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2,300 | February 28, 2012. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Expand Efforts to Support Program Integrity Initiatives. GAO-12-292T. Washington, D.C.: December 7, 2011. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-12-104T. Washington, D.C.: October 4, 2011. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-11-699. Washington, D.C.: September 6, 2011. Medicare Integrity Program: CMS Used Increased Funding for New Act |
2,301 | ivities but Could Improve Measurement of Program Effectiveness. GAO-11-592. Washington, D.C.: July 29, 2011. Improper Payments: Reported Medicare Estimates and Key Remediation Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011. Fraud Detection Systems: Additional Actions Needed to Support Program Integrity Efforts at Centers for Medicare and Medicaid Services. GAO-11-822T. Washington, D.C.: July 12, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespre |
2,302 | ad Use. GAO-11-475. Washington, D.C.: June 30, 2011. Improper Payments: Recent Efforts to Address Improper Payments and Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011. Medicare and Medicaid Fraud, Waste, and Abuse: Effective Implementation of Recent Laws and Agency Actions Could Help Reduce Improper Payments. GAO-11-409T. Washington, D.C.: March 9, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, |
2,303 | D.C.: March 1, 2011. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Medicare: Thousands of Medicare Providers Abuse the Federal Tax System. GAO-08-618. Washington, D.C.: June 13, 2008. Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical. GAO-08-767T. Washington, D.C.: May 6, 2008. Improper Payments: Status of Agencies’ Efforts to |
2,304 | Address Improper Payment and Recovery Auditing Requirements. GAO-08-438T. Washington, D.C.: January 31, 2008. Improper Payments: Federal Executive Branch Agencies’ Fiscal Year 2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, D.C.: January 23, 2008. Medicare: Improvements Needed to Address Improper Payments for Medical Equipment and Supplies. GAO-07-59. Washington, D.C.: January 31, 2007. Medicare: More Effective Screening and Stronger Enrollment Standards Needed for Medical Equipment Supp |
2,305 | liers. GAO-05-656. Washington, D.C.: September 22, 2005. Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. Medicare: CMS Did Not Control Rising Power Wheelchair Spending. GAO-04-716T. Washington, D.C.: April 28, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission fro |
2,306 | m GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. |
2,307 | The IRS and tax administrators worldwide generally use similar administrative practices. Information reporting. Information reporting is a widely accepted practice for increasing taxpayer compliance. Under U.S. law, some types of transactions are required to be reported to the IRS by third parties who make payments to, or sometimes receive payments from, individual taxpayers. Typically, information returns represent income paid to the taxpayer, such as wages or bank account interest. After tax returns are f |
2,308 | iled, the IRS then matches the amounts reported on information returns to the amounts reported on the taxpayer’s return. For any differences, the IRS may send a notice to the taxpayer requesting an explanation. If the taxpayer does not respond to the notice, the IRS may make an additional assessment. For fiscal year 2010, the IRS received over 2.7 billion information returns, sent 5.5 million notices on differences between information returns and tax returns, and assessed an additional $20.7 billion in taxe |
2,309 | s, interest, and penalties. Withholding. Withholding is a widely accepted practice to increase taxpayer compliance. Under U.S. law, employers must withhold income tax from the wages paid to employees. Withholding from salaries requires wage earners to pay enough tax during the tax year to assure that they will not face a large payment at year end. Also, withholding can be required as a backup to information reporting if a payee fails to furnish a correct taxpayer identification number (TIN). If the payee re |
2,310 | fuses to furnish a TIN, the payer generally withholds 28 percent of the amount of the payment— for example, interest payments on a bank account—and remits that amount to the IRS. Electronic tax administration. Many tax administrators in the United States and worldwide have increasingly used electronic tax administration to improve services and reduce costs. The IRS has focused its electronic tax administration on filing tax returns over the Internet, providing taxpayer assistance through its Web site, and p |
2,311 | roviding telephone assistance. To accept electronically filed tax returns, IRS has authorized preapproved e-file providers to submit the returns. IRS cannot accept electronically filed returns directly from taxpayers. Through its Web site, IRS provides taxpayers with publications explaining tax law and IRS administrative procedure. The Web site also provides automated services such as “Where’s My Refund?” During the 2010 filing season, the IRS Web site had 239 million total visits and 277 million searches. |
