Tax Administration: IRS's Information Exchanges with Other Countries Could Be Improved through Better Performance Information
Published: 2011-09-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: With trillions of dollars in cross-border financial activity, U.S. tax authorities and others around the world exchange information with each other to administer and enforce compliance with the tax laws of their respective countries. GAO was asked to (1) identify and describe all income tax treaties and other such agreements between the United States and other countries, (2) describe the volume of exchange activity, types of information exchanged between the United States and its treaty partners, and request processing times, and (3) identify opportunities to improve the effectiveness of current U.S. information exchange processes and procedures. GAO analyzed agreement documents, IRS data on information exchanges, and interviewed program officials and the users of exchanged information.
section_title: What GAO Found
paragraphs: Treaties and other agreements authorizing information exchange provide tax authorities in the United States and abroad with a useful tax law enforcement tool. As of April 30, 2011, the United States had such agreements in force with 90 foreign jurisdictions. Agreements have many similar features, but the bounds within which information can be exchanged are unique to the legal and administrative arrangements agreed to by the United States and each partner. Between 2006 and 2010, 5,111 requests for information to or from the United States and 75 foreign jurisdictions were completed; 4,217 were incoming requests for information such as tax returns or corporate records and 894 were outgoing requests from the United States. IRS's enforcement presence also relies on several other methods to obtain relevant information, including a mechanism which yields about 2.1 million records annually from treaty partners. GAO estimates that most requests close about 50 to 200 days after being opened, but some take much longer. The time it takes to close requests can be influenced by factors such as the complexity of the requested information and the legal system of the treaty partner. GAO analysis of IRS data shows that the United States takes more time to close incoming requests for some groups of countries than others. Although IRS collects data on exchanges between the United States and its treaty partners, the agency does not consistently collect or analyze performance information, such as the type of information requested, whether the information was collected successfully, or feedback from staff making the requests about the usefulness of the information or their views on the process for obtaining it. Collecting this information could help program managers assess how well the IRS is managing the information exchange process, and whether changes to administrative processes and procedures could improve the exchange of information between the United States and its treaty partners.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Commissioner of Internal Revenue determine the key types of performance information that exchange program managers could use to ensure the program is working as well as possible. Specifically, the Commissioner should require the collection of (1) consistent and accurate data on specific tax information exchange cases and (2) feedback from program users on a routine basis as part of regular program operations. IRS concurred with our recommendation. The agencies discussed in this report also suggested technical changes to a draft of this report which GAO incorporated as appropriate.

section_title: Letter
paragraphs: As globalization and technological advancements continue to reduce  barriers to cross-border commerce, individuals and businesses are  increasingly conducting trade and earning income beyond traditional  geographic or political boundaries. According to the U.S. Department of  Commerce, Bureau of Economic Analysis, in 2010, U.S. exports of goods  and services and income receipts were estimated at $2.5 trillion ($1.83  trillion in exports of goods and services and $0.66 trillion in income  receipts on U.S.-owned assets abroad). Meanwhile, imports of goods and  services and income payments were valued at $2.83 trillion ($2.33 trillion  in imports of goods and services, and $0.5 trillion in income payments on  foreign-owned assets in the United States).
Tax authorities around the world have made increasing use of information  exchange with other countries to administer and enforce the tax laws of  their respective countries. In this environment, it is particularly important  that the United States continues to develop and maintain cooperative  cross-border relationships with other countries to ensure that U.S.  taxpayers comply with U.S. tax laws. The legal authority to obtain  information from other countries through international agreements such  as income tax treaties, Tax Information Exchange Agreements (TIEA),  and Mutual Legal Assistance Treaties (MLAT) and Agreements (MLAA)  provides federal officials in the United States with an important tax law  enforcement tool.
Given that little is known about the extent to which information is shared  under these agreements, you asked us to report on exchange practices  between the United States and other countries. On the basis of your  request and subsequent discussions with your offices, this report: (1)  identifies and describes all bilateral income tax treaties, TIEAs, and  MLATs between the United States and other countries in force, proposed,  or signed as of April 30, 2011; (2) describes the volume of exchange  activity, types of information exchanged between the United States and  its treaty partners, and the time to process requests for information; and  (3) identifies opportunities to improve the effectiveness of current U.S.  information exchange processes and procedures. This report also  describes the legal framework and administrative processes that the  United States uses to exchange information with its treaty partners.
For all three of our report’s objectives, we interviewed relevant officials  from the Department of the Treasury, the Internal Revenue Service (IRS),  the Department of Justice (DOJ), and the Department of State and  examined applicable policies and guidance to understand the  administrative procedures involved in information exchange. To identify  and describe agreements, we obtained copies of all current bilateral U.S.  income tax treaties, TIEAs, and MLATs and created a comprehensive  catalog, capturing key dates and other descriptive elements. We also  conducted a content analysis of information exchange provisions  contained in all of the information exchange agreements in force between  the United States and foreign jurisdictions as of April 30, 2011, to identify  and compare key requirements or restrictions for information exchange  contained in each agreement. To determine the volume of exchange  activity, types of information exchanged, and the time required to  complete information exchange requests, we obtained data from the IRS  Exchange of Information and Overseas Operations (EOI/OO) division on  information exchanges completed between January 1, 2006 and  December 31, 2010. To assess the reliability of these data, we  questioned knowledgeable officials, reviewed system documentation, and  examined the data for obvious errors. We determined the data to be  sufficiently reliable for this report. To determine if opportunities exist to  improve IRS processes related to international information exchange, we  reviewed GAO and other guidance on internal controls and interviewed  officials from IRS, DOJ, and the Organisation for Economic Co-operation  and Development (OECD) to obtain their perspectives on the  effectiveness of the current administrative practices for the exchange of  tax information. More detailed information on our methodology can be  found in appendix I.
We conducted this performance audit from January 2010 through  September 2011 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: International agreements, such as income tax treaties, permit the United  States and other countries to provide information to each other for tax  administration and enforcement purposes through a process referred to  as exchange of information or information exchange. Information may be  shared upon request or without a preceding request.
The information shared between countries can cover a range of  documents and sources, and can occur in a variety of formats.  Exchanges include responses to narrowly tailored requests for  documents related to a specific taxpayer, as well as records for  thousands of taxpayers. Exchanges are not limited to tax returns and  other tax system-specific information; other sources can involve public  records, information from securities brokers, and real-estate information.  Exchanges are also defined to include broad-based discussions of policy  and administration between tax authorities. According to the Joint  Committee on Taxation (JCT), there were nearly 2.5 million disclosures of  tax returns or return information to foreign countries under tax treaty  disclosure authority in 2010. The total number of disclosures may be  greater than the number of taxpayers involved, as the same taxpayer may  be the subject of more than one information exchange.
subsections: section_title: Legal Framework of Exchange of Information
paragraphs: Tax treaties, Tax Information Exchange Agreements (TIEA), and Mutual  Legal Assistance Treaties (MLAT) provide U.S. officials working on tax  matters the authority to exchange information with authorities in other  countries. Generally, these agreements contain exchange of information  provisions that have been agreed upon by the United States and one  other country or jurisdiction; that is, they are bilateral. While U.S.  domestic law or international law does not prevent countries from  providing the United States with otherwise unprotected information, such  exchanges typically do not occur outside the bounds of these  agreements.
Tax treaty provisions cover a wide range of tax issues but have two  primary purposes; (1) avoiding double taxation and (2) enforcing the  domestic tax laws of treaty partners. All but one tax treaty between the  United States and other countries contains provisions that authorize  exchange of information. According to officials at the Department of the  Treasury, U.S. officials generally rely on a model income tax treaty to  identify the terms and provisions that the United States would like to  incorporate into its agreements with other countries. The U.S. Model  Income Tax Convention of 2006 is the most recently published model  treaty that U.S. officials rely on to negotiate tax treaty provisions, and  includes Article 26 concerning information exchange. The Department of  State serves as an advisor to the Department of the Treasury, which  develops and negotiates tax treaties and other international agreements  related to tax matters.
