Taxpayer Information: Options Exist to Enable Data Sharing Between IRS and USCIS but Each Presents Challenges
Released: 2005-11-14T00:00:00

Letter

Background

As one of the largest repositories of personal information in the United States, 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, thereby bringing in billions of dollars of tax revenue while boosting voluntary compliance.

IRC Section 6103, amended significantly by the Tax Reform Act of 1976, 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 and/or state employees, and certain others having access to the information except as provided in IRC Section 6103. IRC Section 6103 allows IRS to disclose taxpayer information to federal agencies and authorized employees of those agencies for certain specified purposes. Accordingly, IRC Section 6103 controls whether and how tax information submitted to IRS on federal tax returns can be shared. IRC 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, IRC Section 6103 has exceptions allowing certain 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.

USCIS is part of the Department of Homeland Security (DHS), which was established by the Homeland Security Act of 2002. USCIS 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 USCIS'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. USCIS'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. USCIS's employees who review immigration benefit applications and determine if they should be approved are its adjudicators. USCIS's fraud detection units and Fraud Detection and National Security immigration officers in the districts, service centers, and asylum offices detect potential fraudulent applications and any trends or patterns that suggest potential fraud. USCIS 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.

Under current legislative authority, USCIS is not authorized to receive taxpayer information from IRS directly. USCIS currently obtains self- reported personal and financial information provided by (1) businesses, religious organizations, non-profit entities 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. USCIS also obtains information from third parties, not including IRS, to verify applicants’ self-reported data. Figure 1 illustrates the current lack of data verification between USCIS and IRS during the immigration application process.

Data-sharing arrangements between agencies can take different forms. As used in this report, data sharing means obtaining and disclosing information on individuals between federal agencies (IRS and USCIS) to ensure taxpayers have met their tax obligations or to determine eligibility for immigration benefits. Table 1 lists different forms of data sharing, enabling authority, information gained, and related examples.

An example of applicant-initiated sharing occurs via tax checks required by some states. A taxpayer may authorize a third party to receive his or her IRS tax return information via consent. According to an IRS official, many states may require consents to qualify for benefits or certain types of employment. For example, the state of Missouri requires applicants to be current on their state taxes before receiving a new professional license. An example of agency-initiated sharing is an arrangement between IRS and SSA for the Combined Annual Wage Reporting Program. SSA processes and maintains W-2 and W-3 information on employees. IRS maintains personal and financial information on employees. SSA and IRS conduct exchanges of information to ensure employers are submitting accurate wage information and to identify nonfilers. The agencies have a direct data- sharing arrangement.

Research shows that certain data-sharing programs have value for increasing taxpayer compliance since these programs have identified discrepancies in income reporting amounts and, in some cases, enabled the assessment of additional dollars in unpaid taxes. For example, matching IRS’s unpaid assessment database with the Treasury’s Financial Management Service’s (FMS) records shows a substantial amount of money that could have been collected by either IRS or FMS. In particular, the Taxpayer Relief Act of 1997 allows IRS to continuously levy up to 15 percent of certain federal payments made to delinquent taxpayers. IRS’s continuous levy program adds tax debts to FMS’s program for recovering debts owed to federal agencies. For the levy program, FMS compares federal payee information from agency payment records with extracts of IRS’s unpaid assessments. We estimated that IRS could recover at least $270 million annually from about 70,000 delinquent taxpayers. In addition, our analysis of a match between FMS’s database on payments to contractors and IRS’s unpaid assessment database showed that about 33,000 contractors who received substantial federal payments from civilian agencies during fiscal year 2004 owed a total of more than $3 billion in unpaid taxes. We estimated that if FMS database deficiencies such as erroneous Taxpayer Identification Numbers (TINs) and invalid contractor names were corrected, FMS could have collected at least $50 million more than it did in fiscal year 2004.

Although 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 1974 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 1988 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.

User fees are collected from identifiable recipients of special benefits beyond those accruing to the general public, and the amounts are based on the recovery of costs of providing the service, the market value of goods, or may be set by legislation. Various user fee authorities and guidance exist which range from general to specific authority. Title V of the Independent Offices Appropriations Act of 1952 codified at 31 U.S.C. § 9701 established general authority to assess user fees or charges on identifiable beneficiaries by administrative regulation. Under this general authority, all fees collected would be deposited as miscellaneous receipts to the General Fund of the Treasury and their use would be determined through the annual appropriations process. Authority to assess user fees may also be granted to agencies through the enactment of specific authorizing or appropriations legislation, which may or may not authorize the agencies to retain and/or use the fees they collect.

In setting certain user fees, agencies must follow either the general user fee statute 31 U.S.C. § 9701 or specific user fee statute. For example, IRS must follow IRC section 7528 in certain cases while USCIS adheres to the Immigration and Nationality Act, the general user fee statute, and DHS regulations which outline fees that are collected, the amounts, and by whom (see table 2). The Office of Management and Budget’s (OMB)

Circular A-25, User Charges, establishes general federal policy and guidance for user fees assessed for government services by executive branch agencies. IRS’s chief financial office provides internal guidance on user fees, which provides examples on how to implement the OMB directives. USCIS does not provide internal guidance. According to USCIS officials, the agency’s fee setting is based upon cost studies and a full- fledged regulatory process under the Administrative Procedure Act, with the actual fees provided in regulations.

IRS and USCIS Could Benefit from Data Sharing Although an Immigration Eligibility Change Would Be Key for IRS

IRS’s tax compliance efforts could benefit from data sharing with USCIS if immigration eligibility were changed to require business sponsors to show that they met tax filing and payment requirements to qualify to sponsor immigrant workers. In particular, IRS could benefit because businesses applying to sponsor immigrant workers that had not filed a tax return or paid taxes would need to come into compliance. IRS data can also enable USCIS adjudicators to make more accurate eligibility decisions by better identifying businesses that may not have met immigration eligibility criteria because they had unpaid assessments or did not file tax returns. Further, obtaining IRS data has the potential to improve the timeliness of benefit decisions by (1) decreasing rework/follow-up work and (2) potentially resulting in fewer applicants if benefits are contingent on having met tax filing and payment requirements.

A Change in Eligibility Rules Is Key to IRS Benefiting from a Data-Sharing Relationship with USCIS

Compliance with Payment of Taxes

IRS could benefit from data sharing with USCIS if certain taxpayers, such as business sponsors who owe taxes, were required to be in compliance with tax filing and payment requirements to qualify for immigration benefits such as sponsoring immigrant workers. Our analysis of automated immigration records matched against IRS databases showed that 18,942 businesses applying to sponsor immigrant workers from 1997 through 2004 had $5.6 billion in unpaid assessments, as of December 2003 (app. II). Many were not paying their tax bill or making payments towards fulfilling their tax obligations. As of December 2003, business sponsors from our nationwide selection who were not in installment agreements with the IRS or otherwise making payments to IRS, for taxes due, had unpaid assessments totaling $3.7 billion. Although these businesses with past applications to sponsor immigrant workers would not be affected by a change to requirements for sponsoring workers since they have already received immigration benefits, USCIS officials said that businesses that apply to sponsor workers tend to do so in multiple years. If businesses were required to meet their tax obligations, to the extent that future business sponsors owe taxes, they would need to pay their tax bill or make payment arrangements with the IRS to come into compliance before becoming eligible to sponsor immigrant workers to enter the country. USCIS officials said a statutory change would be preferable to a regulatory change because, although they acknowledge no explicit prohibition exists in immigration laws against conditioning approval of employer petitions on their tax compliance, they have serious legal concerns about USCIS’s authority to issue such a regulation absent specific statutory authority.