2,312 | IRS also received 77 million telephone calls of which IRS phone assistors answered about 24 million calls. Tax enforcement. The U.S. tax system, as well as many other tax systems worldwide, is based on some degree of self-reporting and voluntary compliance by taxpayers. Tax administrations worldwide have enforcement programs to ensure that tax returns are accurate and complete and taxes are paid. Among others, IRS uses two principal enforcement programs. After tax returns have been filed, the Automated Unde |
2,313 | rreporter Program matches data on information returns (usually on income) provided by employers, banks, and other payers of income to data reported on taxpayers’ tax returns. IRS may contact taxpayers about any differences. The Examination Program relies on IRS auditors to check compliance in reporting income, deductions, credits, and other issues on tax returns by reviewing the documents taxpayers provided to support their tax return. IRS, like revenue agencies in many countries, administers tax expenditur |
2,314 | es. Tax expenditures are tax provisions that grant special tax relief for certain kinds of behavior by taxpayers or for taxpayers in special circumstances. Tax expenditures reduce the amount of taxes owed and therefore are seen as resulting in the government forgoing revenues. These provisions are viewed by many analysts as spending channeled through the tax system. For fiscal year 2010, the U.S. Department of the Treasury reported 173 tax expenditures costing, in aggregate, more than $1 trillion. Tax expen |
2,315 | ditures are often aimed at policy goals similar to those of federal spending programs, such encouraging economic development in disadvantaged areas and financing postsecondary education. In 2005, we reported that all U.S. federal spending and tax policy tools, including tax expenditures, should be reexamined to ensure that they are achieving their intended purposes and designed in the most efficient and effective manner. The following examples illustrate how New Zealand, Finland, the European Union (EU), th |
2,316 | e United Kingdom (UK), Australia, and Hong Kong have addressed well-known tax administration issues. Our work does not suggest that these practices should or should not be adopted by the United States. New Zealand, like the United States, addresses various national objectives through a combination of tax expenditures and discretionary spending programs. In New Zealand, tax expenditures are known as tax credits. New Zealand has overcome obstacles to evaluating these related programs at the same time to bette |
2,317 | r judge whether they are working effectively. Rather than doing separate evaluations, New Zealand completes integrated evaluations of tax expenditures and discretionary spending programs to analyze their combined effects. Using this approach, New Zealand can determine, in part, whether tax expenditures and discretionary spending programs work together to accomplish government goals. One example is the Working For Families (WFF) Tax Credits program, which is an entitlement for families with dependent childre |
2,318 | n to promote employment. Prior to the introduction of WFF in 2004, New Zealand’s Parliament discovered that many low-income families were not better off from holding a low-paying job, and those who needed to pay for childcare to work were generally worse off in low-paid work compared to receiving government benefits absent having a job. This prompted Parliament to change its in-work incentives and financial support including tax expenditures. The WFF Tax Credits program differs from tax credit programs in t |
2,319 | he United States in that it is an umbrella program that spans certain tax credits administered by the Inland Revenue Department (IRD) as well as discretionary spending programs administered by the Ministry of Social Development (MSD). IRD collects most of the revenue and administers the tax expenditures for the government. Being responsible for collecting sensitive taxpayer information, IRD must maintain tax privacy and protect the integrity of the New Zealand tax system. MSD administers the WFF’s program f |
2,320 | unds and is responsible for collecting data that include monthly income received by its beneficiaries. Given different responsibilities, IRD and MSD keep separate datasets, making it difficult to assess the cumulative effect of the WFF program. Therefore, to understand the cumulative effect of changes made to the WFF program and ensure that eligible participants were using it, New Zealand created a joint research program between IRD and MSD that ran from October 2004 to April 2010. The joint research progra |
2,321 | m created linked datasets between IRD and MSD. Access to sensitive taxpayer information was restricted to IRD employees on the joint research program and to authorized MSD employees only after they were sworn in as IRD employees. The research provided information on key outcomes that could only be tracked through the linked datasets. The research found that the WFF program aided the transition from relying on government benefits to employment, as intended. It also found that a disproportionate number of tho |
2,322 | se not participating in the program faced barriers to taking advantage of the WFF. Barriers included the perceived stigma from receiving government aid, the transaction costs of too many rules and regulations, and the small amounts of aid for some participants. On the basis of these findings, Parliament made changes to WFF that provided an additional NZ$1.6 billion (US$1.2 billion) per year in increased financial entitlements and in-work support to low- to middle-income families. Appendix II provides more d |
