2001.

    Table 4: Individual OVCI Applicants' Profession, Median Original AGI, and
    Median Adjustment to Original AGI for Tax Year 2001 (Filers and Nonfilers
    but not FBAR applicants)

                                                       Median
                                             Median    adjustment to
             Profession        Applicants original AGI original AGI
    Retired                         52      $43,881        $25,074
    Executive                       47      158,183         23,302
    Business/self employed          32       73,134         22,006
    Banking/ finance/               27        3,596         22,951
    insurance b
    Sales                           22       91,000         24,329
    Medical profession              22       95,928          8,397
    Engineer                        21       55,941          5,722
    Other                           20       23,286         15,197
    Analyst/consultant              11       49,892         20,277
    Computer/ technology            11       39,348          6,461
    Attorney                         9      137,661         23,302
    Administrativea                  8      105,804         11,028
    Building trades                  5       22,684          6,569
    Education c                      5            0         36,364
    Scientist                        5       26,599          8,538
    Real estate                      4    1,100,241        291,871
    Pilot                            4      123,705         14,566
    Arts                             3      123,945         70,799
    Missing                         42            0         54,094
    Totale                         350      $49,598        $23,124

    Source: GAO analysis of IRS data.

    a

    A small number of taxpayers who applied to the OVCI program listed their
    occupations as secretary but their incomes were each in excess of $1
    million for each of the years 1999, 2000, and 2001. b Although a large
    number of applicants were from the banking/finance/insurance sector, a
    large number of these applicants reported large losses on their tax
    returns. As a result, the median original AGI was relatively low.

    Some occupations had more nonfilers apply to the OVCI program than filers,
    so for these cases the median original AGI was zero. d Seven applicants
    were identified as "deceased", and we included these people in the "other"
    category.

    e

    We did not include FBAR applicants in this table because, according to IRS
    officials, there is no adjustment to the FBAR applicants' original AGI.
    These applicants generally reported their offshore holdings on their
    original federal tax returns and incurred no additional taxes or interest
    owed. Because these applicants made up more than half of all applicants,
    if we included them in the table, the median adjustment to original AGI,
    taxes, and interest would all be zero.

    Few Applicants Said They Used Promoters

    29

    Less than 16 percent of all OVCI applicants said they used a promoter. The
    services provided by promoters ranged from simple incorporation offshore
    to more elaborate schemes involving such things as bogus charities.

    The relatively small percentage of OVCI applicants reporting use of a
    promoter may be due in part to the definition of a promoter used in the
    OVCI instructions. IRS defined a promoter as any party who "promoted or
    solicited the taxpayer's use of offshore payment cards or offshore
    financial arrangements." Some taxpayers may have learned about offshore
    arrangements from friends, an attorney, a paid preparer, or others.
    However, IRS did not record detailed information in the OVCI database
    about how the taxpayers learned about the offshore arrangement and
    therefore we do not know the extent to which taxpayers learned of the
    offshore arrangement from these individuals. If OVCI applicants did learn
    of the arrangements from these individuals, they may not have considered
    them to be promoters under IRS's promoter definition, particularly if they
    did not feel that the individual actively sought them out to encourage or
    convince them to use an offshore arrangement. IRS did record information
    on whether the OVCI applicants used a paid preparer. For example, 326 of
    the 350 tax year 2001 OVCI applicants, or 93 percent, said that a paid
    preparer prepared their original tax return.

    Recognizing that the data may change as IRS completes additional
    investigations on promoters, taxpayers who said they used a promoter had
    similar median original AGIs to those who reported not using a promoter.
    For example, in 2001, those who said they used a promoter reported a
    median original AGI of about $41,000, while those applicants who said they
    did not use a promoter reported a median original AGI of about $39,000.

    29 We cannot be precise about the number of taxpayers who said they used a
    promoter. IRS officials said that they had identified 269 potential
    promoters from 140 participants. IRS has opened investigations into 53 but
    does not have sufficient information yet on the remainder to conclude
    whether they are bona fide promoters. In addition, IRS compiled its
    statistics on the number of taxpayers and associated business entities
    that identified promoters-140-but not the number of unique taxpayers who
    identified promoters.

    For those taxpayers who said they used a promoter, the fees they paid
    those promoters varied from nothing to a high of $85,000 for the
    promoter's services.

    One possible explanation for the range in fees is that promoters offer
    different services, from off-the-rack services to custom-tailored
    arrangements. We visited 25 Web sites maintained by individuals or
    companies promoting offshore investments to gain a better understanding of
    the type and cost of the services they provide. The Web sites were
    judgmentally selected to ensure the sample included a variety of
    geographic locations. Of the 25 Web sites we visited, 19 offered
    off-the-shelf offshore companies or package deals. One company advertised
    that taxpayers could incorporate offshore within the next day by buying an
    off-the-shelf company, which is an existing company that has been set up
    by the promoter. At a cost of $1,500, the taxpayer would receive a package
    of services that would include an agent and local office, mail forwarding,
    nominee corporate directors and officers, offshore credit card
    applications, banking forms, and the payment of all government fees. These
    companies are not legitimate business enterprises. Instead, they exist
    strictly to provide taxpayers a way to quickly and easily move money
    offshore and repatriate it without declaring that money to IRS.