Although changing the eligibility requirement would likely help bring taxpayers with unpaid assessments into compliance, IRS would be unlikely to recover all taxes owed by the businesses. IRS officials commented that some businesses, even if they came forward to IRS, would not be able to repay their full debt. USCIS officials made a similar comment and added some businesses may decide not to apply for immigration benefits knowing they are not in compliance with tax filing and payment requirements. Further, either IRS would only be able to pursue collection for business sponsor cases that exceed thresholds IRS uses in determining how many cases to pursue or, if IRS took steps to collect taxes in all of these cases, it would be unable to work other cases. As we have reported previously, IRS has too many compliance cases to work.

Compliance With Filing of Taxes

Immigration data appear less likely to be useful to IRS for identifying applicants who do not file tax returns. For instance, we identified 33 business/entity sponsors from our nonprobability sample who appeared to be unknown to the IRS because they did not show up in any of six different IRS databases. An IRS investigation of the 33 revealed no productive compliance leads. IRS determined most of the sponsors—businesses and religious organizations—were either tax exempt, had no filing requirement, or were no longer liable for the tax. However, these 33 cases were a small fraction of the almost 20,000 business sponsors that appeared to be unknown to IRS based on our nationwide selection of USCIS business sponsor applications (see app. II).

In the mid-1980s, IRS and USCIS entered into a cost-reimbursable data- sharing arrangement under which USCIS shared immigrant data with IRS by completing IRS Form 9003. According to IRS officials, IRS used Form 9003 information to help identify whether individuals who filed for U.S. permanent residency had filed tax returns and properly reported their income. IRS and USCIS shared Form 9003 data for about 10 years but ended this arrangement in 1996. Much of the form 9003 immigrant data received from USCIS 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 view, it was no longer cost effective.

USCIS Can Benefit from Data Sharing with IRS in Making Immigration Eligibility Decisions

More Accurate Immigration Eligibility Decisions

IRS data can enable USCIS adjudicators to make more accurate eligibility decisions by better identifying businesses that may not have met immigration eligibility criteria. Our matching of immigration and taxpayer data identified business sponsors that may not meet immigration financial feasibility and legitimacy tests because they have failed to file tax returns and/or pay all of their taxes. Sixteen percent of businesses from our nationwide selection (67,949 of 413,723 businesses) applying to sponsor immigrant workers did not file one or more tax returns at the time of their application to sponsor an immigrant worker between 1997 and 2004 (app. II). Twenty four percent of businesses (112 of 475 businesses) from our nonprobability sample that applied to sponsor immigrant workers did not file one or more tax returns at the time of their application to sponsor an immigrant worker between 2001 and 2003 (app. II). Five percent of sponsors from our nationwide selection (18,942 of 413,723 businesses) and 20 percent of businesses in our nonprobability sample (94 of 475 businesses) had unpaid tax assessments at the time of application. As of December 2003, for the nationwide results, the assessments totaled $5.6 billion and for the nonprobability sample results, the assessments totaled $39 million (app. II). Filing and paying taxes is an indicator that financial feasibility and legitimacy tests are met. Figure 2 shows matching results identifying business nonfilers and those with unpaid assessments from our nationwide selection.

Immigration adjudicators use applicants’ self-reported personal and financial information plus third party data to make decisions about granting benefits to immigration applicants. For businesses applying to sponsor immigrant workers—employment-based applications— immigration adjudicators use financial information for evaluating two basic eligibility criteria for businesses sponsoring 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. Information on tax returns filed with IRS show income levels and these could be used to validate applicant-provided information. Legitimacy, in the case of employment-based petitions, refers to whether a sponsoring business or organization actually exists, has employees, and has real assets. Figure 3 depicts an overview of the adjudication process for employment-based applications.

Since adjudicators receive self-reported—and sometimes false—personal and financial information from applicants, they sometimes obtain additional or different documentation from the applicant or third parties. For example, at the time of application or during the adjudicatory process, applicants may be required to provide additional documentation, such as tax returns from IRS or unofficial copies to verify financial information reported on immigration forms. However, immigration officials we spoke with in five field locations said applicants could alter or falsify those documents. According to USCIS officials, designing a data-sharing arrangement that includes verification of applicant-provided data during the adjudicatory process would be useful to USCIS adjudicators for the financial feasibility and legitimacy tests and afford more accurate immigration eligibility decisions. Additionally, with an eligibility change as discussed earlier, business sponsors would be required to file tax returns, pay amounts due, or make payment arrangements with IRS before qualifying for immigration benefits. This, in turn, could result in a higher likelihood of USCIS getting applications from business sponsors that have met their tax filing and payment obligations, thereby more likely meeting USCIS’s financial feasibility and legitimacy criteria. USCIS could then better assure that it was granting benefits to those business sponsors that accurately meet their criteria.

USCIS Ombudsman and representatives of immigration advocacy groups have concerns about data sharing and immigration eligibility for business sponsors. Although the Ombudsman acknowledged the benefits of data sharing, he was concerned that another step in the immigration application process could be more cumbersome for business sponsors. He questioned the type of information IRS would share and said businesses in dispute with the IRS should not be prevented from applying for benefits while the dispute is being resolved. A representative from one advocacy group expressed several concerns on behalf of business sponsors including: Increased delays in the immigration process - from their perspective, any additional step in the application process could lengthen the time between when a business decides to sponsor a worker and obtaining USCIS’s approval.

Problems with improving USCIS’s technological capabilities – according to the immigration advocate, USCIS is still mostly paper-driven and therefore it is questionable as to whether they could share data electronically.

Special tax issues related to small businesses – many small business sponsors file tax extensions and, therefore, may not have readily available tax documents. Additionally, newer small businesses have no tax history.

Adjudicator training – adjudicators need to understand how to read and interpret business tax documents because many, in the advocate’s opinion, have no training in dealing with those complicated documents.

A representative of another immigration advocacy group also voiced the same concern about adjudicator training and added that implementing data sharing may be more useful in dealing with small- and medium-sized businesses because, based on their experience, larger businesses are less likely to be involved in immigration fraud. In addition, although not mentioned by USCIS officials, one potential unintended effect of data sharing might be an increased incentive to employ illegal workers. That is, if a business knew that its tax status would be checked by USCIS, or if it was required to meet tax filing and payment obligations before sponsoring immigrant workers, some businesses might decide to meet their labor force needs with workers not properly authorized to work in the United States. Smaller employers, who are more likely to have tax compliance problems according to IRS, may be more likely to make this choice than larger-sized businesses.