Although model treaties are the starting point for U.S. negotiations with  other countries, officials we spoke to noted that the terms and conditions  of tax treaties, like other international agreements, are the product of  negotiations between the countries involved. Specific agreements vary in  the terms or provisions governing exchange of information between the  United States and individual treaty partners, and, as discussed later in  this report, these variations can have meaningful effects on the exchange  of information process. When seeking approval for a treaty, including tax  treaties, the Secretary of State formally submits the proposed treaty to the  President of the United States for transmittal to the United States Senate.  Following advice and consent of the United States Senate, the President  of the United States signs the treaty, and directs the Secretary of State to  take the actions necessary for the treaty to enter into force. After both  countries have complied with the entry-into-force provisions of the treaty,  it becomes binding under international law.
TIEAs also authorize exchange of information between the United States  and other countries for tax purposes. Like tax treaties, the provisions  contained in TIEAs must be agreed upon by all parties to the agreement,  and the terms and conditions governing exchange of information between  the United States and other countries may differ from agreement to  agreement. Unlike treaties, however, TIEAs are executive agreements  that are signed by the President of the United States and do not require  the advice and consent of the United States Senate. Also, while tax  treaties cover a broad array of tax matters including exchange of  information, the sole purpose of a TIEA is to facilitate the exchange of  information. As with tax treaties, TIEAs become binding under  international law once both countries have complied with the entry-into- force provisions.
MLATs create a routine channel for obtaining a broad range of legal  assistance for criminal matters. Like tax treaties, MLATs are treaties that  require the advice and consent of the Senate. MLATs are negotiated by  the DOJ in cooperation with the Department of State. Unlike the  information obtained through tax treaties and TIEAs, which authorize the  exchange of information for tax purposes, MLATs authorize the exchange  of information for criminal matters, which can include criminal tax  matters.
Information shared through exchange of information and information  about such exchanges is confidential and protected by domestic laws and  provisions contained in tax treaties and other such agreements. The  Internal Revenue Code (IRC) protects information exchanged under tax  treaties and other relevant agreements from disclosure in the same  manner as information obtained under domestic laws except in specific  circumstances, such as to courts and administrative bodies. The identity  of taxpayers, information about those taxpayers, and the identity of the  countries involved in the exchange of information are protected from  public disclosure.
Tax treaties, TIEAs, and MLATs require that both the United States and  its treaty partners designate and authorize an entity within their respective  governments to interpret agreement provisions and disclose information.  Tax treaties and TIEAs commonly refer to these entities as “competent  authorities” or “taxation authorities,” while MLATs refer to these entities as  “central authorities” or “competent authorities.” For information exchanges  under tax treaties and TIEAs, the Secretary of the Treasury is the  competent authority. For administrative purposes, the authority to  exchange information with other tax authorities has been delegated to the  IRS Deputy Commissioner (International), Large Business and  International Division.
All exchanges of information under an agreement involving the United  States must occur through formal channels established between the  United States and treaty partner competent or central authorities.  Exchanges that occur within these formal channels restrict the disclosure  of tax information. Also, some foreign governments may restrict foreign  tax authorities from conducting investigative activities within their borders.
Specific exchanges of information are those in which information is  provided by one jurisdiction after it is requested by a partner jurisdiction in  the context of a specific audit or investigation. From the U.S. perspective,  requests for specific exchange of information are incoming or outgoing.  When a treaty partner submits a request for specific exchange of  information to the United States, these foreign initiated requests are  called incoming requests for specific exchange of information.  Conversely, when the United States initiates a request for specific  exchange of information, that request is referred to as an outgoing  request for specific exchange of information.
Treaty partners may also exchange information with one another without  a request. For example, tax administration officials may come across  information about a taxpayer that officials believe could be of interest to  tax administration and compliance officials in another country. The  competent authority may then send this information to the treaty partner’s  competent authority through what is referred to as a spontaneous  exchange of information.
Treaty partners may also exchange information with one another on a  regular or routine basis, through what is referred to as an automatic  exchange of information. Such exchanges typically involve the voluntary  exchange of information on multiple taxpayers, and cumulatively can  include millions of records. For example, a country may routinely provide  information on domestic dividends paid to foreign citizens. Automatic  exchanges of information are similar to spontaneous exchanges because  they are not associated with a formal, one-time written request for  information on a specific taxpayer or taxpayers.
The United States also exchanges information with treaty partners  through the Simultaneous Examination Program (SEP) and Simultaneous  Criminal Investigation Program (SCIP). SEP/SCIP is used in situations  where the United States and a treaty partner have common issues  concerning the examination or investigation of a taxpayer or related  taxpayers. Officials meet to discuss audit plans, information requirements,  and other issues related to the examination or investigation. Treaties also  allow broad-based discussions on matters such as tax administration  trends, operating practices, and tax matters related to particular economic  sectors. In the United States, these exchanges are referred to as  industrywide exchanges of information. According to IRS officials,  industrywide exchanges are rare and do not involve sharing information  about specific taxpayers.
While the provisions of most tax treaties and relevant agreements are  broad enough to permit the exchanges of information previously  described, specific exchanges of information are the only type of  exchanges that the United States and its treaty partners are obligated or  required to do under the terms of these agreements. Therefore, the  administrative processes and much of the data presented in later sections  of this report will focus on the activity occurring through specific  exchanges of information.
section_title: Administrative Procedures for Processing Specific Exchanges of Information
paragraphs: All administrative activities associated with processing incoming and  outgoing requests for specific exchanges of information are handled by  IRS Tax Attachés or EOI/OO staff located in one of the agency’s civilian  posts of duty or in Washington, D.C. IRS has four overseas posts of duty  located in Europe and Asia and one domestic duty post in Plantation,  Florida. Each foreign duty post is headed by a Tax Attaché and the  domestic post is headed by a Revenue Service Representative (RSR).  Tax Attachés, RSRs, and EOI/OO headquarters staff are responsible for  ensuring that the incoming and outgoing requests pertaining to their  designated jurisdictions meet agreement standards and are processed in  a timely manner. Requests for information involving Australia, Canada,  France, Japan, and New Zealand are processed through EOI/OO in  Washington, D.C.
Incoming requests for information are assessed by the relevant Tax  Attaché, RSR, or headquarters staff to ensure that they comport with the  agreement in place with the country and with U.S. laws. All incoming  requests must specifically include (1) the identity of the taxpayer about  whom the information is being requested, (2) an itemized list of all the  information requested, (3) a detailed explanation of relevance of the  information requested and the taxpayer and issue being examined, and  (4) an explanation of how the information that is being requested relates  to the taxes or liabilities covered by the agreement authorizing the  exchange. To ensure that these requirements are met, IRS personnel are  required to complete a checklist for each incoming request for  information. IRS officials stated that they do not fulfill requests for  information they deem to be inadequately supported, and will frequently  ask the relevant treaty partner to provide additional details to support the  request. Incoming requests that meet the specified standards are typically  forwarded to other business operating divisions within the IRS, which then  assign the request to appropriate examiners or revenue agents to obtain  the information. The information obtained to meet the request, or a  determination that the requested information is not obtainable, is passed  back to EOI/OO staff that then send the response to the requesting  jurisdiction.
A similar IRS process is used for U.S.-initiated, outgoing requests for  information. EOI/OO receives requests for information from IRS or DOJ  field staff, and passes the requests along to Tax Attaché, RSR, or  EOI/OO staff. The staff evaluate the request to ensure that it includes all  of the information that the treaty partner will need, including      general case information to establish that a tax examination or  the name and address of the taxpayer under examination or  investigation, when it is known;  the type of tax and tax years (whether calendar or fiscal) involved;  investigation is being conducted;  the location of the information and an explanation as to why the  information is believed to be in the country from which the information  is being requested;  the specific information needed and how the information is relevant to  the investigation;  the date by which the information is needed (can include statute of  limitations or court dates); and    whether certified copies of the documents are required.
Although the international examiner, revenue agent, revenue officer,  investigator, or attorney in charge of the original examination or  investigation summarizes these details using a template developed by  EOI/OO, the formal written request is prepared and transmitted to the  treaty partner by the Tax Attaché, RSR, or EOI/OO staff assigned to the  request.
An interactive graphic illustrating the administrative process for incoming  and outgoing specific exchanges of information is shown in figure 1.  Process details can also be found in appendix III.