2,323 | etails on New Zealand’s evaluation of tax expenditures as well as similarities and differences to the U.S. system. Finland encourages accurate withholding of taxes from taxpayers’ income, lowers its costs, and reduces taxpayers’ filing burdens through Internet- based electronic services. In 2006, Finland established a system, called the Tax Card, to help taxpayers estimate a withholding rate for the individual income tax. The Tax Card, based in the Internet, covers Finland’s national tax, municipality tax, |
2,324 | social security tax, and church tax. The Tax Card is accessed through secured systems in the taxpayer’s Web bank or an access card issued by Finland’s government. The Tax Card system enables taxpayers to update their withholding rate as many times as needed throughout the year, adjusting for events that increase or decrease their income tax liability. When completed, the employer is notified of the changed withholding tax rate through the mail or by the employee providing a copy to the employer. According t |
2,325 | o the Tax Administration, about a third of all taxpayers using the Tax Card—about 1.6 million people—change their withholding percentages at least annually. Finland generally refunds a small amount of the withheld funds to taxpayers (e.g., it refunded about 8 percent of the withheld money in 2007). Finland also has been preparing income tax returns for individuals since 2006. The Tax Administration prepares the return for the tax year ending on December 31st based on third-party information returns, such as |
2,326 | reporting by employers on wages paid or by banks on interest paid to taxpayers. During April, the Tax Administration mails the preprepared return for the taxpayer’s review. Taxpayers can revise the paper form and return it to the Tax Administration in the mail or revise the return electronically online. According to Tax Administration officials, about 3.5 million people do not ask to change their tax return and about 1.5 million will request a tax change. Electronic tax administration is part of a governme |
2,327 | ntwide policy to use electronic services to lower the cost of government and encourage growth in the private sector. According to Tax Administration staff, increasing electronic services to taxpayers helps to lower costs. Overall, the growth of electronic services, according to Finnish officials, has helped to reduce Tax Administration staff by over 11 percent from 2003 to 2009 while improving taxpayer service. According to officials of the Finnish government as well as public-interest and trade groups, the |
2,328 | Tax Card and preprepared return systems were established under a strong culture of national cooperation. For the preprepared return system to work properly, Finland’s business and other organizations that prepare information returns had to accept the burden to comply in filing accurate returns promptly following the end of the tax year. Finland’s tax system is positively viewed by taxpayers and industry groups, according to our discussions with several industry and taxpayer groups. They stated that Finland |
2,329 | has a simple, stable tax system which makes compliance easier to achieve. As a result, few individuals use a tax advisor to help prepare and file their annual income tax return. Appendix III provides more details on Finland’s electronic tax administration system as well as a discussion of similarities to and differences from the U.S. system. The EU seeks to improve tax compliance through a multilateral agreement on the exchange of information on interest earned by each nation’s individual taxpayers. This a |
2,330 | greement addresses common issues with the accuracy and usefulness of information exchanged among nations that have differing technical, language, and formatting approaches for recording and transmitting such information. Under the treaty, called the Savings Taxation Directive, adopted in June 2003, the 27 EU members and 10 other participants agreed to share information about income from interest payments made to individuals who are citizens in another member nation. With this information, the tax authoritie |
2,331 | s are able to verify whether their citizens properly reported and paid tax on the interest income. The directive provides the basic framework for the information exchange, defining essential terms and establishing automatic information exchange among members. As part of the directive, 3 EU member nations as well as the 5 European nonmember nations agreed to apply a withholding tax with revenue sharing (described below) during a transition period through 2011, rather than automatically exchanging information |
2,332 | . Under this provision, a 15 percent withholding tax gradually increases to 35 percent by July 1, 2011. The withholding provision included a revenue-sharing provision, which authorizes the withholding nation to retain 25 percent of the tax collected and transfer the other 75 percent to the nation of the account owner. The directive also requires the account owner’s home nation to ensure that withholding does not result in double taxation. The directive does this by granting a tax credit equal to the amount |