    Several taxpayers who used promoters of this type to avoid paying taxes
    appeared to be scammed themselves. For example:

    o  	One taxpayer was persuaded by a promoter to create an offshore
    corporation. The taxpayer also opened an offshore bank account and gave
    the promoter over $50,000 in cash to deposit into the account. The
    promoter told the taxpayer that the money was stolen before it was ever
    deposited in the account, leaving the taxpayer with practically nothing.

    o  	Another taxpayer invested over $30,000 in an offshore investment
    opportunity that promised a return of 20 percent per year. The taxpayer
    got the money he/she invested through credit card advances. The taxpayer
    received returns on the

    investment for a while, but the payments soon stopped. The taxpayer said
    he/she still owes money on the credit cards.

    Other promoters' schemes are more complicated and targeted toward wealthy
    taxpayers interested in avoiding taxes. Figure 9 is a hypothetical example
    based on an actual case of how a promoter can help taxpayers repeatedly
    send money offshore and repatriate it later, avoiding hundreds of
    thousands of dollars in taxes. We calculated the tax savings below using a
    popular tax software program.

    Figure 9: Hypothetical Example of a Self-Employed Taxpayer Filing Singly
    and Filing a Schedule C (for Profit and Loss from a Sole Proprietorship
    Business)

    In our hypothetical example, the self-employed taxpayer reports $3 million
    in annual business income on his Schedule C (the form attached to a tax
    return that is used to calculate profit or loss for a sole proprietor
    business). The first year, the taxpayer hires the promoter to set up an
    offshore scheme for a fee of $70,000 for financial planning services and
    tax preparation. The promoter creates a bogus offshore charity that
    actually has no charitable activity and a corollary offshore business
    entity. The taxpayer controls both organizations by sitting on the board
    of directors. The taxpayer then sends

    money offshore, basically to himself, through a $500,000 "donation" to the
    offshore charity, which in turn sends the money to the offshore business
    entity. The offshore business entity then gives the taxpayer a $500,000
    "home equity loan," which actually repatriates that amount to the
    taxpayer's domestic bank account. Throughout the year, the taxpayer sends
    monthly mortgage payments to the offshore business entity. The taxpayer
    can then deduct the promoter's fees as a business expense on his Schedule
    C and the charitable donation and mortgage interest as part of his
    itemized deductions on his Schedule A. These false deductions would reduce
    the taxpayer's tax liability from about $1.1 million to about $920,000, a
    savings of about $180,000.

    In the second year, the promoter would charge our hypothetical taxpayer
    less-only $10,000 for tax preparation services. The taxpayer can send the
    $500,000, repatriated as a home equity loan, back to the offshore charity
    as a donation and continue to send mortgage payments offshore. In a new
    wrinkle, however, the offshore business entity has purchased a luxury
    automobile worth about $74,000 and leased it back to the taxpayer. The
    taxpayer would have use of the automobile and would send lease payments to
    the offshore business entity. On his tax return for the second year, the
    taxpayer can deduct his charitable contribution of $500,000, the interest
    on the home loan, the lease payments, and promoter fees as business
    expenses. These false deductions would reduce the taxpayer's taxes by
    about $163,000.

    Therefore, in return for promoter fees of about $80,000, the taxpayer has
    avoided more than $340,000 in taxes in just these 2 years. The taxpayer
    received more than a 300 percent return on his money, a high return when
    compared with those on other traditional investments. In addition, the
    taxpayer receives a level of asset protection from potential creditors.
    If, at some time, creditors were to pursue the taxpayer to collect money,
    they may be unable to reach the assets because it would appear that his
    house is heavily mortgaged and that his expensive car is leased.

    There are many more options for transferring money offshore and then
    repatriating it. For example, according to some promoters' Web sites, an
    offshore charity could award a

    "scholarship" to the taxpayer's child to defray college expenses, or a
    business entity could provide administration services such as bookkeeping
    for the taxpayer. An IRS official conservatively estimated that one
    promoter of this type of scheme has cost the U.S. Treasury about $100
    million in tax revenues.

    Some Taxpayers' Noncompliance Appears

    Deliberate, Others Appears Inadvertent

    Some taxpayers went to great lengths to establish and maintain offshore
    bank accounts

    30

    and credit cards, creating the appearance that the noncompliance was
    deliberate, whereas others appeared to be unaware of their U.S. tax
    obligations for foreign holdings. Deliberately noncompliant taxpayers
    would include some of the taxpayers who, as discussed earlier, used
    promoters and, for example, put funds into their offshore arrangements on
    a cash basis. Examples of other taxpayers who appear deliberately
    noncompliant include the following:

    o  	A taxpayer who reported an original AGI of less than $20,000 on
    his/her federal tax return and claimed the Earned Income Tax Credit. This
    taxpayer's amended federal return showed income in 1 year of over $1
    million and multiple foreign bank accounts. Before applying to the OVCI
    program, the taxpayer never paid any tax on any income received. IRS told
    us that had this taxpayer not applied for inclusion in the program, it is
    doubtful the taxpayer's tax avoidance would have ever been discovered.

    o  	A taxpayer who maintained multiple bank accounts in different foreign
    countries. Each of the accounts contained funds invested in various
    financial instruments. The taxpayer traveled abroad and physically brought
    the money back into the United States.