EOI/OO procedures require that the Tax Attaché, RSR, or EOI/OO staff  responsible for processing the outgoing request provide status updates to  the person requesting the information every 60 days. After the information  has been secured, the response is reviewed by the Tax Attaché, RSR, or  EOI/OO staff responsible for processing the request and forwarded to the  requester. When a treaty partner supplies only part of the information  requested, the IRS official responsible for processing the request follows  up with the treaty partner until all information requested has been  secured, or until all attempts by the treaty partner to secure the  information have been exhausted and it is determined that the information  does not exist or cannot be obtained from the country. The Tax Attaché,  RSR, or EOI/OO staff working the case will forward information to the  requester as it is received.
section_title: Agreements That Authorize Exchange of Information between the United States and its Treaty Partners Differ in Content and Application
subsections: section_title: The United States Has 143 Information Exchange Agreements with 90 Treaty Partners
paragraphs: As of April 30, 2011, the United States had 143 bilateral agreements  authorizing exchange of information with 90 treaty partners. These  agreements include 58 tax treaties, 27 TIEAs, 49 MLATs plus 7 partial  MLATs, and 2 MLAAs in force between the United States and foreign  jurisdictions. Another 12 instruments (7 tax treaties, 2 TIEAs, and 3  MLATs), all incorporating tax information exchange, were signed but were  not in force as of that date. See appendix IV for a list of all income tax  treaties, TIEAs, and MLATs in force as of April 30, 2011. Agreements  signed but not in force are also listed in appendix IV.
Of the 90 treaty partners, 7 were located in the Africa and Middle East  regions, 12 in the Americas region, 18 in the Asia-Pacific region, 16 in the  Caribbean region, and 37 in the Europe region. See figure 2 for an  interactive graphic showing the different agreements that the United  States has with its foreign partners, including a map for each agreement  type.
The number of bilateral instruments involving the United States does not  match the number of tax information exchange relationships the United  States has with foreign partners. For example, the United States has an  MLAT with Uruguay, but that MLAT does not allow for assistance related  to tax offenses unless they pertain to other crimes. Since the United  States has no other instrument with Uruguay, tax information is not  exchanged with that country except if the tax offense relates to the  concealment of income obtained from another crime covered by the  treaty. Therefore, Uruguay is not counted as an exchange partner. At the  same time, multiple partners may be signatories to a single instrument.  For example, the United States has an MLAT with four countries of the  Eastern Caribbean States Organization, which provides a basis for its tax  information exchange relationships with Antigua and Barbuda, Dominica,  Grenada, and St. Lucia.
The terms of an agreement may specifically include or exclude an  associated territory. For example, the U.S.-Australia income tax treaty  includes Australia’s territories of Norfolk Island, Christmas Island, Cocos  (Keeling) Islands, Ashmore and Cartier Islands, and the Coral Sea  Islands, while the U.S.-Denmark income tax treaty terms exclude the  Faroe Islands and Greenland. A territory may also be included in one  agreement and excluded in another. For example, the U.S.-United  Kingdom MLAT extends to the Isle of Man (a dependency of the British  Crown), but the territory is excluded from U.S.-United Kingdom income  tax treaty. Since the United States also has a unique TIEA with the Isle of  Man, it is counted as a separate foreign treaty partner.
Tax information exchange relationships may be created by a single  instrument or by multiple instruments of different types. Figure 3 shows  the numbers of foreign treaty partners with which the United States has  different combinations of agreements.
All U.S. tax treaties (with information exchange provisions) and TIEAs  currently in force obligate the United States and its treaty partners to  exchange certain information upon request. In general, the text of tax  treaties and TIEAs is written broadly, allowing for specific, automatic, and  spontaneous tax information exchanges. Treasury Department officials  told us that the starting point for new agreements and renegotiations is  generally the most recent U.S. Model Tax Convention in use by the  United States. Department of the Treasury officials also noted that the  policies embodied in the most recent Model Tax Convention may evolve  after the publication of the document, therefore changes in policy may not  be documented until the publication of an updated model convention. The  language of particular agreements and the terms governing each bilateral  relationship can vary significantly from agreement to agreement,  depending on when the agreement was negotiated and what the two  countries agree to.
Tax treaties with information exchange articles and TIEAs create, at a  minimum, the obligation for exchange partners to respond to permitted  requests for information. Fifty-eight treaties and 12 TIEAs explicitly  describe a standard for the relevance or necessity of the information  allowed to be requested. The standard found in the 2006 U.S. Model Tax  Convention is that information that “may be relevant for carrying out the  provisions of this Convention or of the domestic laws of the Contracting  States concerning taxes of every kind” is to be exchanged upon request,  which mirrors the statutory standard governing IRS’s authority to access  records in a domestic context. Some agreements use a variation of the  standard, however, such as “foreseeably relevant,” “as is necessary,” “as  is relevant,” or “as is pertinent.” The “may be relevant” standard and the  “forseeably relevant” standard—regarded as equivalent by the U.S.  government—are considered a lower bar than some other standards.
The 2006 U.S. Model Tax Convention technical explanation cites a U.S.  Supreme Court case and states that the “may be” language “would not  support a request in which a Contracting State simply asked for  information regarding all bank accounts maintained by residents of that  Contracting State in the other Contracting State, or even all accounts  maintained by its residents with respect to a particular bank.” This means  that, as a general rule, the United States does not make requests or  respond to requests under these agreements where the names or other  identifier (such as an account number) of potentially noncompliant  persons are unknown. The information exchange provisions of TIEAs and  bilateral tax treaties concluded by the United States require that a request  for information satisfy a standard of relevance in order to be considered a  valid request under the agreement. One of the requirements of the  relevance standard is that requests contain “the identity of the person(s)  under examination or investigation.” During interviews, officials of the IRS  and Treasury Department explained that the recent global recognition of  the importance of full exchange of information for tax purposes has led  countries to refine information exchange practices to ensure that  exchange will occur to the widest appropriate extent, and that these  topics are under active discussion at international standard-setting bodies  such as the Organisation for Economic Co-operation and Development  (OECD) and the Global Forum on Transparency and Exchange of  Information that focuses on exchange of information issues. Accordingly,  a valid request for information will not always require the name of  particular taxpayers under examination or investigation. In addition, the  Treasury Department’s Technical Explanation of the 2009 protocol  amending the 1996 bilateral tax treaty with Switzerland states the  following: “In a typical case, information sufficient to identify the person  under examination or investigation would include a name, and to the  extent known, an address, account number or similar identifying  information.” Moreover, IRS and Treasury Department officials explained  that the template TIEA text used by the United States was changed in  January 2011 to state that a request for information must contain “the  identity of the person or ascertainable group or category of persons under  examination or investigation.” It is mutually understood that there can be  circumstances in which there is information sufficient to identify the  person under examination or investigation even though the requesting  state cannot provide a name. At the time that this study was conducted,  however, the Internal Revenue Manual had not been correspondingly  updated to reflect this clearer articulation of policy.
Some arrangements contain provisions that outline particular types of  information-gathering measures beyond specific exchanges upon  request. For example, the U.S.–Austria treaty explicitly states that “states  shall spontaneously or upon request exchange information” and that  “states may agree on information to be furnished on a regular basis.”  Several other tax treaties state that exchange of information shall be on a  “routine basis” or “upon request” with reference to particular cases.  Several TIEAs specifically provide for automatic and spontaneous  exchange of information in addition to providing information upon  request. The presence of automatic or spontaneous exchange language  in an agreement does not mean such exchanges necessarily happen,  and the absence of such language does not mean automatic or  spontaneous exchanges do not occur, as treaties and TIEAs are  generally broad enough to permit such types of exchange.
Certain limits to specific information exchange are common to most tax  treaties and TIEAs. Specifically, countries are not obligated to  carry out administrative measures at variance with the laws and  administrative practice of either contracting state (47 out of 67 tax  treaties and 24 out of 27 TIEAs);  supply information that contracting states would not be able to obtain  under their own laws (51 out of 67 tax treaties and 26 out of 27  TIEAs); or    provide information that would disclose trade, business, industrial,  commercial, or professional secret or trade-process or information  that would be contrary to public policy of either contracting state (46  out of 67 tax treaties and 26 out of 27 TIEAs).
Additionally, all tax treaties with information exchange articles and all  TIEAs contain disclosure provisions that protect the confidentiality of the  information exchanged. Forty tax treaties and 12 TIEAs also state that an  exchange partner may not decline a request simply because it may not  need that information for its own purposes. These agreements also  contain provisions that obligate the requested state to use its information- gathering measures to obtain the requested information even though it  may not need that information for its own purposes.