2,333 | of tax paid to the nation in which the account is located. A September 2008 report to the EU Council described the status of the directive’s implementation. During the first 18 months of information exchange and withholding, data limitations such as incomplete information on the data exchanged and tax withheld created major difficulties for evaluating the directive’s effectiveness. Further, no benchmark was available to measure the effect of the changes. According to EU officials, the most common administra |
2,334 | tive issues, especially during the first years of implementation of the directive, have been the identification of the owner reported in the computerized format. It is generally recognized that a Taxpayer Identification Number (TIN) provides the best means of identifying the owner. However, the current directive does not require paying agents to record a TIN. Using names has caused problems when other EU member states tried to access the data. For example, a name that is misspelled cannot be matched. In add |
2,335 | ition, how some member states format their mailing address may have led to data-access problems. Other problems with implementing the directive include identifying whether investors moved their assets into categories not covered by the directive (e.g., shifting to equity investments), and concerns that tax withholding provisions may not be effective because withholding rates were low until 2011 when the rate became 35 percent. The EU also identified problems with the definition of terms, making uniform appl |
2,336 | ication of the directive difficult. Generally these terms identify which payments are covered by the directive, who must report under the directive, and who owns the interest for tax purposes. Nevertheless, EU officials stated that the quality of data has improved over the years. The EU officials have worked with EU member nations to resolve specific data issues, which has contributed to the effective use of the information exchanged under the directive. EU officials told us that the monitoring role by the |
2,337 | EU Commission, the data-corrections process, and frequent contacts to resolve specific issues have contributed to effective use of the data received by EU member states. Appendix IV provides more details on the EU Saving Taxation Directive and related issues such as avoiding double taxation as well as a discussion of similarities to and differences from the U.S. system. The UK promotes accurate tax withholding and reduces taxpayers’ filing burdens by calculating withholding rates for taxpayers and requiring |
2,338 | that payers of certain types of income withhold taxes at standard rates. The UK uses information reporting and withholding to simplify tax reporting and tax payments for individual tax returns. Both the individual taxpayer and Her Majesty’s Revenue and Customs (HMRC)—the tax administrator—are to receive information returns from third parties that make payments to a taxpayer such as for bank account interest. A key element is the UK’s Pay As You Earn (PAYE) system. Under the PAYE system, HMRC calculates an |
2,339 | amount of withholding from wages to meet a taxpayer’s liability for the current tax year based on information reporting from the employer and other income information employees may provide. According to HMRC officials, the individual tax system in the UK is simple for most taxpayers who are subject to PAYE. PAYE makes it unnecessary for wage earners to file a yearly tax return, unless special circumstances apply. For example, wage earners do not need to file a return unless income from interest, dividends, |
2,340 | or capital gains exceeds certain thresholds or if deductions need to be reported. Therefore, a tax return may not be required because most individuals do not earn enough of these income types to trigger self-reporting. For example, the first £10,100 (US$16,239) of capital gains income is exempt from being reported on tax returns. PAYE also facilitates the reconciliation of tax liabilities for prior tax years through the use of withholding at source for wages. The withheld amount may be adjusted by HMRC to c |
2,341 | ollect any unpaid taxes from previous years or refund overpayments. HMRC annually notifies the taxpayer and employer of the amount to withhold. HMRC also may adjust the withheld amount through information provided by taxpayers. If taxpayers provide the information on their other income such as self-employment earnings, rental income, or investment income, HMRC can adjust the PAYE withholding. Individuals not under the PAYE system are required to file a tax return after the end of the tax year based on their |
2,342 | records. In addition, HMRC uses information reporting and tax withholding as part of its two-step process to assess the compliance risks on filed returns. In the first step, individual tax returns are reviewed for inherent compliance risks because of the taxpayers’ income level and complexity of the tax return. For example, wealthy taxpayers with complex business income are considered to have a higher compliance risk than a wage earner. In the second step, information compiled from various sources—includin |
2,343 | g information returns and public sources—is analyzed to identify returns with a high compliance risk. According to HMRC officials, these assessments have allowed HMRC to look at national and regional trends. HMRC is also attempting to uncover emerging compliance problems by combining and analyzing data from the above sources as well as others. Appendix V provides more details on the UK’s information reporting and withholding system as well as a discussion of similarities to and differences from the U.S. sys |