According to USCIS officials, adjudicators would find IRS information on small businesses particularly useful since they are limited in their ability to assess these businesses’ financial feasibility and legitimacy. IRS has also encountered problems in corroborating financial information provided by small businesses and its research generally shows higher noncompliance among its small business population. Among our nonprobability sample, 25 of 43 business sponsors with unpaid assessments reported their net incomes as less than $10 million on USCIS employment-based applications. Additionally, USCIS has begun a series of benefit fraud assessments, which take a random sample of applications filed within certain immigrant and nonimmigrant categories and assess them for fraud by verifying key data reported. Based on the results of their fraud assessments, USCIS could focus on businesses that are more prone to fraud to match IRS data against in determining their financial feasibility and legitimacy.

The type of taxpayer data USCIS adjudicators find useful could change under a USCIS proposal to revise regulations for employment-based immigration applications. USCIS officials are seeking to revise requirements since they believe that (1) establishing the validity of the sponsor is sufficient to meet immigration statutory requirements and (2) adjudicators were spending too much time trying to establish a sponsor’s income levels for well-known or established businesses. In the interim, in May 2004, USCIS issued updated guidance to adjudicators directing them not to reestablish a sponsor’s ability to pay with its USCIS Form I-485, Application to Register Permanent Residence or to Adjust Status (see app. II) to minimize processing delays. If this regulatory change is made, IRS taxpayer data could still help adjudicators establish the legitimacy or the bona fide nature of a business sponsor. According to USCIS officials, if the proposed regulation were adopted, USCIS would still need tax documents but would no longer need specific income information from tax returns. USCIS adjudicators would need tax return information such as whether the sponsor filed income tax returns, what years they filed, how many employees they had, and if they paid taxes, and they would need to further evaluate whether additional IRS information would be useful. USCIS would need specific income information from the tax return, such as adjusted gross income, only in cases where the initial information provided by IRS raised questions about the sponsor for USCIS (e.g., if the employer had unpaid assessments or was a nonfiler). As of July 2005, the proposed regulatory change was with DHS’s legal office, awaiting approval.

More Timely Immigration Eligibility Decisions

USCIS officials said that access to IRS taxpayer data could also improve the timeliness of making benefit decisions primarily because it could decrease the rework and follow-up work with the applicant. 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 applicant-provided data (e.g., sending fewer RFEs to applicants; see figure 3 for an overview of the adjudicatory process). 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. As we reported in May 2001, USCIS officials said that lengthy processing times had resulted in increased public inquiries on pending cases, which, in turn, caused USCIS to shift resources away from processing cases to responding to inquiries, adversely affecting processing time.

Under a presidential initiative, USCIS has a 5-year, $540 million effort under way intended to reduce its backlog of applications, and ensure a 6-month average processing time per immigration application by the end of 2006. While USCIS has made progress on meeting most of its fiscal year 2004 and 2005 processing time goals, which range from 2 months to 20 months, its overall goal is to reduce processing time to 6 months in fiscal year 2006. This will be difficult because USCIS’s fiscal year 2004 and 2005 average processing times for some forms are more than twice as long as its fiscal year 2006 goal of a 6-month processing time. As Figure 4 shows, for three of the six forms we examined—the I-485 (Application to Register Permanent Residence or to Adjust Status), I-751 (Petition to Remove the Conditions on Residence), and N-400 (Application for Naturalization),— USCIS will need to cut its application processing times by more than 50 percent by fiscal year 2006 to meet its goal and thereby improve the timeliness of eligibility decisions.

In his fiscal year 2006 budget request, USCIS’s director stated “Although we are on track to achieve the President’s backlog elimination mandate, we fully realize that funding alone will not enable us to achieve this goal…I have worked closely with the leaders in USCIS to continually review our processes, identify opportunities for streamlining and further improvement, and to implement meaningful change.” USCIS’s director is looking for opportunities to further streamline the adjudicatory process, and, as stated previously, USCIS 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 applicant- provided data, which could reduce USCIS’s processing times for business sponsors’ applications.

USCIS staff in headquarters said that changing immigration eligibility to require proof of tax filing and payment compliance for business sponsors may also deter businesses that are not filing and paying their taxes from submitting immigration applications because they would know that USCIS would deny their applications. If so, this could somewhat reduce the volume of applications received and, thereby contribute to quicker application processing times.

IRS and USCIS Have Data-Sharing Options but Each Presents Challenges

A variety of options is available to IRS and USCIS for establishing and implementing data sharing. An applicant-initiated data-sharing relationship could be implemented under existing IRC authority through a taxpayer consent, whereby a taxpayer authorizes IRS to disclose his or her information to other agencies. Under an agency-initiated option, agencies could share information directly with each other in an electronic format, a process that is viewed as more efficient and desirable by USCIS and IRS officials. However, achieving such efficient data sharing may take time due to various legal, technological, and cost challenges that must be overcome. Establishing user fees to cover data-sharing costs are a way agencies can fund these various data-sharing options, but IRS lacks authority to include in its user fees the costs for bringing non-compliant business sponsors into compliance or to retain such fees.

Applicant-Initiated Option Could Be Implemented Using Existing Disclosure Authority

Taxpayer Consents Under Existing Disclosure Authority

One option for establishing data sharing between IRS and USCIS is to use an existing authority within the Internal Revenue Code (IRC). USCIS is not currently authorized to directly receive taxpayer information for immigration eligibility decisions under IRC Section 6103. However, individual taxpayers could authorize IRS to disclose their tax return information to agencies like USCIS through a taxpayer consent submitted either via paper or electronically. The consent must be in the form of a separate written document pertaining solely to the authorized disclosure – with text appearing on a paper document or text appearing on a separate computer screen. The consent must include: (1) taxpayer identity information (i.e., name, address, SSN or EIN); (2) the designee to whom the disclosure is to be made; (3) the type of tax return (or specified portion of the return) or return information (and the particular data) that are to be disclosed; and (4) the tax year or years to be covered. The consent must be signed and dated by the taxpayer who filed the return or to whom the return information relates and IRS must receive the consent within 60 days of the taxpayer’s signature and date.

Taxpayers use the Form 4506, Request for Copy of Tax Return, and the Form 4506-T, Request for Transcript of Tax Return, to authorize the paper consent. A tax return can show that the taxpayer filed a tax return and a tax transcript can show whether the taxpayer had a filing requirement, owed taxes, or paid taxes. Figure 5 is an overview of the way IRS processes paper consents, any costs to the taxpayer, and the average turnaround times.

IRS paper consents permit the agency to verify for a third party whether a taxpayer has been filing required tax returns and paying his or her taxes. These verifications may be referred to by various names but can be generically called “tax checks.” They are often done in connection with a taxpayer’s application for benefits, licensing, or employment. Entities that use tax checks include mortgage institutions, major banks, financial institutions, state revenue agencies, and federal agencies. States are the biggest users of taxpayer information. According to an official with the Federation of Tax Administrators, many states have a taxpayer consent requirement, along with their own consent form, to require potential employees or contractors to consent to a state tax check as a condition of employment or to receive a license. When states verify individual and business compliance with state tax requirements, they are also able to determine federal compliance as permitted by IRC 6103(d), since states routinely receive extracts of IRS taxpayer information (See table 3 for examples of state and private entities that require tax checks.).

