Improving Withholding on Income Paid to Offshore Recipients
Some forms of U.S. source income paid to overseas recipients are subject to tax withholding unless certain exceptions apply. Hundreds of billions of dollars of income flow offshore and the Internal Revenue Service (IRS) has long struggled to ensure that proper withholding occurs. IRS created the Qualified Intermediary (QI) program to better ensure withholding compliance. GAO reviewed the program and made several recommendations, including that the Commissioner of Internal Revenue should do the following:
- measure U.S. withholding agents' reliance on self-certified documentation and use that data in IRS compliance efforts.
- determine why U.S. withholding agents and QIs report billions of dollars in funds flowing to unknown jurisdictions and to unidentified recipients. Based on this determination, IRS should take appropriate steps to recover any withholding taxes that should have been paid and to better ensure that U.S. taxes are withheld when account owners do not properly identify themselves.
- work to enhance agreed-upon procedures (AUP) by requiring the external auditor to report any indications of fraud or illegal acts that could significantly affect the results of the review. Under current AUPs, the external auditor is required to report whether the QI is in material violation of, or is under investigation for, violation of the "know your customer" rules.
- IRS should direct the head of the QI program office to expand this reporting requirement in the QI contractual agreement to require the external auditor to report any indications of fraud or illegal acts encountered while performing AUPs.
- require electronic filing of forms in QI contracts whenever possible, thereby reducing the need to manually process data reported from abroad. Further, IRS should invest the funds necessary to perfect these data.
IRS generally agreed with GAO's recommendations, but its planned actions were not fully responsive to the recommendations. In October 2008, IRS announced draft changes to the QI program consistent with GAO's recommendation to enhance the agreed-upon procedures.
^ Back to topKey Reports
- Tax Compliance: Qualified Intermediary Program Provides Some Assurance That Taxes on Foreign Investors Are Withheld and Reported, but Can Be Improved
- GAO-08-99, December 19, 2007
- Summary (HTML) Highlights Page (PDF) Full Report (PDF, 50 pages) Accessible Text Recommendations (HTML)
- Tax Compliance: Challenges in Ensuring Offshore Tax Compliance
- GAO-07-823T, May 3, 2007
- Summary (HTML) Highlights Page (PDF) Full Report (PDF, 32 pages) Accessible Text