2,344 | tem. The Australian High Net Wealth Individuals (HNWI) program focuses on the characteristics of wealthy taxpayers that affect their tax compliance. High-wealth individuals often have complex business relationships involving many entities they may directly control or indirectly influence and these relationships may be used to reduce taxes illegally or in a manner that policymakers may not have intended. The HNWI program requires these taxpayers to provide information on these relationships and provides such |
2,345 | taxpayers additional guidance on proper tax reporting. According to the Australian Taxation Office (ATO), in the mid-1990s, ATO was perceived as enforcing strict sanctions on the average taxpayers but not the wealthy. By 2008, ATO found that high-wealth taxpayers, those with a net worth of more than A$30 million (US$20.9 million), had substantial income from complex arrangements, which made it difficult for ATO to identify and assure compliance. ATO concluded that the wealthy required a different tax admin |
2,346 | istration approach. ATO set up a special task force to improve its understanding of wealthy taxpayers, identify their tax planning techniques, and improve voluntary compliance. Due to some wealthy taxpayers’ aggressive tax planning, which ATO defines as investment schemes and legal structures that do not comply with the law, ATO quickly realized that it could not reach its goals for voluntary compliance for this group by examining taxpayers as individual entities. To tackle the problem, ATO began to view we |
2,347 | althy taxpayers as part of a group of related business and other entities. Focusing on control over related entities rather than on just individual tax obligations provided a better understanding of wealthy individuals’ compliance issues. The HNWI approach followed ATO’s general compliance model. The model’s premise is that tax administrators can influence tax compliance behavior through their responses and interventions. For compliant wealthy taxpayers, ATO developed a detailed questionnaire and expanded t |
2,348 | he information on business relationships that these taxpayers must report on their tax return. For noncompliant wealthy taxpayers, ATO is to assess the tax risk and then determine the intensity of ATO’s compliance interventions. According to 2008 ATO data, the HNWI program has produced financial benefits. From the establishment of the program in 1996 until 2007, ATO had collected A$1.9 billion (US$1.67 billion) in additional revenue and reduced revenue losses by A$1.75 billion (US$1.5 billion) through compl |
2,349 | iance activities focused on highly wealthy individuals and their associated entities. ATO’s program focus on high-wealth individuals and their related entities has been adopted by other tax administrators. By 2009, nine other countries, including the United States, had formed groups to focus resources on high-wealth individuals. Appendix VI provides more details on Australia’s high-wealth program as well as similarities and differences to the U.S. system. Although withholding of taxes by payers of income is |
2,350 | a common practice to ensure high levels of taxpayer compliance, Hong Kong’s Salaries Tax does not require withholding by employers. Instead, tax administrators and taxpayers appear to find a semiannual payment approach effective. Hong Kong’s Salaries Tax is a tax on wages and salaries with a small number of deductions (e.g., charitable donations and mortgage interest). The Salaries Tax is paid by about 40 percent of the estimated 3.4 million wage earners in Hong Kong, while the other 60 percent are exempt |
2,351 | from Salaries Tax. Rather than using periodic (e.g., biweekly or monthly) tax withholding by employers, Hong Kong collects the Salaries Tax through two payments by taxpayers for a tax year. Since the tax year runs for April 1st through March 31st, a substantial portion of income for the tax year is earned by January (i.e., income for April to December), and the taxpayer is to pay 75 percent of the tax for that tax year in January (as well as pay any unpaid tax from the previous year). The remaining 25 perce |
2,352 | nt of the estimated tax is to be paid 3 months later in April. By early May, the Inland Revenue Department (IRD)—the tax administrator—annually prepares individual tax returns for taxpayers based on information returns filed by employers. Taxpayers review the prepared return, make any revisions such as including deductions (e.g., charitable contributions), and file it with IRD. IRD then will review the returns and determine if any additional tax is due. If the final Salaries Tax assessment turns out to be h |
2,353 | igher than the estimated tax previously assessed, IRD is to notify the taxpayer, who is to pay the additional tax concurrently with the January payment of estimated tax for the next tax year. Hong Kong’s tax system is positively viewed by tax experts, practitioners, and a public opinion expert based on our discussions with them. They generally believe that low tax rates, a simple system, and cultural values contribute to Hong Kong’s collection of the Salaries Tax through the two payments rather than periodi |