    30 IRS rejected OVCI applicants who did not divulge the entirety of their
    scheme to avoid paying U.S. taxes. IRS told us that 49 applicants were
    rejected for that reason, and those cases were sent to IRS's Criminal
    Investigation Unit.

    o  	A taxpayer who initially hired attorneys to create an offshore entity,
    and then used wire transfers and a mailbox abroad to route after-tax
    income from the United States to the foreign account for deposit. The
    taxpayer did not pay U.S. taxes on the interest income earned on these
    funds and claims to have not repatriated any of the foreign deposits
    during that time.

    In an increasingly global and mobile world, taxpayers may hold foreign
    accounts and credit cards for a number of legitimate reasons. For example,
    taxpayers may have worked or traveled overseas extensively or inherited
    money from a foreign relative. Some taxpayers in these situations told IRS
    that they were unaware they had to pay U.S. taxes on this income and that
    their noncompliance was unintentional. For example:

    o  	One taxpayer said that he/she had made a personal loan overseas and
    had not reported the interest income of about $10,000 he/she had received.
    Because the taxpayer held about 1 percent of his/her original AGI offshore
    and had paid taxes on all other income, it appears that this taxpayer may
    not have intentionally avoided his/her tax obligation.

    o  	Another taxpayer along with a sibling invested an inheritance in a
    joint account in a foreign country for convenience. The taxpayer realized,
    when the OVCI program was announced, that the interest income on this
    account should have been reported. He/she reported, through the OVCI
    program, interest income of less than $2,000 over the years covered by
    OVCI. The taxpayer paid taxes on all other domestic income during this
    time and appeared to have overlooked the interest income.

    o  	A young taxpayer got a job overseas. The taxpayer did not believe
    he/she needed to file tax returns in the United States because he/she was
    paying income taxes in the country in which he/she was working. When the
    taxpayer found out that he/she was required to file in the United States,
    the taxpayer contacted IRS. The

    taxpayer was eligible for the Foreign Tax Credit, which offsets some or
    all U.S. taxes owed. As a result, the U.S. tax obligation was less than
    $10,000 for all of the years covered by the OVCI program.

    An IRS official told us that detecting offshore income would be
    particularly difficult without many of these taxpayers applying to the
    OVCI program. Typically, IRS compares taxpayers' information returns, such
    as the W-2 forms for wages or forms 1099 for interest or dividends, to
    their income tax returns to identify underrreported income or nonfilers.
    An IRS official said that since offshore entities, such as foreign banks,
    are generally not subject to U.S. information reporting requirements,
    identifying underreported foreign income would be difficult. For IRS to
    investigate the taxpayer's return beyond the documentation provided on
    income and various information returns would require investigating those
    entities and the accuracy of the transactions reported. Such
    investigations could be very labor intensive.

    Concluding Observations

    The diversity of the OVCI population indicates that multiple compliance
    strategies may be appropriate for addressing those taxpayers holding money
    offshore. For example, increased educational efforts might be effective
    for those who became noncompliant inadvertently or those who were unaware
    of the need to report their offshore holdings to IRS. For those taxpayers
    who deliberately held money offshore illegally to avoid paying taxes,
    investigation of promoters or others who may have assisted taxpayers may
    both help reduce the spread of evasion to other taxpayers and identify
    those already out of compliance for corrective action. However, because
    the median AGIs for OVCI participants were relatively modest and the
    additional tax, interest, and penalties collected to date have also been
    relatively modest, personnel-intensive investigations of individual cases
    who have hidden substantial amounts offshore could significantly reduce
    the net gain to Treasury from these cases. This puts a premium on IRS
    developing means to identify those cases that should be subjected to such
    investigations and, if possible, alternative compliance strategies for
    others.

    Messrs. Chairman, this concludes my prepared statement. I would be happy
    to respond to any questions you or other Members of the committee may have
    at this time. For further information on this testimony, please contact
    Michael Brostek at (202 512-9110) or [brostekm@gao.gov]. Individuals
    making key contributions to this testimony include Susan Baker, Tom Bloom,
    Michelle Bowsky, Laura Czohara, Michele Fejfar, Jyoti Gupta, Signora May,
    Karen O'Conor, Amy Rosewarne, Jeff Schmerling, Tina Smith, Jonda Vanpelt,
    and Jim Ungvarsky.

    Appendix I: Objectives, Scope, and Methodology

    Our objectives were to determine (1) the extent to which IRS and CIS share
    and verify data for immigration eligibility decisions or taxpayer
    compliance purposes and (2) the benefits and challenges, if any, of
    increasing data sharing and verifying activities.

    We performed our work at various IRS offices, including the Office of
    Governmental Liaison and Disclosure, the Office of Safeguards; the Office
    of Program, Evaluation, and Risk Analysis; and the Privacy Advocate's
    Office. Our work also included interviews with employees in IRS's Wage and
    Investment Operating Division and Small Business/Self Employed Operating
    Division, the Department of the Treasury's Office of Tax Policy and Office
    of Inspector General for Tax Administration, and program offices at CIS,
    and with CIS officials in selected service centers and district offices.
    We collected and analyzed information on the extent of data sharing and
    verifying activities between IRS and CIS from January 1997 through March
    2004. To respond to your initial request on data sharing and verifying
    between IRS and selected agencies, we also interviewed Social Security
    Administration (SSA) officials and collected and analyzed information on
    data sharing and verifying between IRS and SSA. To illustrate a
    longstanding data sharing relationship, we summarized the IRS and SSA data
    sharing relationship in the background section.