While tax treaties and TIEAs share many common principles, many also  contain unique features. For example, information exchange  arrangements can cover different types of tax information. Twenty-seven  tax treaties permit exchange of information in any case concerning U.S.  federal taxes, 21 limit information exchange to cases concerning taxes  described under the general scope of the convention, and 10 limit  exchange to cases concerning specific taxes or apply other restrictions.  All U.S. TIEAs cover exchanges on all U.S. federal taxes, although most  specifically state that they do not cover state and local taxes or taxes  levied by political subdivisions. Eighteen treaties and 23 TIEAs also  expressly provide that an exchange partner cannot decline to share  information because it is held by a bank or other financial institution,  though the absence of such a provision does not mean that a treaty  partner will decline to share such information. Five treaties specify that  the requested state will allow representatives to interview individuals and  examine evidence in the requested state, while 18 TIEAs include  provisions to this effect. Two treaties—with Canada and the  Netherlands—have provisions within their exchange of information  articles that specifically permit disclosure of information to an arbitration  board. One agreement—the Panama TIEA—has a provision that “parties  may exchange technical know-how, develop new audit techniques,  identify new areas of non-compliance, and jointly study non-compliance  areas.”
The focus of information exchange under MLATs is different than tax  treaties and TIEAs. Assistance under a MLAT, including on tax matters, is  generally only available for the investigation, prosecution, and prevention  of criminal offenses or for proceedings related to criminal matters. MLATs  may also explicitly state that no dual-criminality requirement exists for that  MLAT. Dual-criminality is the requirement that the conduct in question be  a crime under the domestic laws of both the requesting and requested  state for assistance to be provided. In 25 MLATs there is a limited dual- criminality requirement, such as for any searches, seizures, or forfeitures.  Where a dual-criminality requirement exists, whether or not assistance  can be provided on tax matters depends, in part, on the domestic law of  the other jurisdiction. MLATs also commonly provide grounds on which a  request for information may be refused, but these grounds for refusal vary  among agreements.
Appendix V provides detailed information on the contents of each of the  agreements.
section_title: Volume, Type, and Processing Time of Requests Varies
subsections: section_title: Volume of Requests Made
paragraphs: IRS provided us with the number of new incoming and outgoing specific  information exchange requests for the years 2006 through 2010. The  number of incoming requests fluctuated over the 5-year period, ranging  from a high of 1,173 requests in 2006 to a low of 797 in 2008. The  number of outgoing requests also fluctuated during this period and  ranged from a high of 236 requests in 2008 to a low of 165 in 2010. Table  1 provides the number of new incoming and outgoing requests for each  year. Requests in this table include both closed requests and requests  that were still open at the end of 2010.
The number of outgoing specific requests does not equal IRS’s  international enforcement presence or the number of U.S. taxpayers who  have been the subject of IRS examinations. According to IRS and  Treasury officials, one reason for this is that a single specific request for  information from a treaty partner can involve multiple taxpayers. Also, an  outgoing information exchange request typically comes after IRS has tried  other means to obtain information, including a review of information  received from treaty partners through automatic exchanges  (approximately 2.1 million records about U.S. taxpayers are received  annually by IRS, as discussed below) or through obtaining the information  directly from the taxpayer or from third parties using other enforcement  tools.
section_title: Volume and Type of Closed Requests
paragraphs: Between 2006 and 2010, the IRS closed 5,111 incoming and outgoing  requests involving 75 treaty partners. There were 4,217 foreign-initiated  incoming requests, and 894 U.S.-initiated outgoing requests closed  during this period. The number of closed incoming and outgoing specific  requests between the United States and a single treaty partner varied  widely, ranging from five treaty partners that had just 1 incoming or  outgoing request during the period to a single treaty partner with 711  requests. Also, request activity is concentrated in a small number of  countries, with the 10 most-active countries representing roughly 68  percent of all requests.
IRS provided us with data about the type of information that was  requested in 3,569 exchanges (2,971 incoming requests and 598  outgoing requests between 2006 and 2009). Corporate records, tax  return data, and third-party interviews constituted about 78 percent of  closed incoming requests for which we received data on information type.  For outgoing requests, corporate records, tax return data, and bank  records accounted for 77 percent of exchanges. Requests for bank  records made up 6 percent of incoming exchange requests, but 21  percent of outgoing requests. Conversely, requests for third-party  interviews were 20 percent of incoming requests, but only 6 percent of  outgoing requests. Figure 4 shows incoming and outgoing requests by  type of information that was requested for the 3,569 exchanges for which  we received data on information type.
IRS also receives and provides information through automatic and  spontaneous exchanges. According to EOI/OO officials, the United States  is currently engaged in the automatic exchange of information with 25  countries, transmitting approximately 2.5 million records annually to other  countries and receiving approximately 2.1 million records from its treaty  partners. Through automatic exchange of information, the United States  provides some treaty partners with information on taxable income and  federal tax withholding related to certain types of income received by U.S.  nonresidents. IRS officials told us that the information that the United  States receives through automatic exchange of information varies by  treaty partner and includes data on wages, interest, dividends, and other  forms of income.
Regarding spontaneous exchanges, the United States sends about 10  spontaneous exchanges of information to its treaty partners annually,  according to EOI/OO officials. They also said that the United States  receives around 300 spontaneous exchanges of information annually,  mostly from developed countries with sophisticated tax systems, and that  the number fluctuates widely from year to year. IRS officials stated that  information the IRS receives spontaneously is processed by IRS Tax  Attachés or EOI/OO staff located in one of the agency’s posts of duty or  in Washington, D.C. If the taxpayer is the subject of an ongoing  examination, the information is forwarded to the appropriate IRS staff for  possible action. If the taxpayer is not the subject of an ongoing  examination, the information is evaluated to determine if there are tax  consequences and whether or not a recommendation for action should be  made to the appropriate field staff. Although Tax Attachés and EOI/OO  staff evaluate and forward information to the appropriate field offices,  agency officials stated that each office has its own business plan which  may not include examinations based on spontaneously provided  information. Consequently, these examinations would be worked on to  the extent local offices consider them to be better opportunities than other  cases they would work on using their discretionary audit authority.
Nevertheless, officials noted that spontaneous exchanges have led to  some significant tax assessments, including several of $100,000 or more.  Taxpayers affected by spontaneous exchanges have at times alerted IRS  to others who turned out to have significant additional tax liabilities. In at  least some cases, IRS would not have known about the noncompliance in  the absence of the spontaneously shared information.
section_title: Time Taken to Process Requests for Specific Exchange of Information
paragraphs: The amount of time that the United States and its treaty partners took to  close specific requests for information, or processing time, varied widely  for requests made between 2006 and 2010. During this period of time, the  number of calendar days to close both incoming and outgoing requests  for information ranged from requests opened and closed on the same day  to one request that took 1,442 calendar days to close. The United States  tended to respond to requests for information faster than treaty partners  responded to outgoing requests from the United States. The median  number of calendar days to close U.S.-initiated outgoing requests was  149, compared to 108 calendar days for incoming requests.
To identify factors that could explain the differences in processing time,  we considered the possibility that the type of information requested may  be associated with the length of time taken to close the request. We  found that, overall, processing times varied by the type of information  requested. For all incoming and outgoing requests, processing times  ranged from a median of 152 calendar days for requests involving bank  records to 31 days for public records. Outgoing requests made by the  United States to its treaty partners took longer to close than incoming  requests for the same types of information for nearly all categories of  information requested. Table 2 provides the processing times for all of the  3,569 requests where the type of information requested was recorded.
Because request processing times for different information types varies,  we developed a statistical model to estimate the amount of time that a  new request will take to close, holding the type of information requested  constant. When controlling for information type, incoming requests to the  United States are processed an estimated 17 percent faster on average  than outgoing requests from the United States to its treaty partners. As  shown in figure 5, our model estimates that most information exchange  requests are likely to close about 50 to 200 days after being opened, but  some can take much longer.