2,354 | c withholding. Tax rates are fairly low, starting at 2 percent of the adjusted salary earned and not exceeding 15 percent. Further, tax experts told us that the Salaries Tax system is simple. Few taxpayers use a tax preparer because the tax form is very straightforward and the tax system is described as “stable.” Further, an expert on public opinion in Hong Kong told us that taxpayers fear a loss of face if recognized as not complying with tax law. This cultural attitude helps promote compliance. IRS offici |
2,355 | als learn about foreign tax practices by participating in international organizations of tax administrators. IRS is actively involved in two international tax organizations and one jointly run program that addresses common tax administration issues. First, the IRS participates with the Center for Inter-American Tax Administration (CIAT), a forum made up of 38 member countries and associate members, which exchange experiences with the aim of improving tax administration. CIAT, formed in 1967, is to promote i |
2,356 | ntegrity, increase tax compliance, and fight tax fraud. The IRS participates with CIAT in designing and developing tax administration products and with CIAT’s International Tax Planning Control committee. Second, the IRS participates with the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA), which is chaired by the IRS Commissioner during 2011. The FTA was created in July 2002 to promote dialogue between tax administrations and identify good tax administration |
2,357 | practices. Since 2002, the forum has issued over 50 comparative analyses on tax administration issues to assist member and selected nonmember countries. IRS and OECD officials exchange tax administration knowledge. For example, the IRS is participating in the OECD’s first peer review of information exchanged under tax treaties and tax information exchange agreements. Under the peer-review process, senior tax officials from several OECD countries examine each selected member’s legal and regulatory framework |
2,358 | and evaluate members’ implementation of OECD tax standards. The peer-review report on IRS information exchange practices is expected to be published in mid-2011. As for the jointly run program, the Joint International Tax Shelter Information Centre (JITSIC) attempts to supplement ongoing work in each country to identify and curb abusive tax schemes by exchanging information on these schemes. JITSIC was formed in 2004 and now includes tax agencies of Australia, Canada, China, Japan, South Korea, the United K |
2,359 | ingdom, and the United States. According to the IRS, JITSIC members have identified and challenged the following highly artificial arrangements: a cross-border scheme involving millions of dollars in improper deductions and unreported income on tax returns from retirement account withdrawals; highly structured financing transactions created by financial institutions that taxpayers used to generate inappropriate foreign tax credit benefits; and made-to-order losses on futures and options transactions for ind |
2,360 | ividuals in other JITSIC jurisdictions, leading to more than $100 million in evaded taxes. To date, the IRS has implemented one foreign tax administration practice. As presented earlier, Australia’s HNWI program examines sophisticated legal structures that wealthy taxpayers may use to mask aggressive tax strategies. In 2009, the OECD issued a report for a project on the tax compliance problems of wealthy individuals and concluded that “high net worth individuals pose significant challenges to tax administra |
2,361 | tions” due to their complex business dealings across different business entities, higher tax rates, and higher likelihood of using aggressive tax planning or tax evasion. According to an IRS official, during IRS’s participation in 2008 in the OECD Project, IRS staff began to realize the value of Australia’s program to the U.S. tax system. The IRS now has a program focused on wealthy individuals and their networks. The IRS provided technical comments that are included in this report. As agreed with your offi |
2,362 | ces, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the report date. At that time, we will send copies to the Commissioner of Internal Revenue and other interested parties. This report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Pu |
2,363 | blic Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IX. For our objective to describe how other countries have approached tax administration issues that are similar to those in the U.S. tax system, we selected six foreign tax administrators. We based our selection of these practices on several factors, including whether the tax administrators had advanced economies and tax systems and the foreign tax administrator’s approach differed, at least in |
2,364 | part, from how the United States approaches similar issues. These tax systems also needed to have enough information available in English on their Web site for us to preliminarily understand their tax system and practices. In addition, we considered practices of interest to the requesters. To describe each of the practices, we reviewed documents and held telephone conferences with officials from each tax administrator. We also met with officials of Finland’s government in Helsinki. When possible, we confir |