For example, an Executive Order permits the state of Kansas to require a tax check in order for individuals and businesses to qualify for state employment or state contracts. State law also permits the rejection of a business’s application if the business owes the state taxes. Further, Kansas requires a tax check on all new and renewing vehicle dealership licenses. A March 2003 Kansas Legislative Audit Report found 514 motor vehicle dealers who owed $7 million in state sales tax. Before a business can apply or renew its dealership license at the state’s Division of Motor Vehicles (DMV), the business must present to the DMV proof that it fulfilled its state tax filing and payment requirements. According to an official with the Kansas Secretary of Revenue, for an active dealer, the threat of license revocation provided an incentive to bring non-compliant businesses into compliance. Businesses with unpaid assessments either paid their assessments or set up a payment plan. The state increased its car dealer tax compliance rate by 97 percent, according to an official with the Kansas Secretary of Revenue.

As noted previously, IRS taxpayer consents can also be implemented electronically. Similar to the paper consent, the electronic consent must indicate taxpayer identity information, the designee to whom the disclosure is made, the type of return information that is to be disclosed, and the tax year or years covered. USCIS officials are agreeable to using taxpayer consents if they could be implemented electronically in a way similar to an electronic verification pilot project that was undertaken by IRS and the Department of Education (Education). In the pilot, students who wanted to qualify for financial aid authorized the IRS to release their tax information to their academic institutions via the Internet. After authorizing the release, IRS sent the individuals’ tax transcripts directly to the schools. This procedure then resolved any inconsistencies between information on the tax transcripts and on financial aid applications.

Challenges Using Taxpayer Consents

One challenge agencies face in implementing data sharing based on taxpayer consents is the costs IRS and USCIS would incur to make data sharing work. Taxpayer consents can be costly and resource intensive when using paper, according to IRS officials. For example, IRS processed approximately 340,000 paper return and transcript requests at an IRS estimated cost of about $6.2 million (see table 4) during fiscal year 2004. Furthermore, the process can be paper intensive since IRS typically receives only hard copies of taxpayer consents. The agency only accepts paper requests via mail or fax, and no electronic versions of the paper copies (e.g., scanned copies cannot be e-mailed to IRS) are accepted. The process also can be time intensive. For example, the average processing turnaround time to process a copy of a tax return is 30 days; and the average turnaround time for a tax transcript is 10 to 30 days.

USCIS officials are reluctant to use a paper consent because the agency is moving from a paper to an electronic environment. USCIS officials warned that requiring applicants to consent to a paper or electronic tax check would necessitate business process and procedural changes by USCIS, as well as an education process to the immigration community and the third parties that assist petitioners with their applications. USCIS officials said that requiring business and individual applications to undergo a tax check could strain already limited agency resources. USCIS application data showed the estimated annual volume for the six immigration forms we reviewed totaled about two million for fiscal year 2004. USCIS officials said implementing a tax check for employment-based business applications—estimated to be at least 180,000 for fiscal year 2004—would be less difficult to process than the six application forms that require financial information. Also, because the same business sponsor could file applications more than once in a year, depending on how USCIS implemented the requirement for a tax check, it could be valid for a certain period of time according to whatever policy USCIS established. Subsequently, the business would not have to undergo a tax check every time it sponsored a worker, which would not strain USCIS’s resources.

Although use of tax data has helped some federal agencies better administer their programs, some are concerned that widespread use of taxpayer consents may undermine taxpayers’ right to privacy and, subsequently, voluntary tax compliance. The confidentiality of tax data is considered by many to be crucial to voluntary compliance. 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. When such waivers are granted, agencies are not obligated to follow the recordkeeping, reporting, and safeguard requirements that apply to tax data, although the less stringent requirements of the privacy act may still apply. IRS’s National Taxpayer Advocate stated in 2003 that “Widespread use of tax information by federal or state agencies will, in fact, undermine our tax administration system,” and that “A change in tax compliance of even one percentage point equates to an annual loss of over $20 billion of revenue to the federal government.” In its October 2000 report to the Congress on taxpayer confidentiality, Treasury’s Office of Tax Policy recommended that before a government program is allowed to use taxpayer consents, the requesting agency should first conduct a statistical test match or a small-scale pilot. If that test or pilot demonstrates that the program’s need for information outweighs concerns about taxpayer privacy and voluntary tax compliance, then Treasury will determine whether the agency can proceed with a limited program using taxpayer consents or whether a legislative amendment should be sought permitting direct access.

Agency-Initiated Electronic Option Is Seen as More Efficient, but Additional Authority Would Be Needed

Specific Disclosure Authorities for Sharing Data Electronically

Another option for data sharing is direct agency-to-agency sharing. Such data-sharing arrangements are enabled by specific statutes or regulations and, in the case of electronic data matching, have written agreements between agencies. Education, SSA, and the Centers for Medicare and Medicaid Services (CMS) are examples of agencies that have existing data- sharing relationships with IRS using electronic media such as a magnetic tape. These agencies are able to share data with IRS because they were each given specific authorities under IRC Section 6103, which authorizes the disclosure of a taxpayer’s return information and tasks IRS with oversight of safeguards for taxpayer information. Further, agencies enter into a computer matching agreement (CMA), which outlines the purpose for the data-sharing relationship, the information to be shared, the method of sharing, the approximate number of records to be shared, the frequency of sharing, and the length of the data-sharing arrangement. The requesting agency is required to attach to the CMA an analysis that measures the costs and benefits associated with a data-sharing arrangement with IRS. Agencies must also provide IRS an annual report on their security safeguards that protect against any unauthorized access or disclosure of data received during the arrangement.

As shown by the examples in table 5, each agency’s data-sharing relationship with IRS differs in terms of the number of records shared, the method and frequency of sharing, the annual cost to the agency, and the cost per record.

Electronic Data Sharing between IRS and the Department of Education The Department of Education obtains the mailing addresses of taxpayers for use in collecting debt from students who have defaulted on loans. Under the Taxpayer Address Request program, as authorized by IRC Section 6103(m)(4), Education furnishes the name and SSN of each defaulted student to the IRS. IRS then matches the information to its records and provides Education the most recent address for the taxpayer. Education sends about 4.6 million records annually to IRS for matching.

Electronic Data Sharing between IRS and the Social Security Administration SSA is using each section within IRC Section 6103 that authorizes the disclosure of taxpayer information by IRS to SSA for benefit eligibility purposes. For example, the Disclosure of Information to Federal, State, and Local Agencies, under IRC Section 6103(l)(7), enables SSA to request and use taxpayer information from IRS to determine the eligibility of applicants and recipients of Supplemental Security Income, the nation’s largest cash assistance program for the poor. SSA officials estimate a savings of approximately $48 million annually with this data-sharing relationship. In addition, with the Medicare Secondary Payer Program, as authorized by IRC Section 6103(l)(12), SSA, through information collected from employers of working-aged beneficiaries and Medicare-eligible spouses such as name and SSN, is able to avoid duplicate payments for services by identifying Medicare-eligible individuals who have primary coverage through a group health plan. This data-sharing relationship’s annual savings are estimated at $463 million.