We also explored whether certain treaty partner characteristics were  associated with processing times for incoming and outgoing requests.  Assuming that treaty partners who share characteristics would respond to  requests similarly, we developed five groups of treaty partners that  shared a particular set of characteristics. These characteristics included  (1) the type of agreements authorizing exchange of information with the  United States, (2) the existence of active automatic exchange of  information with the United States, (3) membership in the OECD, (4)  implementation of OECD standards for improving transparency and  establishing effective exchange of information in tax matters, and (5)  trade volume with the United States. Descriptions of the treaty partner  groupings that we identified and our hypotheses concerning potential  factors that could explain differences in request processing times are  summarized as follows:    Agreement type—Tax treaties have multiple purposes, including  preventing double taxation and improving tax-law compliance through  information exchange, while TIEAs are focused primarily on the  exchange of information. Because a TIEA represents a particular  commitment to information exchange, we considered the possibility  that information exchange requests involving TIEA partners may be  addressed more quickly than exchanges with partners with whom the  United States does not have a TIEA.    Treaty partners that actively engage in automatic exchange of  information with the United States—As noted previously, the United  States engages in automatic information exchange with 25 partners.  The presence of an active automatic exchange of information  arrangement with these countries signifies an agreement between the  United States and its treaty partners to exchange information on a  routine basis. Given the potential for IRS to leverage relationships  established through the automatic exchange of information and the  nature of information exchanged, we considered the possibility that  specific-exchange requests may be addressed more quickly between  the United States and these partners than with partners with whom  the United States does not currently share information automatically.  We also considered the possibility that automatic exchange may  obviate the need for requests for information that IRS or treaty partner  tax authorities have readily on hand, leaving a larger percentage of  requests for information that take more time to obtain.    OECD Members and Nonmembers—OECD member countries have  established and committed to principles and standards of  transparency and information exchange for tax purposes, as reflected  in the 2002 OECD Model Agreement on Exchange of Information on  Tax Matters and Article 26 of the OECD Model Tax Convention on  Income and on Capital. We considered the possibility that these  shared principles related to information exchange, including standards  for information availability and access, have contributed to faster  request processing times between the United States and treaty  partners who are members of the OECD than with partners who are  not members of the OECD.    Trade Volume—We considered the possibility that higher trade  volume with the United States (imports and exports) could reduce the  amount of time that it takes to address requests for information.  Higher volumes of cross-border trade can present more opportunities  for taxpayers in the United States and abroad to generate foreign- source income, and could indicate an established relationship  between the United States and a treaty partner. Given these factors,  we examined differences in specific exchange–request processing  times between the top 25 U.S. trade partners (among U.S. treaty  partners) and all other treaty partners.    Treaty Partner Implementation of International Tax Standards  Related to Transparency and Effective Exchange of  Information—The international tax standards for improving  transparency and establishing effective exchange of information in tax  matters were developed by the OECD in cooperation with non-OECD  countries and have been endorsed by other organizations in the  international community (the United Nations and the Group of Twenty  Finance Ministers and Central Bank Governors). The standards  require jurisdictions to exchange information on-request in all tax  matters for the purposes of administering and enforcing domestic tax  law without regard to domestic tax interest or bank secrecy. We  considered the possibility that substantial implementation of these  standards could contribute to faster request processing times,  comparing request processing times for treaty partners that had  substantially implemented these standards with those that either had  not substantially implemented these standards or were not included in  the OECD review of transparency and exchange of information  standards as of 2006 (the beginning of our evaluation period).
Using statistical models, and controlling for information type, we  compared how processing times for both incoming and outgoing requests  differed across the previously described treaty partner groupings. Table 3,  provides estimates of the percentage difference in average processing  time between incoming and outgoing requests, adjusted for information  type, along with 95 percent confidence intervals. After adjusting for the  type of information requested, we found no statistically significant  difference in processing times for outgoing requests. For example, our  model estimates that countries with TIEAs responded to outgoing U.S.  requests 5 percent faster than countries without TIEAs, but the difference  could range between 14 percent slower and 28 percent faster. This  indicates that there is no observable difference between countries with  and without TIEAs. The relatively smaller number of outgoing requests  tends to increase our uncertainty about the differences across groupings.  Fewer opportunities to observe the processing of requests typically  produces larger confidence intervals.
Our analysis of the time it takes the United States to respond to incoming  requests found that, adjusted for information type, statistically meaningful  differences were present among the country groupings, as shown in table  3. The United States responds to information requests from treaty  partners with TIEAs significantly faster than to countries without TIEAs,  suggesting that the focus on tax information exchange represented by the  signing of a TIEA may make a difference in processing time. Response  times by the United States for requests from countries with which  automatic information exchange is taking place are significantly slower  than response times for incoming requests from countries with which  automatic information exchange is not taking place. This suggests that  automatic exchange may be taking care of simpler requests leaving a  larger body of more complicated, time-consuming requests to be handled  through specific exchange cases. The United States also responds more  quickly to requests from OECD members than to other countries,  suggesting that the explicit commitment and common standards between  the United States and these countries may make a difference in the time  it takes the United States to respond to requests from OECD countries.
For countries that have implemented the international transparency and  information exchange standards, we considered the possibility that  response times would be faster for countries that have implemented the  standards, but instead we found that the U.S. response time to incoming  requests from these countries was between 25 and 57 percent slower  than the U.S. response to countries that had either not substantially  implemented the standards or had not been evaluated. In analyzing the  time it takes the United States to respond to requests from the top 25  U.S. trading partners, we considered the possibility that higher volumes of  trade would indicate more established relationships between the United  States and these countries and faster response times. Instead we found  that the U.S. response time to requests from top trading partners was  significantly slower. U.S. response times were between 63 and 96  percent slower for requests from top trading partners than from other  countries, after adjusting for information type.
The unavailability of certain data to us for this analysis, particularly the  details of specific requests, means that we are unable to analyze why the  U.S. response time to requests might be slower for some types of  countries. While the factors that we analyzed may contribute to  differences in processing times among groups of treaty partners, other  factors that we cannot analyze may be at work. For example, if a single  country involved in a large portion of exchange activity had especially  short or long response times, the presence of that country in any of the  treaty partner groupings we analyzed could have a disproportionate  influence on the estimated differences.
Also, with respect to the processing time differences across the treaty  partner groupings, IRS officials noted that country-specific factors, such  as the sophistication or complexity of a country’s tax rules and the  existence of administrative arrangements such as automatic exchange  arrangements, can influence the nature of the information requested and  the amount of time required to obtain it. For example, developed  countries (like many major U.S. trade partners) tend to have tax systems  that are administered through a complex set of tax rules. Under these  rules, taxpayers can use intricate tax avoidance or tax evasion strategies,  which can lead to examinations of elaborate business relationships,  involving one or more entities under the direct or indirect control of a  taxpayer. Examinations of this nature can require large volumes of  detailed information that can be difficult and time-consuming to obtain.  Conversely, the information needs for countries with less complex tax  rules tend to be straightforward, uncomplicated and require much less  processing time for information requests. Similarly, officials stated that  processing times for requests from countries with which the United States  exchanges information automatically may take longer because the  information requested is more complex and difficult to obtain than the  information that is exchanged on a routine basis.
section_title: Fluctuations in Time to Fulfill Specific Exchange Requests and the Number of Requests Can Occur for a Variety of Reasons
paragraphs: Similar to processing time across groups of treaty partners, the time  required to process a specific exchange varies by individual request.   According to IRS and DOJ officials that we interviewed, some of these  differences are attributable to factors such as the complexity of the  information requested, whether requested information is already on-hand  at the tax authority, and whether legal processes must be invoked to  secure the requested information. Examples of factors raised in the  interviews that can affect the time it takes another country to respond to  U.S.-initiated requests are listed below. Officials we spoke to noted that  some of these factors may also influence the length of time it takes the  United States to respond to requests from other countries.    Requests for complex information take more time to fulfill than  requests for less complex information.    Narrowly focused requests for information already reported to the tax  authority of the treaty partner are usually quickly addressed because  that information is readily available, while requests that require the  government agency responding to the request to go to third-party  record keepers often take more time and effort to address.    Requests that appear to officials in the foreign country to be  inadequately supported or to not demonstrate “foreseeable relevance”  to a case can require extensive follow-up between IRS and the  exchange partner.    The laws of other jurisdictions have a big influence on the time  required to fulfill a request. For instance, some jurisdictions’ bank  secrecy rules involve a lengthy court process and possibly a petition  to a national banking commission to secure information. Officials also  told us that some jurisdictions may give priority to criminal matters,  and may view tax matters as civil (as opposed to criminal) in nature.    The organizational structure of a partner jurisdiction’s exchange office  can also influence response times, such as when requests are passed  through multiple employees and levels of review.    Translation issues can also slow down the amount of time it takes to  secure requests if officials in the requested country have to translate  the request into or from English before it can be assigned to  appropriate staff.