2,365 | med additional information provided to us by officials to assure that we had a reasonable basis for the data presented. We used official reports published by the tax administrators, such as their annual reports, that are made available to the public on their Internet Web site. To identify taxpayers’ attitudes toward Hong Kong’s semiannual payment system, we interviewed experts who were either university professors, were the authors of publications on Hong Kong’s tax system, or were practitioners in well-kno |
2,366 | wn law or accounting firms. To understand the development of Finland’s Internet-based withholding estimation and prepared returns system, we met with the public interest and trade groups that provided assistance to Finland’s Parliament during the system’s development. To describe whether and how the Internal Revenue Service (IRS) identifies and integrates tax administration practices used in other countries, we interviewed IRS officials and reviewed related documents. We also followed up with IRS officials |
2,367 | based on any information we found independently about practices that relate to issues in the U.S. tax system and our comparison of U.S. and other administrator’s practices. The descriptive information on the practices of foreign administrators presented in this report may provide useful insights for Congress and others on alternatives to current U.S. tax policies and practices. However, our work did not include the separate analytic step of identifying and assessing the factors that might affect the transfe |
2,368 | rability of the practices to the United States. To adjust foreign currencies to U.S. dollars, we used the Federal Reserve Board’s database on foreign exchange rates. We used rates that matched the time period cited for the foreign amount. For current amounts, we used the exchange rates published for February 25, 2011. If the amounts were for a previous year, we used the exchange rate published for the last business day of that year. For example, if foreign amounts were cited as of 2006, we used exchange rat |
2,369 | es for December 29, 2006. We did not adjust amounts from previous years for inflation. To help ensure the accuracy of the information we present, we shared a summary of our descriptions with representatives of the six foreign tax administrators and incorporated their comments as appropriate. The IRS provided technical comments that are included in this report. We conducted our work from October 2009 to May 2011 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our obj |
2,370 | ectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this report. The New Zealand tax system is centralized through the Inland Revenue Department (IRD). Most of New Zealand’s NZ$49 billion (US$35.5 billion) in revenue for fiscal ye |
2,371 | ar 2009 was raised by direct taxation that includes PAYE (Pay As You Earn), Company Tax, and Schedular Payments. In addition, tax expenditures (tax credits in New Zealand) for social programs that were administered by IRD in 2009 include KiwiSaver and Working For Families (WFF) Tax Credits programs. The WFF Tax Credits program, started in 2004, seeks to assist low- to middle-income families with the goal of promoting employment and ensuring income adequacy. Prior to 2004, New Zealand had another program int |
2,372 | ended to assist families. However, the New Zealand government discovered that many low-income families were no better off from holding a low-paying job and that those who needed to pay for childcare to work generally were worse off in low-paid work compared to only receiving government benefits. This prompted the government to change in-work incentives and financial support for families with dependent children. These changes were incorporated into the WFF program in 2004. It was estimated that program costs |
2,373 | would increase by NZ$1.6 billion (US$1.2 billion) per year. The WFF Tax Credits program is an umbrella program that spans certain tax credits administered by the IRD as well as discretionary spending programs administered by the Ministry of Social Development (MSD). Table 2 shows the tax and discretionary spending components of the WFF tax credits program and the agency responsible for them. Under the program IRD makes payments to the majority of eligible recipients during the tax year. The IRD and MSD por |
2,374 | tions of the WFF tax credit program are intended to work together to assist low- to middle- income families and promote employment. Information that IRD collects and uses in administering the tax credits is subject to New Zealand’s protections for the privacy of sensitive taxpayer information contained in the Tax Administration Act. The information that MSD collects and uses is not subject to the same restrictions. To meet their separate needs, IRD and MSD keep separate datasets. New Zealand’s joint researc |
2,375 | h projects integrated research between IRD and other governmental agencies with related programs. The projects were designed to ensure that all disbursements of revenue through either direct program outlays or tax expenditures were administered effectively to meet the goals for social programs, making sure people get the assistance to which they are entitled. One example of joint research was the study of the WFF tax credits program. To overcome the problem of the separate datasets and still protect sensiti |