    To determine the extent to which IRS and CIS share and verify data for
    benefit decisions or taxpayer compliance, we interviewed IRS and CIS
    officials about the existence of a data sharing relationship. We
    identified the legislative and regulatory authorities that govern
    disclosure of personal and taxpayer information. Additionally, we
    identified the types of personal and financial information CIS and IRS
    maintain for immigration decisions and tax compliance, respectively.

    To determine the benefits of increasing data sharing and verification
    activities, we collected and analyzed immigration and taxpayer
    information. We interviewed IRS and CIS officials to obtain views on
    possible impediments or missed opportunities to verify information to make
    better programmatic decisions, and reviewed existing studies or

    reports on data verification activities. We determined what personal and
    financial information IRS collects but does not verify with CIS and why,
    and whether officials believe verification with immigration would be
    useful for tax compliance purposes. We determined what personal and
    financial information CIS receives but does not verify with IRS and why,
    and whether immigration officials believe verification with IRS would be
    useful for immigration eligibility decisions.

    We used two sets of immigration data from CIS to match with IRS taxpayer
    data to determine the potential value for increased data sharing and
    matching. First, we used a nationwide selection of automated data on
    certain immigration applications: I-129 (Petition for a Nonimmigrant
    Worker), I-140 (Immigrant Petition for Alien Worker), and I-360 (Petition
    for Amerasian, Widow(er), or Special Immigrant31) submitted from January
    1, 1997, through March 5, 2004, to CIS service centers for immigration
    benefits. We used only those applications in CIS's Computer Linked
    Application Information Management System, Version 3.0 (CLAIMS 3), a
    database containing nationwide data, that contained an individual's Social
    Security Number (SSN) or a business's Employer Identification Number (EIN)
    --3.4 million out of 4.5 million had usable SSNs or EINs-- for the
    matching process. We obtained automated data for those years because CIS's
    automated system had historical data not readily available in hard copy
    files. Because the nationwide selection did not include any financial
    information, we could not use it to determine whether CIS applicants
    reported the same income amounts to IRS as to CIS.

    Second, we visited five CIS field locations and selected a nonprobability
    sample of 984 immigration files covering the period of 2001--2003 at four
    of the locations because they contained personal as well as financial
    information. These hard copy files were applications for citizenship,
    employment, and family-related immigration and change of immigration
    status applications. We used the hard copy immigration files to build an
    automated database of certain personal information, such as the
    individual's SSN or business's EIN and income reported to CIS. We obtained
    hard copy files for those years because the CIS offices we visited had
    immigration applications for those years onsite.

    Immigration offices send older files to storage. Since each district and
    service center organized and stored its applications in a different way
    and immigration officials could not always provide an updated count of
    applications by form number, we developed an approach to selecting
    applications that included pulling approximately every 50th file in
    immigration file rooms. We generally selected approximately 50-75 files at
    each field location for the following forms: I-129 (Petition for a
    Nonimmigrant Worker); I-140 (Immigrant Petition for Alien Worker); N-400
    (Application for Naturalization); I-751 (Petition to Remove the Conditions
    on Residence); I-360 (Petition for Amerasian, Widow(er), or Special
    Immigrant); and I-864 (Affidavit of Financial Support). We planned to
    select 50 files for Form I-829 (Petition by Entrepreneur to Remove
    Conditions) but only reviewed 12 files due to resource constraints and the
    voluminous nature of the application files. The matching results for our
    nonprobability sample included Form I829s for a small number of individual
    immigrants who had unpaid assessments or were nonfilers and none for
    business or individual sponsors.

    We matched the SSNs/EINs in our nationwide selection of immigration
    applications and our nonprobability sample of immigration applications
    with IRS's Business Master File (BMF) and Individual Master File (IMF) and
    other subsets such as the Revenue and Refunds Database. We identified
    immigration applicants/taxpayers that (1) matched with the IRS master
    files, (2) had unpaid assessments, (3) were nonfilers, (4) were
    businesses/organizations that had no record of tax activity in the last 5
    years, and (5) did not match IRS master files. Additionally, to ensure we
    identified only business and organization sponsors whose EINs were unknown
    to IRS, we had IRS perform three additional matches using its BMF Taxpayer
    Identification Number Cross-Reference File, the BMF Entity File and the
    IMF Entity File.

    We assessed the reliability of IRS's BMF and IMF data and the CIS's CLAIMS
    3, a database containing nationwide data, by (1) performing electronic
    testing of required data elements, (2) reviewing existing information
    about the data and the system that

    31 The I-360 applications in our sample were submitted by religious
    organizations sponsoring religious workers.

    produced them, and (3) interviewing agency officials knowledgeable about
    the data. We determined that the data were sufficiently reliable for the
    purposes of this testimony.