The volume of information exchange activity, especially outgoing requests  from the United States, can be influenced by the time it takes for partner  countries to respond to requests. We were told that officials consider the  costs and benefits of making information exchange requests, including  their expectations about the amount of time it will take the treaty partner  to respond to the request. Over time, the IRS field staff and others who  make requests for foreign information become more willing to request  information where they expect to get the information they need in a timely  manner. This is particularly true in cases where information has to be  secured quickly because, for example, the statute of limitations period is  coming to a close.
The relationship between competent authorities of the United States and  a treaty partner can also influence the volume of exchange activity. An  IRS official described a situation in which a country that received  information from the United States subsequently made that information  public, in violation of the agreement confidentiality provisions. When an  IRS field staff person inquired about making a new request to the country  that had not protected U.S. taxpayer privacy, he was told that his request  could not be processed at that time because the disclosure issue had not  yet been resolved. In another case, an official was informed by an  EOI/OO point of contact that one of several requested countries was  unlikely to comply with the request and therefore the request was not  pursued with that country.
section_title: Improved Collection of Balanced Performance Data Could Help IRS Improve Administrative Processes and Program Outcomes for Exchange of Information
paragraphs: GAO guidance on internal controls and numerous other GAO reports  say that reliable performance information is a critical tool for managers to  use to understand how well processes are working and to identify  opportunities to improve those processes. Government Performance and  Results Act of 1993 (GPRA) guidance also states that balanced  performance information can help managers measure or monitor program  accomplishments and progress toward pre-established goals. The  collection of balanced performance information should, amongst other  things, address both program outputs (product or service delivery) and  program outcomes (results of the product or services delivered).
Currently, the IRS collects performance information on the specific  exchange of information program in two ways. For IRS, much of the  performance information related to exchange of information is collected  through an electronic information system called the Issue Management  System (IMS). Implemented in October of 2009, IMS is a consolidated  database that combines case-management data from multiple programs  within the Large Business and International (LB&I) division to (1) support  revenue agents in remote locations; (2) improve issue identification; (3)  improve information tracking, reporting and sharing; and (4) capture data  in support of performance assessment. According to EOI/OO officials, the  information exchange–related data collected in IMS is used primarily as  an inventory-management tool. They said that managers use the system  routinely as new cases come in to make decisions about dividing up the  new exchange request cases among the staff based on the staff  members’ inventory of open cases. The information collected in IMS also  allows managers to monitor program output information such as how  much program activity is occurring and the length of time it takes to close  requests.
EOI/OO, however, does not currently use the system to collect  performance outcome information such as whether IRS actually secured  information from or was successful in providing information to U.S. treaty  partners. An earlier system used by EOI/OO had a data field for noting  that the requested information was provided. Managers told us, however,  that it was not useful because it had a default setting of “no,” meaning  that negative responses included cases where the staff person entering  the data did not make any entry in that field. While the IMS system now in  use does not include a field for noting if the requested information was  obtained, IRS has deemed the collection of such information worthwhile  in the past. Because the primary obligation of the competent authority is  to exchange information for tax purposes, collecting information on the  extent to which requests are fulfilled would provide managers with  valuable information on program outputs.
IRS officials also said that they are not currently capturing or analyzing  data on the type of information being requested in their information  system which, as our analysis shows, may influence the time that it takes  the United States and its treaty partners to respond to requests.  Consequently, IRS managers may be missing opportunities to determine  why certain countries are much slower than other countries to respond to  some kinds of information requests and possibly take steps to work with  those countries to improve response times. For instance, IRS might need  to explain its requests differently for some countries or may have a basis  for encouraging another country to streamline inefficient processes.
IRS also collects data on program performance from agency personnel  who make requests for information through the Foreign Information  Assistance Request Appraisal Questionnaire, though only rarely. The  Appraisal Questionnaire includes a series of questions about the quality  of their interactions with EOI/OO staff, usefulness of the information  received, and other program outcomes. However, EOI/OO officials told us  that fewer than 25 questionnaires were returned between 2006 and 2010.  They said that the questionnaires are distributed to program customers  with the bundle of information obtained by EOI/OO from the treaty  partner, but that they do not usually follow up with customers when  questionnaires are not returned.
In order to get a sense of how IRS and DOJ field staff perceive the  process of obtaining information from other countries, we interviewed 27  such staff who made specific requests for foreign information in recent  years. They described a variety of experiences with the process. Some  of these officials told us about problems they encountered or ways that  the program could have better helped their audits, investigations,  collections activities, or court cases. For example, several said that they  would have liked to have known more about the program and its  operations prior to preparing their requests. Given the amount of time  required to prepare information requests, other program users expressed  interest in receiving more up-front guidance on how to prepare a request.  Others expressed concern about the length of time required to obtain the  information requested or the completeness and utility of the information  received. Several of the staff we interviewed also noted how helpful and  informative the Tax Attachés, RSRs, or EOI/OO staff that facilitated the  process were.
Though collected infrequently, the use of the Appraisal Questionnaire by  EOI/OO demonstrates that IRS has judged the collection of such  performance information to be worthwhile. If EOI/OO routinely obtained  information on, for example, the usefulness of its instructions to field staff  or the timeliness of responses, managers would know how common such  concerns may be among program users and might be able improve the  exchange of information.
Furthermore, currently available data do not provide important outcome  information on the program as a whole, such as the usefulness of specific  exchanges to IRS tax compliance enforcement efforts. Such information  could help identify opportunities to, for instance, better train IRS  personnel on when and how to request foreign information and what  types of information are most useful in resolving cases. To the extent that  IRS would like to minimize the cost of collecting and analyzing information  on program outcomes, the agency could consider using a sampling  approach that would allow program managers to generalize the  information collected from a smaller population of program users to the  overall population of program users.
section_title: Conclusions
paragraphs: The United States has developed a broad information exchange network.  While agreements have many similar features, the specific parameters  under which information can be exchanged are unique to the legal and  administrative arrangements negotiated by the United States and each  separate treaty partner. The volume of information exchanges under  these agreements and the amount of time required to process those  exchanges varies, and may be influenced by several factors.
Although the IRS collects data on exchanges between the United States  and its treaty partners, the agency does not assemble or make use of  information such as the extent to which requests for information are  fulfilled or the type of information requested, and does not consistently  collect customer feedback. Without reliable and consistent data like  these, IRS managers may be missing opportunities to identify and  address possible problems with the information exchange program and  improvements that could make the program more successful. Such  information could tell program managers how well IRS is meeting its  obligations as the U.S. competent authority and whether administrative  processes and procedures need to be examined for ways to improve the  transmission of information. Better performance information could not  only help improve administrative operations, but could also enhance the  usefulness of this important tax law enforcement tool.
section_title: Recommendation for Executive Action
paragraphs: To identify opportunities to improve the administrative processes and  procedures that the IRS uses to exchange information between the  United States and its treaty partners, we recommend that the  Commissioner of Internal Revenue determine the key types of information  that exchange program managers could use to ensure the program is  working as well as possible. The commissioner should specifically require  the collection of (1) consistent and accurate data on specific tax  information exchange cases, such as the extent to which requests for  information are satisfied and the type of information requested, and (2)  feedback from information exchange program users on how well the  program is working and how it might be improved.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of the Treasury, the  Commissioner of Internal Revenue, the Secretary of State, and the  Assistant Attorney General for Administration Department of Justice. We  received written comments from the Deputy Commissioner for Services  and Enforcement of the Internal Revenue Service (IRS); his comments  are reprinted in appendix VII. The Secretary of the Treasury, the  Secretary of State, and the Assistant Attorney General for Administration  Department of Justice did not provide written comments. The Department  of the Treasury, IRS, and the Department of Justice also suggested  several technical changes to the report, which we incorporated where  appropriate.