Electronic Data Sharing between IRS and the Centers for Medicare and Medicaid Services The most recent data-sharing relationship under IRC Section 6103 is between IRS and CMS in which CMS uses taxpayer information on a daily basis to determine eligibility for the Transitional Assistance Program, which provides up to $600 to individuals to purchase prescription drugs. IRC Section 6103(l)(19) authorizes IRS to disclose to CMS specified tax return information of applicants for transitional assistance to help CMS identify eligible applicants. Figure 6 describes how the data matching occurs. In fiscal year 2004, CMS sent IRS about one million records for matching, and this data-matching arrangement cost CMS approximately $130,000.

Electronic Data Sharing via Transcript Delivery System IRS offers electronic service, or e-service, products that are accessed directly by authorized third parties such as tax practitioners and state revenue agencies. Available since July 2004, the Transcript Delivery System (TDS) allows authorized third parties to immediately, electronically access taxpayer transcript information like the return transcript, account transcript, record of account, and verification of nonfiling—products that otherwise are available via the paper consent Form 4506-T. Tax practitioners can use this service if the taxpayer authorizes disclosure via Form 2848, Power of Attorney, which must be on file with IRS before the practitioner can request and receive a taxpayer’s data. This type of disclosure is authorized via IRC Section 6103(e)(6). Only three states are currently using TDS, as authorized by IRC Section 6103(d).

The TDS e-services are Internet based and authorized users can access them from any computer with minimal Internet capabilities. The authorized individual retrieving taxpayer information inputs the request, and the information is accessed immediately. For fiscal year 2004, IRS estimates that it cost about 4.8 cents to provide access to a transcript using TDS.

Challenges Associated with Electronic Data Sharing

Legal Challenge of Data Sharing Electronically sharing taxpayer information directly from IRS to USCIS without a taxpayer consent has a number of legal, technological, and cost challenges if it is used for immigration benefit purposes. In order to electronically share information without first obtaining taxpayers’ consent, IRC Section 6103 would need to be changed to authorize IRS to disclose taxpayer information directly to USCIS for immigration eligibility purposes. Over the years, a number of exceptions have gradually been added to IRC Section 6103 that allow access to taxpayer information. As mentioned previously, some are concerned that disclosing taxpayer data could affect the taxpayer’s right to privacy and, subsequently, undermine voluntary tax compliance. According to Treasury, the burden of supporting an exception to IRC 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 6 lists the criteria Treasury and IRS have applied when evaluating specific legislative proposals to amend IRC Section 6103 for governmental disclosures.

Technological Challenges of Electronic Data Sharing USCIS must also address a number of technological challenges to lay the foundation that would enable data sharing to take place between the two agencies. For example, in our July 2004 testimony, we reported that: USCIS does not maintain any automated financial data on applicants. Although USCIS 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.

USCIS systems contain some inaccurate data. We and the Department of Justice’s Office of Inspector General have criticized USCIS systems because they contain some inaccurate data for identifying pieces of information that identifies applicants (such as immigrants’ addresses).

USCIS and IRS databases do not always have a common numerical identifier for tracking individuals or businesses. USCIS uses alien registration numbers as tracking identifiers whereas IRS uses SSNs or EINs. Although USCIS’s systems capture SSNs/EINs if they are provided on applications, USCIS does not require them to be entered into its systems. Thus, even though business sponsors should all have SSNs (if sole proprietor) or EINs (if another form of business), USCIS may not have entered the number into automated databases and therefore cannot match directly to IRS records.

These limitations in USCIS’s record keeping would make electronic sharing of data between USCIS and IRS less productive than it otherwise could be, regardless of whether the data sharing was done directly between the agencies pursuant to a change in IRC Section 6103 or whether done through taxpayer consents. USCIS officials recognize that these problems could interfere with achieving data sharing in the fully electronic environment that they hope to achieve for adjudicators, but if a policy decision was made to share data, they believe that some form of electronic data sharing could be achieved relatively quickly without major technological improvements. The officials believe that USCIS could develop interim solutions while other USCIS transformation activities are under way. For example, these officials said USCIS could modify its existing automated systems to add a SSN/EIN identifier, and could adopt procedures to ensure the identifiers are routinely entered in all locations. They view this as a business process and policy challenge rather than a technological challenge. They also believe they could link the existing USCIS record identifiers to SSNs and EINS to enable data sharing to take place with IRS relatively quickly.

Officials did offer some cautions about how quickly even these changes could be implemented. For example, they said that although adding a SSN/EIN identifier to their existing systems may only take a few months, changing immigration forms and notifying adjudicators and the larger community about the change could take much longer. As mentioned previously, these officials contend that establishing a new immigration requirement on applicants for a tax check will necessitate business process and procedural changes by USCIS, as well as an education process to the immigration community and the third parties that assist petitioners with their applications, which could take years. Finally, these USCIS officials pointed out, and the agency’s fiscal year 2006 budget request reflects, that the agency’s current priorities fall into three areas: (1) enhancing national security, (2) eliminating the immigration benefit application backlog, and (3) improving customer service. They stated that implementing changes to enable data sharing with IRS might take a longer time because it is not one of the agency’s three main priorities.

If data sharing were to occur, officials ultimately would prefer to have it integrated into a transformed USCIS information technology (IT) environment. Since July 2004, USCIS has taken a number of steps to improve IT capability. In March 2005, USCIS unveiled its IT transformation plan that USCIS describes as a large scale and complex program to increase capabilities, streamline processes and support the collection of service fees. As such, the overall planned IT upgrade includes changes, which will improve the agency’s overall IT environment as well as facilitate data sharing such as: Moving from a paper to an automated environment; Adding a unique identifier to track records for background checks; Implementing electronic adjudication whereby adjudicators will be able to review immigration applications and supporting evidence online, among the first increments of the IT upgrade.

Of the many ongoing activities related to USCIS’s IT transformation, USCIS officials described three major projects under way to improve its ability to receive and share data within the agency as well as with other agencies: Data layer/repository – this project will present users with a consolidated system to access information from 63 USCIS systems rather than the current situation where users have to log onto separate systems to obtain data. This capability would be available to adjudicators and, eventually, to external users.

Software updates – this project will upgrade, among other things, USCIS’s desktop and software capabilities, USCIS’s servers and network, and USCIS’s capability to support the new electronic processes.

E-adjudication pilots – this project will allow paperless (electronic) adjudication for certain immigration forms. Initially, USCIS has plans to pilot green card replacement/renewal applications (Form I-90) and extension applications for temporary workers in specialty occupations (Form I-129 H1B).

In the fall of 2004, USCIS officials anticipated implementing the e- adjudication pilots by mid-April 2005 and having the ability to receive data from IRS in June or July 2005. However, these projects have not gotten under way as scheduled; the start of the pilots is dependent on the data layer and software updates being in place. USCIS could not provide us with a completion date for the data layer and e-adjudication pilots due, in part, to uncertainty regarding future funding. USCIS expects to complete full implementation for its information technology transformation by fiscal year 2010. We are examining USCIS’s technological improvements as part of our ongoing work on immigration backlog and benefit fraud issues.