    Our review was subject to some limitations. We relied on IRS officials to
    identify offices that use personal information because there is no
    central, coordinating point within IRS for receipt of this type of
    information. We relied on CIS officials to identify immigration forms they
    believed would most benefit from data sharing with IRS, and we relied on
    IRS and CIS officials' views on possible impediments or missed
    opportunities to verify information, any additional data sharing and
    verification needs, and the benefits of increased disclosure of taxpayer
    information. Because our sample of 984 hard copy applications at selected
    CIS field locations was not a probability sample, we cannot make
    inferences about the population of applications. In addition, because
    EINs/SSNs were only available for 3.4 million of the 4.5 million
    applications in our nationwide selection of automated applications, our
    findings from these records are not representative of the entire
    population. IRS identified the limitations of its database that affect our
    results. Immigration applicants/taxpayers who were in IRS's nonfiler
    database could include individuals who did not meet IRS filing
    requirements. Immigration applicants/taxpayers in IRS's unpaid assessment
    database may include taxpayers that have entered into an installment
    agreement, have proposed an offer-in-compromise or are in litigation with
    IRS about amounts due. Since IRS searched its tax data for the last 5
    years (1999-2004) and we collected 7 years of immigration data
    (1997-2004), a small percentage of the businesses that submitted
    applications during 1997 and 1998 but are unknown to IRS could no longer
    be in operation.

    We conducted our work from July 2003 through June 2004 in accordance with
    generally accepted government auditing standards.

    Appendix II: Objectives, Scope, and Methodology for OVCI Program

    Our two objectives were to provide information on (1) the characteristics
    of taxpayers who came forward under IRS's Offshore Voluntary Compliance
    Initiative (OVCI) program and (2) how those taxpayers became noncompliant.

    To develop information on the characteristics of OVCI taxpayers, we relied
    on IRS's OVCI database. We used data from the applicants' original and
    amended federal tax returns, including adjusted gross income (AGI), taxes,
    penalties, and interest owed; the applicants' state and country of
    residence; and the applicants' occupational information. We also obtained
    information on applicants' use of promoters. Our information is limited to
    those taxpayers who voluntarily admitted they held offshore assets, so the
    information provided is not necessarily representative of any larger
    population of taxpayers who used offshore arrangements to avoid paying
    U.S. taxes. Of the 1,321 taxpayers who came forward under the OVCI
    program, 16 did not apply for relief for 1999, 2000, or 2001. An
    additional 400 were entities that were set up by and associated with
    applicants to handle the taxpayers' offshore funds. The tax liabilities,
    if any, of these entities would be reflected in the additional taxes,
    penalties, and interest of the individual taxpayers in IRS's OVCI
    database. In addition, IRS rejected 49 applicants for not divulging the
    entirety of their schemes. Therefore, the numbers we reported here were
    limited to the 861 applicants for whom we had data for 1 or more of the
    years 1999, 2000, and 2001.

    To assess the reliability of the IRS data we present in this testimony, we
    reviewed IRS's data verification procedures. For example, according to a
    senior manager, all financial data entered into the OVCI database was
    compared to the taxpayer's account on IRS's Individual Master File. IRS
    also told us that after all data were entered, a manager rechecked each
    entry for errors. We reviewed a judgmental sample of 35 cases files based
    on factors such as particularly high or low AGIs, high or low adjustments
    to original AGI, or high or low taxes, penalties, or interest owed at
    IRS's campus in Philadelphia to compare the data in the applicant's files
    to what was transcribed in the

    OVCI database. In addition, we analyzed IRS's data reliability processes
    and conducted our own limited data verification. We believe the data we
    used are sufficiently reliable and useful for reporting on the
    characteristics of those who came forward under the OVCI program.

    To determine how OVCI applicants became noncompliant, we talked to IRS
    officials and obtained information on the taxpayers' circumstances while
    reviewing the 35 cases in Philadelphia, such as their reasons for
    noncompliance and their experiences with promoters, if any. To better
    understand taxpayers' use of promoters, we also visited 25 Web sites
    maintained by individuals or companies promoting offshore investments to
    gain a better understanding of the type and cost of the services they
    provide. The Web sites were judgmentally selected to ensure the sample
    included a variety of geographic locations. We also reviewed examples of
    intricate schemes employed by some OVCI applicants to avoid paying taxes
    by holding money offshore illegally to develop a hypothetical illustration
    of such schemes.

    We did our work at IRS's campus in Philadelphia and its National Office in
    Washington, D.C. We conducted our fieldwork from January 2004 through June
    2004 in accordance with generally accepted government auditing standards.

    Appendix III - OVCI Applicant Income Information by Tax Year for 1999,
    2000, and 2001

    As shown in tables 5, 6, and 7, there are yearly variations in OVCI
    applicants' median original AGI; adjustment to original AGI; and the
    taxes, penalties, and interest.

    In the tables, the nonfilers' median original AGI is shown as zero because
    they did not file tax returns, although according to an IRS official, they
    did illegally hide money offshore and incurred taxes, penalties, and
    interest. According to another IRS official, for those applying to the
    program for relief from Report of Foreign Bank and Financial Accounts
    (FBAR) penalties, the data show original AGIs because they generally
    reported all of their income and paid taxes due, but had failed to
    disclose the existence of their foreign bank accounts. There is no
    adjustment to original AGIs because they had already reported their
    offshore holdings on their original federal tax returns and, consequently,
    incurred no additional taxes or interest owed. In addition, the Department
    of the Treasury waived the FBAR penalties.