The IRS agreed with our observation that opportunities exist to improve  information exchange between the United States and its treaty partners  through improved collection of performance data and information  exchange program user feedback. The IRS also agreed with our  recommendation that the IRS identify key types of information that  exchange program managers could use to ensure that the program is  working as well as possible, including consistent and accurate data on  specific tax information exchange cases and feedback from information  exchange program users.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of the Treasury, the Secretary of  State, the Attorney General of the United States, the Commissioner of  Internal Revenue, and other interested parties. This report will also be  available at no charge on GAO’s website at http://www.gao.gov. If you or  your staff have any questions about this report, please contact me at  (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix VIII.
section_title: Appendix I: Scope and Methodology
paragraphs: This report (1) identifies all bilateral income tax treaties, Tax Information  Exchange Agreements (TIEA), and Mutual Legal Assistance Treaties  (MLAT) between the United States and other countries in force,  proposed, or signed as of April 30, 2011, and describes the legal  framework and administrative processes that the United States uses to  exchange information with its treaty partners; (2) describes the volume  and types of information exchanged between the United States and its  treaty partners and the time to process requests for information; and (3)  identifies opportunities to improve the effectiveness of current U.S.  information exchange processes and procedures.
To develop a comprehensive list of countries with which the United States  has entered income tax treaties, TIEAs, and MLATs, we examined  information obtained from a combination of government and commercially  available data to identify agreements that were in force, proposed, or  signed as of April 30, 2011. Specifically, we relied on information obtained  from Treaties in Force—a compilation of international agreements  between the United States and other countries published by the U.S.  Department of State, U.S. Tax Treaties (Publication 901) published by the  Internal Revenue Service (IRS), the Government Printing Office (GPO)  website, Thomson Reuters’s Checkpoint, and Lexis Nexis. For each  agreement, we identified the name of the country with which the United  States entered into the agreement, the year the agreement was signed,  the year the agreement entered into force, and the date the provisions of  the agreement were made effective (when provided). For tax treaties, we  identified the article within the agreement authorizing information  exchange. Where applicable, we also recorded the year of any revisions  made to the original agreement, and the effective date of the most recent  protocol or other such amendment to the agreement. We consulted with  knowledgeable officials at the U.S. Department of State, Department of  the Treasury, IRS, and the Department of Justice to ensure the  completeness and accuracy of the consolidated list we developed from  these sources.
To describe the legal framework for information exchange, including the  types of information covered and limitations on information, we  systematically analyzed the information exchange provisions contained in  all of the income tax treaties, TIEAs, and MLATs that were in force as of  April 30, 2011. For income tax treaties, we compared the information  exchange provisions in each agreement to key information exchange  provisions contained in the 2006 U.S. Model Tax Convention of  November 15, 2006. We conducted similar content analysis for TIEAs,  by analyzing similarities and differences in the information exchange  provisions across the agreements identified. We analyzed each MLAT to  determine the extent to which the agreements permit assistance in  investigations involving criminal tax matters and limitations on such  assistance.
To describe the administrative processes that the United States uses to  exchange information with its treaty partners, we reviewed guidance  contained in policy documents such as the IRS Internal Revenue Manual  and the Department of Justice Criminal Tax Manual. From this guidance  we also identified the general procedures that the United States uses to  exchange information, including the U.S. departments and agencies  involved and paperwork requirements. We also examined user guides for  the information systems used to collect data on information requests. We  interviewed knowledgeable officials in the Department of the Treasury,  the IRS, and the Department of Justice to further understand the role of  these agencies and any process or procedural requirements for  administering information exchange between the United States and its  treaty partners.
To develop summary information on the volume of incoming and outgoing  requests for information, processing times, and other characteristics of  requested exchanges under the authority of income tax treaties and  TIEAs, we analyzed IRS data on all exchange requests that were initiated  and completed between January 1, 2006, and December 31, 2010. The  information exchange data provided by IRS and discussed in this report  also included exchanges made under estate tax treaties, although IRS  and Department of the Treasury officials told us that information  exchange under these treaties is rare. The information developed only  applies to exchanges occurring during this period and cannot be  generalized to exchanges occurring outside of this time frame. Because  the information exchanged under income tax treaty, TIEA, and MLAT  authority is protected by confidentiality provisions contained in the  agreements and by U.S. domestic law, we did not have access to data  that could reveal the identity of individual taxpayers or individual treaty  partners. Therefore, we relied on anonymous country codes assigned by  IRS and treaty partner groupings that we developed in consultation with  IRS to examine the exchange activity between the United States and its  treaty partners. To assess the reliability of these data, we interviewed  knowledgeable officials, reviewed system documentation, and examined  the data for obvious errors. We determined the data to be sufficiently  reliable for this report.
We used statistical models to estimate the difference in closing times  among various groups of requests, holding constant the type of  information requested. These “duration” models apply only to requests  initiated and closed between January 1, 2006, and December 31, 2010.  Our data exclude requests that were open at the end of this period, “and  IRS could not provide the type of information requested for 1,542 out of  5,111 requests. Our models assumed that most requests close quickly,  while a few requests remain open for longer periods of time. This  assumption was reasonable, given the actual number of requests that  closed at various times in this period. The models made different  assumptions about how the mean closing time varied across the groups  of interest, such as incoming versus outgoing requests for various types  of information. This allowed us to estimate the proportional differences  across groups while holding constant the type of information requested,  along with the statistical certainty of the estimates.
To identify ways in which the United States can enhance the  effectiveness of its administrative practices for sharing information with  foreign jurisdictions, we interviewed and collected information from IRS,  Justice, and OECD officials and assessed the information obtained  against criteria contained in GAO guidance on internal controls and  performance measurement. IRS and the Department of Justice provided  us the names of officials who had requested information in 2009 and  2010 for use in criminal and civil investigations or cases, and we  interviewed 6 IRS and 12 DOJ officials identified in this way. We also  selected 11 additional IRS officials to interview using a nonprobability  sampling technique, through which we randomly selected at least one  exchange case from each of the exchange groupings discussed in the  section of this report titled “Volume, Type and Processing Time of  Requests Varies,” and asked EOI/OO to provide contact information for  the officials involved in the cases. The staff person responsible for two of  our randomly selected cases was also on the list of names that IRS had  previously provided to us. The total number of IRS and DOJ staff who had  made information exchange requests that we interviewed was 27.  The  information obtained through these interviews is only applicable to the  experiences of the officials interviewed and cannot be generalized to the  entire population of IRS and DOJ officials making requests through the  IRS-specific exchange of information program.
We conducted this audit from January 2010 to September 2011 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Article 26 (Exchange of Information and Administrative Assistance) of 2006 U.S. Model Tax Convention
paragraphs: The provisions of Article 26 of the 2006 U.S. Model Tax Convention serve  as the basis for information exchange in new tax treaties. The article’s  provisions are reprinted below.
section_title: Appendix III: Administrative Processes for Addressing Outgoing and Incoming Specific Requests for Information
paragraphs: An interactive graphic illustrating the administrative process for incoming  and outgoing specific exchanges of information is also shown in figure 1.
Outgoing attachment must contain:  -  Name and address of taxpayer in question  -  Type of tax and tax years involved  (fiscal/calendar)  -  Evidence that an investigation is being  -  Any background information that should not be  sent to foreign competent authority  -  Identification of location of information and why  -  Any statute, court, or other dates by which the  the United States believes it is in that location  -  Whether the request includes grand jury  -  Specific information needed  -  How information is relevant to the investigation  -  Any statute, court, or other dates by which the  -  Any documentation certification requirements  Step 2  U.S. Competent Authority  A formal request letter is prepared and sent to foreign competent authority.   Step 3  Foreign Competent Authority  A formal request letter is received and a formal response is prepared and sent back to the U.S. competent authority. A formal  response may contain partial or complete information, or an explanation of why material cannot be obtained.   Step 4  U.S. Competent Authority  Information results are sent to IRS Revenue Agent or Examiner  Incoming Requests  Step 1  Foreign Competent Authority  A request for information is sent to  the U.S. competent authority.
Incoming foreign requests must contain:  -  Specific identification of the taxpayer  -  Itemized list of specific information requested  -  A detailed narrative identifying the tax nexus of the relevance of the information sought to  the taxpayer and the issues examined  -  An explanation of how the request for transactions, facts, or documents pertains to a tax or a  tax liability covered by a tax treaty or a TIEA  Step 2  U.S. Competent Authority  A request is evaluated and the case is assigned to the appropriate division.   Step 3  IRS Revenue Agent or Examiner  If feasible, the requested information is obtained within 60 days and sent to the U.S. competent authority. Information results may  consist of partial or complete information, or an explanation of why material cannot be obtained. If necessary, a status update is  provided every 60 days until resolved.   Step 4  U.S. Competent Authority  A formal response is sent to the foreign competent authority.
subsections: section_title: Algeria
paragraphs: See Kingdom of the Netherlands  MLAT, which covers Aruba. It  may not be used for assistance  related to fiscal offenses  requested of Aruba.