Cost Challenges of Data Sharing Estimating the cost benefit associated with establishing and maintaining a data-sharing relationship can be complicated. One reason developing a cost estimate is difficult is because electronic methods of sharing data can vary, and different costs are associated with different methods of sharing. For example, USCIS may incur technological costs related to improving their IT capability to enable data sharing, which can be processed by either magnetic tape or computer file, each of which has different costs. However, some of the necessary IT improvements are already planned and would be funded as part of USCIS’s comprehensive upgrade of its IT systems if data sharing with IRS does not occur.

Estimating the cost benefit is also complicated because of the difficulty both agencies may encounter in establishing costs for providing the service. The Computer Matching and Privacy Protection Act of 1988 states that no matching program can be approved unless the agency has preformed a cost-benefit 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 stresses 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 our July 2004 testimony, we recommended that IRS and USCIS assess the benefits and costs of data sharing to enhance tax compliance and improve immigration eligibility decisions. IRS responded by stating it would study the issues and work with USCIS to identify possible solutions. DHS/USCIS agreed with our recommendation and said they were “exploring a technical capability for effectively and efficiently sharing data with the IRS on individuals who apply for immigration benefits.” In addition, in 2004, we reported IRS did not have a cost accounting system capable of providing reliable cost information, and in 2004, we also reported USCIS had insufficient cost data to determine the full extent of its operating costs.

Finally, estimating the cost benefit is also complicated because of uncertainty regarding the net benefits that would be gained from data sharing. 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 USCIS developed more leads for possible enforcement actions, IRS likely would only be able to pursue the portion of cases that exceeds thresholds IRS uses in determining how many cases to pursue. Further, apparent noncompliance may not be substantiated. For example, some of those who appear not to have filed tax returns based on matching IRS and USCIS data may indeed have filed but were not found in IRS’s databases due to inaccurate information in USCIS files or otherwise not have a filing obligation. Of business sponsors with unpaid assessments, some portion likely would be unable to repay all taxes owed. From USCIS's perspective, although we found that many businesses may not have filed tax returns or may owe taxes, some of these situations may not be significant enough to affect a USCIS adjudicator's decision about their financial feasibility or legitimacy. For instance, some of the businesses applying to sponsor immigrant workers that owe taxes may not owe enough to raise doubts about their ability to pay the worker. This may be especially true for larger businesses.

Currently Authorized User Fees Can Fund Data Sharing, but IRS Could Not Recover All Related Costs

Under current statutes, USCIS likely would be able to increase its user fees to recover all costs associated with data sharing with IRS and to retain the fees, but IRS would not be able to charge user fees that would include costs to bring noncompliant business sponsors into compliance. Because IRS could not recover all costs, it might not realize an increase in net tax collections through data sharing with USCIS.

Both IRS and USCIS currently have authority that states when and under what circumstances they can charge user fees and defines permissible uses of the funds. IRS is statutorily restricted to retaining no more than the $119 million in user fees annually. If the additional user fees to perform tax checks for USCIS business applicants seeking to sponsor workers generate additional funds that exceed IRS’s limit, the agency would be unable to retain the excess amounts. Further, IRS is limited to recovering the costs directly associated with providing a service to taxpayers. USCIS, on the other hand, does not have a limit on the amount of user fees it can collect and currently is authorized to collect and retain a user fee related to providing adjudicatory and naturalization services including compliance related costs.

In 2004, IRS collected over $137 million in user fees for a wide range of services, including installment agreements, offers in compromise, and Freedom of Information Act (FOIA) requests. In fiscal year 2004, about 82 percent of all user fees collected by IRS were for installment agreements or employee plans and exempt organizations’ letter rulings and determination letters. The 1995 Treasury Appropriations Act specifies that IRS can keep an overall maximum of $119 million per year of the user fees it collects for specific purposes, with the rest of the user fees going into the Treasury general fund. However, statutory formulas also limit how much IRS can retain of certain individual user fees. Due to these individual user fee limits, in 2004, IRS retained about $90 million from the user fees collected (see table 7) while the remaining $48 million went to the Treasury general fund.

According to USCIS officials, in 2004, USCIS collected $1.3 billion in user fees for administering a variety of immigration services and benefits. Altogether, the agency has about 60 user fees, which range from $2 to $585, except for the $1000 premium-processing fee for select employment based applications. With the exception of FOIA fees, which are retained by the Treasury, DHS retains all user fees collected. According to USCIS, the agency’s budget will be entirely fee based beginning in fiscal year 2007.

IRS cannot collect and retain a user fee to support the compliance-related costs it incurs in connection with data-sharing activities. IRS currently only has authority to collect and retain a user fee related to the direct cost of providing the service—such as providing a copy of a tax return. If business sponsors were required to meet their tax obligations before they could sponsor immigrant workers, IRS also would incur costs to bring some sponsors into tax filing and payment compliance. As discussed earlier, bringing noncompliant business sponsors into compliance could displace other compliance activities that IRS would otherwise undertake.

Depending on whether bringing the noncompliant business sponsors into compliance brought in more, the same, or less taxes than the displaced cases, bringing business sponsors into compliance could result in little change to IRS’s overall net tax collections, an increase, or possibly even a decrease.

If data sharing were begun between USCIS and IRS and a user fee is charged, a number of implementation issues also would need to be considered. For example, would both agencies charge fees to cover their costs? Would one charge a fee sufficient to cover both agencies’ costs and, if so, how often would it forward collected monies to the other agency? In addition, if IRS were authorized to include costs for bringing noncompliant business sponsors into compliance, it likely would have to adjust the fees as it gained experience in determining how much cost it would incur to bring sponsors into compliance.

Conclusions

Data sharing between IRS and USCIS has the potential to better guide IRS’s efforts to identify and correct noncompliance by taxpayers and result in more informed, accurate, and timely immigration eligibility decisions by USCIS adjudicators. Although the agencies would benefit in differing ways, establishing and implementing data sharing can be beneficial to both agencies. For tax compliance purposes, requiring a tax check— documenting whether a business sponsor has filed required returns and paid required taxes—likely would lead some businesses to come into compliance because they would know that USCIS would consider this information in determining whether the business can sponsor immigrant workers. However, because USCIS would only consider this information as one indication of whether businesses qualify to sponsor workers, a greater tax compliance increase is likely if businesses were required to meet tax filing and payment obligations as a condition for sponsoring workers. Given the billions of dollars of unpaid tax assessments among past business sponsors, our matching results illustrate strong potential for increased tax collections from changing immigration eligibility requirements. Although USCIS officials say no statutory provision prohibits USCIS from changing its regulations to require business sponsors to meet their tax filing and payment obligations, officials believe a statutory change would better withstand a legal challenge. Further, because collecting the unpaid assessments of business sponsors would displace other tax collections work, absent funding to cover its costs of bringing the business sponsors into compliance, IRS might not realize a net increase in overall tax collections.

For immigration eligibility purposes, requiring business sponsors to meet their tax filing and payment obligations would help ensure businesses applying to sponsor immigrant workers are legitimate. Short of this change, either an applicant-initiated or an agency-initiated data-sharing arrangement could help improve benefit decisions. Our analysis shows strong potential to improve thousands of immigration eligibility decisions if USCIS uses IRS data to help support officials’ decisions about a business sponsor’s financial health.