    Table 5: OVCI Applicants' Income and Amounts Owed for Tax Year 1999

                          Median  Median adjustment   Median    Median    Median
                         original to original AGI   additional penalties interest
    Population Number   AGI                      tax oweda  assessed    owed
         Filers      323  $79,394           $24,914     $5,685      $800   $1,116
    Nonfilers      21        0            67,086      3,011     1,178    1,243
          FBAR       462   34,722                 0          0         0        0
         Total       806  $49,469                $0         $0        $0       $0

    Source: GAO analysis of IRS data.
    aThese figures represent the median for the amount IRS has verified
    through audits that taxpayers owed
    IRS. As IRS continues to conduct audits of OVCI taxpayers, the median may
    rise or fall somewhat.

    Table 6: OVCI Applicants' Income and Amounts Owed for Tax Year 2000

                          Median  Median adjustment   Median    Median    Median
                         original to original AGI   additional penalties interest
    Population Number   AGI                      tax oweda  assessed    owed
         Filers      331  $87,530           $25,664     $5,591      $674     $655
    Nonfilers      27        0            71,782      7,288     1,810    1,295
          FBAR       459   41,448                 0          0         0        0
         Total       817  $51,663                $0         $0        $0       $0

    Source: GAO analysis of IRS data.

    a These figures represent the median for the amount IRS has verified
    through audits that taxpayers owed IRS. As IRS continues to conduct audits
    of OVCI taxpayers, the median may rise or fall somewhat.

    Table 7: OVCI Applicants' Income and Amounts Owed for Tax Year 2001

                          Median
                         original                   Median      Median    Median
                         AGI for  Median adjustment additional penalties interest
    Population Number   2001   to original AGI   tax oweda  assessed    owed
         Filers      326  $55,869           $20,460     $4,289      $523     $263
    Nonfilers      24        0            82,561      7,573     2,431      860
          FBAR       458   31,667                 0          0         0        0
         Total       808  $38,761                $0         $0        $0       $0

    Source: GAO analysis of IRS data.

    a These figures represent the median for the amount IRS has verified
    through audits that taxpayers owed IRS. As IRS continues to conduct audits
    of OVCI taxpayers, the median may rise or fall somewhat.

    Appendix IV - OVCI Applicant Geographical Information by Tax Year for
    1999, 2000, and 2001

    Tables 8, 9, and 10 show the number and median original AGI of applicants
    to the OVCI program by state. In all 3 of the years shown, applicants from
    Florida, California, Connecticut, Texas, and New York make up half of all
    applicants to the OVCI program. In all 3 years, seven states had only one
    applicant to the OVCI program and at least three states had no applicants.

    Table 8: State, Number of Applicants, and Original Median AGI for Tax Year
    1999

                 State                 Applicants            Median AGI
    Florida                                      114               $51,318
    California                                   101                64,590
    Connecticut                                   87                30,354
    Texas                                         58                45,868
    New York                                      45                96,648
    Pennsylvania                                  37                36,480
    Ohio                                          22                41,891
    Massachusetts                                 21                93,187
    Michigan                                      20                63,212
    Maryland                                      19                52,964
    New Jersey                                    19                95,994
    Arizona                                       18                66,831
    Virginia                                      17                24,097
    Illinois                                      16               118,621
    South Carolina                                15                79,394
    Georgia                                       14               107,968
    Colorado                                      12                46,407
    North Carolina                                12                59,901
    Nevada                                        10                24,615
    Oklahoma                                      10                   770
    Washington                                     9                26,546
    Minnesota                                      8               119,810
    Alabama                                        5                 5,343
    Indiana                                        5                86,853
    Iowa                                           5                57,964
    New Hampshire                                  5                17,699
    Totala                                       806               $49,469

    Source: GAO analysis of IRS data.
    a Because few OVCI applicants resided in the following states, we are not
    disclosing specific information
    about them due to concerns that the information could be used to identify
    the taxpayers: Alaska,
    Arkansas, Delaware, District of Columbia, Hawaii, Idaho, Kansas, Kentucky,
    Louisiana, Maine, Mississippi,

    Missouri, Montana, Nebraska, New Mexico, North Dakota, Oregon, Puerto
    Rico, Rhode Island, South Dakota, Tennessee, Utah, Vermont, West Virginia,
    Wisconsin, and Wyoming. Therefore, the totals do not reflect only numbers
    shown in the table.

    Table 9: State, Number of Applicants, and Original Median AGI for Tax Year
    2000

                 State                 Applicants            Median AGI
    Florida                                      115               $55,831
    California                                    97                73,330
    Connecticut                                   89                35,706
    Texas                                         58                50,965
    New York                                      47               132,642
    Pennsylvania                                  39                37,332
    Ohio                                          25                44,635
    Massachusetts                                 22                95,317
    Michigan                                      22                45,786
    Arizona                                       19                93,711
    New Jersey                                    19               101,675
    Maryland                                      18                93,894
    Illinois                                      16                82,666
    South Carolina                                16                81,730
    Virginia                                      16                28,273
    Georgia                                       14               155,554
    North Carolina                                13                51,123
    Colorado                                      12                47,051
    Oklahoma                                      11                 8,570
    Nevada                                        10                64,896
    Washington                                     9                28,412
    Minnesota                                      8               133,935
    Alabama                                        5                42,908
    Indiana                                        5                11,928
    Iowa                                           5                84,034
    New Hampshire                                  5                15,587
    Totala                                       817               $51,663

    Source: GAO analysis of IRS data.

    a

    Because few OVCI applicants resided in the following states, we are not
    disclosing specific information about them due to concerns that the
    information could be used to identify the taxpayers: Alaska, Arkansas,
    Delaware, District of Columbia, Hawaii, Idaho, Kansas, Kentucky,
    Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska, New Mexico,
    North Dakota, Oregon, Puerto Rico, Rhode Island, South Dakota Tennessee,
    Utah, Vermont, West Virginia, Wisconsin, and Wyoming. Therefore, the
    totals do not reflect only numbers shown in the table.