Potential MLATa  2009  n.a.
Income tax treaty  1980  1984  Yes  Potential tax treaty  2010  n.a.
Income tax treaty  2001  2003  Yes  Income tax treaty  1973  1976  No  Income tax treaty  1999  1999  Yes  *Jurisdiction is not currently a tax information exchange partner.
section_title: Appendix V: Catalog and Key Characteristics of Information Exchange Agreements
subsections: section_title: Country
paragraphs: Year most  recent  protocol  with  information  exchange  signed  (1)
Y  O Y  O O  O Y  Y  aa  Y  Obb  N  Y  Y  (6)  O  N  O  N  N  N  O  Y  O  Y  O  N  O  N  N  N  O  Y  N  N  O  N  N  N  O  N  O  Y  Y  Y  (7)
section_title: Country
paragraphs: N  Under the treaty, information may be disclosed in public court proceedings or judicial decisions  unless the requested state raises an objection.  Treaty provides that information to be exchanged must be of a class that can be obtained under the  laws and administrative practices of each state with respect to its own taxes.
section_title: Country Panama
paragraphs: C, I, R, V, U, Z  1. the identity of the taxpayer whose tax or criminal liability is at issue;  2. the period of time with respect to which the information is requested;  3. the nature of the information requested and the form in which the requesting party would  prefer to receive it;  4. the matter under the requesting party’s tax law with respect to which the information is  sought;  5. the reasons for believing that the information requested is foreseeably relevant to tax  administration and enforcement of the requesting party, with respect to the person  identified in subparagraph (a) of this paragraph;  6. grounds for believing that the information requested is present in the requested party or  is in the possession or control of a person within the jurisdiction of the requested party;  7. to the extent known, the name and address of any person believed to be in possession  or control of the information requested;  8. a statement that the requesting party would be able to obtain and provide the requested  information if a similar request were made by the requested party;  9. a statement that the requesting party has pursued all reasonable means available in its  own territory to obtain the information, except where that would give rise to disproportionate  difficulty.  “J”—Information to be exchanged without regard to whether the person to whom the  information relates is, or whether the information is held by, a resident of the party, or a  requested party is not obliged to provide information that is neither held by its authorities  nor in the possession or control of persons within its territorial jurisdiction, or both.  (Bermuda TIEA requires when a requesting state asks for information (1) relating to a  nonresident or (2) relating to a matter that is not criminal or tax fraud, the requesting state  shall certify that the request is relevant and necessary for the determination of a tax liability.  If information is requested on a nonresident in either jurisdiction, the requested state must  be satisfied that the information is necessary for the proper administration and enforcement  of fiscal law.)  “T”—Information to be exchanged without regard to whether the requested party needs  such information for its own tax purposes, or information to be exchanged without regard to  whether the conduct being investigated would constitute a crime under the laws of the  requested party, or both.  “L”—Privileges under the law of the requesting party shall not apply to the execution of a  request by the requested party. (Under Bahamas TIEA, information is not to be exchanged  that constitutes or would reveal a privileged communication, but each contracting party has  the exclusive right to determine what constitutes privilege under its own laws.)  “B”—Each party shall ensure that it has the authority to obtain and provide information held  by banks, other financial institutions, and any person, including nominees and trustees,  acting in an agency or fiduciary capacity, or information regarding (beneficial) ownership, or  both. (Costa Rica TIEA states that when Costa Rica is the requested state, it will provide  bank information only with the authorization of the Judge of Administrative Trials, which is  granted in matters related to the enforcement of laws relating to tax fraud as defined by  Costa Rican law.)  “E”—Allow officials of the requesting party to enter the territory of the requested party to  interview individuals and examine records or attend a tax examination, or both.  “D”—Request is not to be declined because the taxpayer disputes the tax liability.  “M”—Where the requesting party has not pursued all means available in its own territory to  obtain the information, except where such recourse would give rise to disproportionate  difficulty.  “C”—Where the disclosure of the information requested would be contrary to the public  policy of the requested party.  “X”—Information is subject to legal privilege.  “I”—Information contains trade, business, industrial, commercial, or professional secret or  trade process.  “R”—For the administration or enforcement of a provision of tax law of the requesting state  that discriminates against nationals of the requested state.  “V”—That would result in taking administrative measures at variance with the requested  party’s laws and administrative practices, provided there is compliance with the Exchange  of information article.  “U”—The requested party shall not be required to obtain and provide information that the  requesting party would be unable to obtain in similar circumstances under its own laws.  “Z”—The statute of limitations applies to the requesting party. (Peru TIEA does not mention  statute of limitations, but does say that the TIEA does not apply to the extent that an action  or proceeding is barred by the requesting state’s laws.)
Circumstances under  which requests can be denied  A, B, C, D, G  A, C, D  A, B, C, D  A, B, C, D, G  A, B, C  A, B, C, D  A, B, C, D  A, B, C, F  A, B, C, F  A, B, C, H  A, B, C, F  B, C, D, F, H, J  A, B, C  A, B, C, D, G  A, B, C, D, G, J  A, C, D  A, B, C  A, B, C, D, F, H, J  A, B, C, D, F, H, J  A, B, C, D, F, H, J  A, B, C, D, F, H, J  A, B, C, D, F, H, J  A, B, C, D, F, H, J  A, B, C  D, contrary to the public interest  A, B, C  A, B, C, D  B, C, D, F  B, C, D, F  B, C, D, F  A, B, C  A, B  “N”-MLAT contains a provision specifically stating that dual criminality is not a requirement  for assistance  “X”-MLAT contains no discussion of dual criminality  “L”-MLAT contains a dual-criminality requirement in certain circumstances, such as  requests dealing with searches and seizures and forfeitures  “Y”-MLAT contains a dual-criminality requirement for assistance  “A”-the request relates to an offense under military law that would not be an offense under  ordinary criminal law  “B”-the request relates to a political offense  “C”-the execution of the request would prejudice the security or other similar essential  interests of the requested state  “D”-the request does not conform to the requirements of the treaty  “E”-the request relates to an offense for which the penalty in the requesting state is  deprivation of liberty for a period of a year or less  “F”-the request relates to an offender who, if proceeded against under the law of the  requested state for the offense for which assistance is requested, would be entitled to be  discharged on the grounds of a previous acquittal or conviction  “G”-the execution of the request would violate the constitution of the requested state  “H”-there are substantial grounds leading the central authority of the requested state to  believe that compliance would facilitate the prosecution or punishment of the person to  whom the request refers on account of his race, religion, nationality, or political opinions  “I”-the execution of the request would violate the obligations of the requested state under  any international multilateral treaty relating to human rights  “J”-the request does not show either that proceedings for criminal law enforcement  purposes have been instituted in the requesting state or than (sic) there are reasonable  grounds for believing that a criminal offense has been or is likely to be committed  Bulgaria is considered to have a partial MLAT through the EU-MLAT.  Mutual Legal Assistance Agreement.  On October 10, 2010, the Netherlands Antilles dissolved and is now Curaçao and St. Maarten.
section_title: Appendix VI: Composition of Treaty Partner Groupings
subsections: section_title: and Development (OECD)
paragraphs: Partners  with a Tax  Information  Exchange  Agreement  (TIEA)
section_title: and Development (OECD)
paragraphs: Partners  with a Tax  Information  Exchange  Agreement  (TIEA)
section_title: and Development (OECD)
paragraphs: Partners  with a Tax  Information  Exchange  Agreement  (TIEA)
section_title: and Development (OECD)
paragraphs: Partners  with a Tax  Information  Exchange  Agreement  (TIEA)
section_title: Appendix VII: Comments from the Internal Revenue Service
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, David Lewis, Assistant Director;  LaKeshia Allen, analyst-in-charge; Gezu Bekele; Nicole Dery; Anna  Draganova; Michele Fejfar; Robert Gebhart; Emily Gruenwald; Donna  Miller; John Mingus; Ellen Rominger; Andrew Stephens; Jessica  Thomsen; and Jeff Tessin made key contributions to this report.