Even though data sharing shows promise to benefit both agencies, they would face implementation choices and challenges that could require technological or statutory solutions. In order to develop a better understanding of the implementation challenges and costs, to explore the most practical options for full scale implementation of data sharing, and to more completely assess benefits to IRS and USCIS from data sharing, USCIS should undertake a pilot test of data sharing under existing authority to use taxpayer consents to obtain tax data. Such a study would be consistent with congressional and executive branch policies that stress that sharing of tax data be thoroughly justified given concerns about possible adverse effects on tax compliance if the confidentiality of taxpayer’s data is compromised. Additionally, a study could assess issues raised by USCIS’s Ombudsman and immigration advocacy groups. A study would provide executive and legislative policymakers better information for determining the costs and benefits of data sharing and whether USCIS should require taxpayer consents from all future business sponsors or whether a change to IRC Section 6103 would better support efficient data sharing.

Matters for Congressional Consideration

To improve taxpayer compliance and USCIS’s immigration benefit decisions, Congress should consider (1) changing immigration eligibility to require businesses applying to sponsor immigrant workers to meet tax filing and payment obligations to sponsor immigrant workers and (2) authorizing a user fee to be collected and retained by IRS to cover the costs of bringing non-compliant taxpayers into compliance.

Recommendation for Executive Action

To improve the accuracy and timeliness of USCIS’s immigration eligibility decisions absent requiring businesses to have met their tax filing and payment obligations, we recommend the Secretary of the Department of Homeland Security direct USCIS, in consultation with the IRS, to conduct a pilot data-sharing test. In the test, USCIS should require a tax check for selected businesses and other entities applying to sponsor immigrant workers before qualifying for immigration benefits. The pilot test should assess and document the costs and benefits of data sharing including key issues such as using paper or electronic consents, or pursuing specific IRC Section 6103 disclosure authority, assessing resource implications, and considering how the agencies would allocate responsibilities for collecting and allocating user fees from the business sponsors.

Agency Comments and Our Evaluation

The Commissioner of Internal Revenue provided written comments on a draft of this report in a September 16, 2005, letter. The Commissioner agreed that data sharing between the IRS and USCIS within the Department of Homeland Security may have many benefits. IRS agreed to conduct a small-scale pilot test, in conjunction with USCIS, to determine whether a business case exists for supporting data sharing before pursuing legislation or a large-scale taxpayer consent program. The Commissioner also stated an executive working group will determine the merits of applying user fees for compliance data sharing.

On behalf of the Secretary of DHS, the Director of DHS’s Office of Inspector General Liaison provided written comments on a draft of this report in a September 26, 2005, letter. The Director generally agreed with our recommendation and acknowledged the pilot program would be consistent with USCIS’s desire to explore ways to streamline its processes and could provide necessary information with respect to considering the feasibility of initiatives such as data sharing on a larger scale. He appreciated GAO’s recognition of the burden of paper taxpayer consent forms place on USCIS and its reluctance to embark on a process that would be largely paper-based.

Although the Director generally agreed with our recommendation, his agreement was contingent on the extent to which USCIS can lawfully engage in a pilot program as we recommend. The Director’s letter did not elaborate on his uncertainty regarding USCIS’s ability to lawfully engage in the recommended pilot program. Based on supplemental communication, his concern focused on USCIS’s authority to require business sponsors to consent to a tax check. According to the Director, immigration laws contain no explicit prohibition on conditioning employer petitions on their tax compliance and doing so might be legally defensible. Nevertheless, he said USCIS has serious legal concerns about USCIS’s authority to promulgate regulations with such a requirement.

The Director did not describe the legal concerns and therefore we do not have a basis to evaluate them. Consulting with IRS in determining how to design the pilot test should help USCIS resolve these concerns. We note that Education requires taxpayer consents as a condition of participation in certain student loan repayment programs. Should USCIS ultimately conclude that it does not have authority to require such a waiver, an option for proceeding with the pilot test would be to ask selected business applicants to voluntarily allow USCIS to directly obtain tax data from IRS. Taxpayers may authorize others to obtain their tax data directly from IRS.

The Director also expressed concerns about the impact of ongoing tax disputes on immigration benefit decisions if those decisions are contingent on a taxpayer being required to meet tax filing and payment obligations. We believe consultations between USCIS and IRS in designing a pilot program can address this issue. For instance, officials might decide that businesses with some minimal level of tax underpayment or businesses with tax delinquencies that are actively participating in a payment arrangement with IRS would not be disqualified from sponsoring immigrant workers. We would urge USCIS and IRS to develop data-sharing policies that would minimize the impact of ongoing tax disputes on immigration benefit decisions for business sponsors.

In commenting on a user fee to be collected and retained by the IRS, the Director agreed that IRS should be provided with adequate resources to carry out its tax compliance mission but had serious concerns about the user fee proposal. The Director commented that policy considerations have kept USCIS from completely using its authority to recover its full costs. He noted that Congress has mandated several additional fees for certain employment-based applications and that, “in short, the more interagency functions the overall cost of an application to USCIS is expected to support, the higher the cost to the applicant without consequent improvements in USCIS services, the less likely it is that USCIS will be able to increase its fees as may be necessary to fully recover its own costs.” The Director also noted that we had previously reported that fee collections are not sufficient to pay USCIS’s full costs.

We understand that many considerations must be taken into account in setting USCIS’s overall fees. However, as our report indicates, obtaining a benefit from IRS’s perspective depends substantially on having sufficient funds to bring business applicants that have outstanding tax filing or payment obligations into compliance. Further, as also indicated in our report, USCIS access to IRS tax data for determining immigration benefit decisions has the potential to improve service to USCIS’s business applicants because it could decrease rework and follow-up work with the applicant that currently occurs. This would help USCIS in minimizing processing time for all business sponsors. Ultimately, with more routine access to IRS data, USCIS might not need to request as much financial information from business applicants as it does now since USCIS officials themselves see IRS data as more reliable than information provided by applicants. Finally, the GAO report cited by the Director did conclude that USCIS fees were not sufficient to fully fund USCIS’s operations. The insufficiencies, however, were not due to fees being collected for interagency functions. Rather, we said this resulted because USCIS’s fee schedule was based on an outdated fee study that did not include all costs of USCIS’s operations and costs had increased since the fee study was conducted.

Finally, the Director commented that the proposed user fee to cover IRS’s compliance related costs seemed to be different in concept from other existing user fees. As the Director noted, it was not within the scope of our review to examine all user fee relationships between IRS and other agencies. Based on the work we did, we are not aware of another case in which IRS receives a user fee to bring applicants for other agencies’ benefits into compliance with their tax obligations. However, Congress has authorized new or expanded funding arrangements to help IRS deal with its workload. For instance, in Treasury’s appropriations for 1995, Congress specifically authorized IRS to establish new user fees or raise existing fees for services provided in order to increase receipts. More recently, Congress also authorized IRS to use private collection agencies to assist in collecting delinquent taxes and specified that up to 25 percent of money collected can be used to pay the collection agencies and another 25 percent can be retained by IRS. Given the substantial unpaid taxes that we found among businesses applying to sponsor immigrant workers, we believe that it is appropriate for Congress to consider steps for effectively bringing these taxpayers into compliance without unduly deterring IRS from pursuing other noncompliant taxpayers. As our report explains, for this to occur, IRS’s costs for bringing the noncompliant business sponsors into compliance must be covered, otherwise IRS might experience a net decrease in tax collections. Consequently, our report put forth the user fee as one option for Congress to consider for supporting a potential data- sharing arrangement between IRS and USCIS.