         Table 10: State, Number of Applicants, and Original Median AGI for Tax
                                       Year 2001
                     Median Florida 115         California 98        Connecticut 87        Texas 57        New  47                      39        Ohio 25        Massachusetts 21         New    20                 19        Illinois 18                 18        Arizona 17                 17 0 South    16                13        North    13        Colorado 12        Oklahoma 11                  10        Nevada 9 292 Minnesota 8         Alabama 5        Indiana 5        Iowa 5        New       5        Total 808
    State Applicants  AGI               $42,589               40,123                30,895          49,892 York    112,299 Pennsylvania    19,880         41,013                  112,460 Jersey    55,463 Michigan    46,662             76,783 Maryland    83,913            48,917 Virginia      Carolina    77,732 Georgia    83,423 Carolina    50,509             35,278             1,232 Washington    33,495                          121,779           30,130           39,036        68,655 Hampshire   18,456 a         $38,761

    Source: GAO analysis of IRS data.
    a Because few OVCI applicants resided in the following states, we are not
    disclosing specific information
    about them due to concerns that the information could be used to identify
    the taxpayers: Alaska,
    Arkansas, Delaware, District of Columbia, Hawaii, Idaho, Kansas, Kentucky,
    Louisiana, Maine, Mississippi,
    Missouri, Montana, Nebraska, New Mexico, North Dakota, Oregon, Puerto
    Rico, Rhode Island, South
    Dakota, Tennessee, Utah, Vermont, West Virginia, Wisconsin, and Wyoming.
    Therefore, the totals do not
    reflect only numbers shown in the table.

    Appendix V - OVCI Applicant Occupational Information by Tax Year for 1999,
    2000, and 2001

    As shown in tables 11, 12, and 13, retired individuals account for the
    most applications in

    each year. The three most common occupations for each year are executives,

    business/self-employed individuals, and those involved in
    banking/finance/insurance.

           Table 11: Individual OVCI Applicants' Professions, Numbers, Median
        Original AGIs, and Median Adjustments to Original AGI for Tax Year 1999
                     (Filers and Nonfilers but not FBAR applicants)
                                   Median
                                   adjustment                                                                                       Banking/                                                                                                                                                                                                                                                Education           Real
                           Median  to         Retired 52                 Executive 47                              31 49,443 36,795 finance/  26 48,778 37,748 Sales 22                         21                         18                                  12                         10 53,118 6,887          8               Administrativea 8               Scientist 5              c         5 0       estate 4                 Pilot 4                         4               Arts 4                Other 19                       44               Totale 344
               Number of  original original                                                          Business/self                  insurance                                                                   Medical                                                        Computer/                                                                                                                                                                        Building
    Profession applicants   AGI    AGI                   $61,543 $24,894              236,031 40,614 Employed                                                           105,251 40,586 Engineer    83,695 8,685 profession    84,952 14,847 Analyst/consultant    44,699 6,852 technology                 Attorney   116,753 5,381                   77,292 27,356             12,832 7,801               9,266          892,885 239,931         115,778 75,128 trades     16,974 55,203        178,432 90,998          13,515 28,245 Missing    28,562 42,663            68,626 $28,432

                           Source: GAO analysis of IRS data.

    a

    A small number of taxpayers who applied to the OVCI program listed their
    occupations as secretary but their incomes were each in excess of $1
    million for each of the years 1999, 2000, and 2001. b Although a large
    number of applicants were from the banking/finance/insurance sector, a
    large number of these applicants reported large losses on their tax
    returns. As a result, the median original AGI was relatively low.

    c

    Some occupations had more nonfilers apply to the OVCI program than filers,
    so for these cases the median original AGI was zero. d Seven applicants
    were identified as "deceased," and we included these people in the "other"
    category.

    e

    We did not include FBAR applicants in this table because, according to IRS
    officials, there is no adjustment to the FBAR applicants' original AGI.
    These applicants generally reported their offshore holdings on their
    original federal tax returns and incurred no additional taxes or interest
    owed. Because these applicants made up more than half of all applicants,
    if we included them in the table, the median adjustment to original AGI,
    taxes, and interest would all be zero.