As agreed with your office, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Secretary of the Department of Homeland Security, the Director of the United States Citizenship and Immigration Services, and other interested parties. We will also make copies available to others on request.

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. GAO staff who made major contributions to this report are listed in appendix IV.

Objective, Scope, and Methodology

Our objectives were to determine the (1) potential benefits of data matching and the (2) options for establishing and maintaining a data- sharing relationship between the Internal Revenue Service (IRS) and the U.S. Citizenship and Immigration Services (USCIS), including any challenges associated with those options.

We performed our work at various IRS offices, including the Office of Governmental Liaison and Disclosure, the Office of Safeguards; and the Office of Program, Evaluation, and Risk Analysis. Our work included interviews with employees in IRS's Wage and Investment Operating Division and Small Business/Self Employed Operating Division. We interviewed USCIS officials in headquarters’ operational, technological, fraud, ombudsman, and policy offices. Additionally, we interviewed representatives of two immigration advocacy groups—the American Council on International Personnel and the American Immigration Lawyers Association—to obtain their perspectives on potential changes to immigration eligibility rules.

To determine the potential benefits of data matching between IRS and USCIS, we summarized the benefits reported in our July testimony (GAO- 04-972T), including the results of our data matching efforts (see app. II). We worked with IRS on conducting additional research for business sponsors unknown to IRS (identified in our July 21, 2004 testimony) to determine whether they are operating businesses/organizations and have any tax compliance problems. To better illustrate the potential tax compliance benefit related to business sponsors who have unpaid tax assessments, we further stratified the business sponsors with unpaid assessments from our nationwide selection to identify subpopulations of business sponsors that were or were not in a payment arrangement or had made payments within 2 years.

To determine the options for establishing and maintaining a data-sharing relationship between the IRS and USCIS, we interviewed IRS and USCIS officials on processes in place that support data sharing under existing disclosure authorities. We summarized operational information such as timeliness, costs, and volume levels for existing data-sharing relationships to provide perspective on the options for establishing a data-sharing relationship between IRS and USCIS. We interviewed IRS officials on the resource implications of sharing data via different data-sharing arrangements. We compiled examples of private institutions and state entities that use “tax checks”— IRS verification that a taxpayer filed and/or paid his or her taxes--for eligibility determination purposes and to summarize costs associated with “tax checks.” We interviewed IRS and USCIS officials and obtained and reviewed statutory and regulatory guidance on the use of user fees and summarized information on (1) types of user fees IRS has in place to support compliance and enforcement activities, (2) regulatory implications for employing a user fee to support data sharing between USCIS and IRS, and (3) whether user fees go to the general fund or the Treasury fund. Finally, we interviewed USCIS officials and reviewed documents on planned changes to immigration eligibility that may impact the type of IRS information immigration adjudicators will need for eligibility decisions.

To determine the potential challenges of data matching between IRS and USCIS under the various data-sharing options, we primarily summarized the challenges reported in our July testimony, including the technological, cost, and legislative barriers. We identified and reviewed the legislative and regulatory authorities that govern disclosure of personal and financial information for eligibility determinations and tax compliance purposes. We interviewed USCIS policy and legal staff on the implications of changing immigration eligibility decisions to require applicants to (1) provide taxpayer consents that allow IRS to share data and (2) be current on their taxes and review related documentation. We also interviewed USCIS and IRS officials regarding future cost challenges associated with establishing a data-sharing relationship.

We assessed the reliability of IRS's Business Master File (BMF) and Individual Master File (IMF) data and the USCIS's Computer Linked Application Information Management System, Version 3.0 (CLAIMS 3), a database containing nationwide data but not naturalization data, by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. As part of our annual audits of IRS’s financial statements, we also assess the reliability of IRS’s BMF and IMF data with respect to unpaid assessments by testing selected statistical samples of unpaid assessment modules. We determined that the data were sufficiently reliable for the purposes of this report.

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 USCIS officials to identify immigration forms they believed would most benefit from data sharing with IRS, and we relied on IRS and USCIS 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 USCIS field locations was not a probability sample, we cannot make inferences about the population of applications. In addition, because employer identification numbers/social security numbers 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. We did not assess the reliability or quality of taxpayer information collected by IRS or the accuracy of information applicants reported to USCIS. Immigration applicants/taxpayers who were in IRS’s non-filer database could include individuals who did not meet IRS filing requirements. We relied on IRS’s investigation of the 33 business sponsors that were not in IRS’s databases since disclosure rules limit our contact with taxpayers. Since IRS searched its tax data for the last 5 years (1999– 2004) and we collected 7 years of immigration data (1997-2004), an unknown but likely small percentage of the businesses that submitted applications during 1997 and 1998, but are unknown to IRS, could be no longer in operation. Additionally, we did not assess the reliability of IRS data on the cost of paper taxpayer consents since we used this information for background purposes. We conducted our work from August 2004 through August 2005 in accordance with generally accepted government auditing standards.

Summary of IRS/USCIS Data-Matching Results

The tables that follow present the data we reported in our July 2004 testimony (GAO-04-972T) on the results of matching two sets of USCIS immigration data 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 Immigrant) submitted from January 1, 1997, through March 5, 2004, to USCIS service centers for immigration benefits. We used only those applications in USCIS’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). For the matching process, 3.4 million out of 4.5 million records had usable SSNs or EINs. We obtained automated data for those years because USCIS’s automated system had historical data not readily available in hard copy files. We used these 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 USCIS applicants reported the same income amounts to IRS and USCIS.

Second, we visited five USCIS field locations and selected a nonprobability sample of 984 immigration files covering the period of 2001 through 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 USCIS. We obtained hard copy files for those years because the USCIS offices we visited had immigration applications for those years on-site. 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) that accompanies the I-485 (Application to Register Permanent Residence or to Adjust Status). 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 I-829s for a small number of individual immigrants who had unpaid assessments or were nonfilers and none for business or individual sponsors.

To facilitate matching immigration and taxpayer data, we divided immigration applicants into three groups: business sponsors, individual sponsors, and individual beneficiaries. 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 used this sample to determine whether USCIS applicants reported the same income information to IRS as to USCIS and also as a second source of examples of USCIS applicants may who not have filed tax returns and may have owed taxes to IRS.

Tables 1-3 show our results on business sponsors, individual sponsors, and individual beneficiaries that have unpaid assessments or are nonfilers for both our nationwide selection and nonprobability sample of immigration files.

Comments from the Internal Revenue Service

Comments from the Department of Homeland Security

GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

In addition to the contact named above, major contributors to this assignment were Signora J. May, Assistant Director; Jyoti Gupta, Tina Younger, Michele Fejfar, Shirley Jones, Amy Rosewarne, and James Ungvarsky who made key contributions to this report.