           Table 12: Individual OVCI Applicants' Professions, Numbers, Median
        Original AGIs, and Median Adjustments to Original AGI for Tax Year 2000
                     (Filers and Nonfilers but not FBAR applicants)
                                   Median
                                   adjustment                                                                                       Banking/                                                                                                                                                                                                                                                                                                                                                                            Real
                           Median  to         Retired 57                 Executive 48                              33 74,387 38,576 finance/  24 104,129 81,372 Sales 23                           22                         21                                 11                           10 53,427 3,721 Administrativea 8                         8                Other 19               Education 6               Arts 5               Scientist 5 23,946 41,127          4               Pilot 4               estate 4                           46 735        Totale 358
               Number of  original original                                                          Business/self                  insurance                                           Medical                                                                                    Computer/                                                                                                                                                                             Building
    Profession applicants   AGI    AGI                   $71,939 $19,192              258,665 42,943 employed                                                            123,315 48,587 profession    108,723 20,948 Engineer    66,765 7,529 Analyst/consultant    134,351 20,210 technology                                   113,736 29,043 Attorney   161,341 13,095          27,074 24,133             20,945 23,886        62,631 59,230                           trades     15,689 32,313         98,423 33,955          1,133,868 198,818 Missing        36,873            $41,448 $27,033

    Source: GAO analysis of IRS data

    a

    A small number of taxpayers who applied to the OVCI program listed their
    occupations as secretary but their incomes were each in excess of $1
    million for each of the years 1999, 2000, and 2001. b Although a large
    number of applicants were from the banking/finance/insurance sector, a
    large number of these applicants reported large losses on their tax
    returns. As a result, the median original AGI was relatively low.

    Some occupations had more nonfilers apply to the OVCI program than filers,
    so for these cases the median original AGI was zero. d Seven applicants
    were identified as "deceased," and we included these people in the "other"
    category.

    e

    We did not include FBAR applicants in this table because, according to IRS
    officials, there is no adjustment to the FBAR applicants' original AGI.
    These applicants generally reported their offshore holdings on their
    original federal tax returns and incurred no additional taxes or interest
    owed. Because these applicants made up more than half of all applicants,
    if we included them in the table, the median adjustment to original AGI,
    taxes, and interest would all be zero.

           Table 13: Individual OVCI Applicants' Professions, Numbers, Median
        Original AGIs, and Median Adjustments to Original AGI for Tax Year 2001
                     (Filers and Nonfilers but not FBAR applicants)
                                   Median
                                   adjustment                                                                                       Banking/                                                                                                                                                                                                                                                                      Education                                     Real
                           Median  to         Retired 52 $43,881 $25,074 Executive 47                              32 73,134 22,006 finance/  27 3,596 22,951 Sales 22                          22                       21              Other 20                                  11                          11 39,348 6,461          9                Administrativea 8                         5              c         5 0        Scientist 5              estate 4                   Pilot 4                Arts 3                        42 0        Totale 350
               Number of  original original                                                          Business/self                  insurance                                        Medical                                                                                                        Computer/                                                                             Building
    Profession applicants   AGI    AGI                                                158,183 23,302 employed                                                          91,000 24,329 profession    95,928 8,397 Engineer    55,941 5,722          23,286 15,197 Analyst/consultant    49,892 20,277 technology                 Attorney   137,661 23,302                   105,804 11,028 trades     22,684 6,569               36,364             26,599 8,538          1,100,241 291,871         123,705 14,566        123,945 70,799 Missing      54,094            $49,598 $23,124

    Source: GAO analysis of IRS data.

    a

    A small number of taxpayers who applied to the OVCI program listed their
    occupations as secretary but their incomes were each in excess of $1
    million for each of the years 1999, 2000, and 2001. b Although a large
    number of applicants were from the banking/finance/insurance sector, a
    large number of these applicants reported large losses on their tax
    returns. As a result, the median original AGI was relatively low.

    Some occupations had more nonfilers apply to the OVCI program than filers,
    so for these cases the median original AGI was zero. d Seven applicants
    were identified as "deceased," and we included these people in the "other"
    category.

    e

    We did not include FBAR applicants in this table because, according to IRS
    officials, there is no adjustment to the FBAR applicants' original AGI.
    These applicants generally reported their offshore holdings on their
    original federal tax returns and incurred no additional taxes or interest
    owed. Because these applicants made up more than half of all applicants,
    if we included them in the table, the median adjustment to original AGI,
    taxes, and interest would all be zero.

    (450237)

    GAO's MissionEURThe 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.

    Obtaining Copies of The fastest and easiest way to obtain copies of GAO
    documents at no cost

    is through GAO's Web site (www.gao.gov). Each weekday, GAO postsGAO
    Reports and newly released reports, testimony, and correspondence on its
    Web site. To Testimony have GAO e-mail you a list of newly posted products
    every afternoon, go to

    www.gao.gov and select "Subscribe to Updates."

    Order by Mail or PhoneEURThe first copy of each printed report is free.
    Additional copies are $2 each. A check or money order should be made out
    to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
    Orders for 100 or more copies mailed to a single address are discounted 25
    percent. Orders should be sent to:

    U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
    D.C. 20548

    To order by Phone: EURVoice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
    512-6061

      To Report Fraud, Contact:~Waste, and Abuse in Web site:
      www.gao.gov/fraudnet/fraudnet.htm~

    E-mail: fraudnet@gao.govFederal Programs Automated answering system: (800)
    424-5454 or (202) 512-7470

    Congressional EURGloria Jarmon, Managing Director, JarmonG@gao.gov (202)
    512-4400 U.S. Government Accountability Office, 441 G Street NW, Room 7125

    Relations Washington, D.C. 20548

    Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202)
    512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
    Washington, D.C. 20548

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It 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.
    *** End of document. ***