2,376 | ve tax data, the New Zealand government approved a joint research program that created interagency linked datasets between IRD and MSD. Parliament intended that these linked datasets be used to evaluate the tax expenditures and discretionary spending programs, to ensure that the benefits of the overall program were being fully used by its participants. These linked datasets, known as the “WFF Research Datasets,” were constructed from the combined records of the MSD and IRD. They contained several years of d |
2,377 | ata, and included information about all families who had received a WFF payment during these years. The data included monthly amounts of income received from salary and wages from employment and from the main benefit payments. The linked dataset information was to be used solely to analyze the results of WFF. It could not be used to take any action, whether adverse or favorable, against a particular individual. In 2004, MSD and IRD developed a Memorandum of Understanding (MOU) for the WFF program. The MOU i |
2,378 | ncluded processes to share information while ensuring that all sensitive data were protected from unauthorized disclosure. The MOU permitted IRD to provide MSD with aggregate taxpayer information needed to conduct evaluations with a restriction that only allows IRD employees direct access to sensitive taxpayer information. However, IRD was authorized to distribute sensitive taxpayer information to authorized MSD employees if they were part of the joint research team and were sworn in as IRD employees. Swear |
2,379 | ing in MSD agents as IRD agents permitted IRD to apply the same sanctions to IRD and MSD agents who did not adhere to IRD’s data-protection policies. The WFF joint research revealed social and cultural barriers that prevented targeted participants from taking full advantage of the WFF program. These barriers included the perceived stigma from receiving government aid if the person could work or felt that the aid infringed on independence or self-sufficiency; transaction costs from accepting government aid s |
2,380 | uch as taking time off from work, arranging childcare, or following many rules and regulations; low value of applying for the program when the person was close to the maximum eligibility threshold; and geographic barriers when the person lived in areas that were remote or had no transportation, telephone, or Internet. The WFF joint research provided information needed to identify the population that benefited from the program and reduce some of the barriers that kept recipients, particularly an indigenous p |
2,381 | opulation, from participating in the target program. Since the inception of the WFF program in 2004, the joint research documented the following benefits from reducing barriers to the targeted population: The percentage of single parents working 20 hours or more increased from 48 percent in June 2004 to 58 percent in June 2007. This represents 8,100 additional single parents in the workforce. The number of single parents receiving benefits from MSD fell by 12 percent from March 2004 to March 2008. Those tha |
2,382 | t received the benefits did so for a shorter time and stayed off the benefit programs longer. While structural differences exist between the New Zealand and U.S. tax systems, both systems use tax expenditures (i.e., tax credits in New Zealand). Unlike the United States, New Zealand has developed a method to evaluate the effectiveness of tax expenditures and discretionary spending programs through joint research that created interagency linked datasets. New Zealand did so while protecting confidential tax da |
2,383 | ta from unauthorized disclosure. In 2005, we reported that the United States had substantial tax expenditures but lacked clarity on the roles of the Office of Management and Budget (OMB), Department of the Treasury, IRS, and federal agencies with discretionary spending programs to evaluate the tax expenditures. Consequently, the United States lacked information on how effective tax expenditures were in achieving their intended objectives, how cost- effectively benefits were achieved, and whether tax expendi |
2,384 | tures or discretionary spending programs worked well together to accomplish federal objectives. At that time, OMB disagreed with our recommendations to incorporate tax expenditures into federal performance management and budget review processes, citing methodological and conceptual issues. However, in its fiscal year 2012 budget guidance, OMB instructed agencies, where appropriate, to analyze how to better integrate tax and spending policies that have similar objectives and goals. Finland’s national and mun |
2,385 | icipal governments as well as local church councils levy taxes. Nationally, 39 percent of all taxes are paid under individual and corporate income taxes and a capital gains tax. Taxes on goods, services, and property total about 33 percent of revenue; most of this revenue is from the Value Added Tax (VAT). The final 28 percent comes from social security taxes (e.g., national health insurance system and employment pension insurance). Finland’s individual income tax is levied on a graduated rate schedule with |
2,386 | four tax brackets, ranging from 7.0 percent to 30.5 percent for incomes over €64,500 (US$92,441) with the tax on investment income levied at a flat rate of 28 percent in 2009. Finland’s corporate income tax is levied at a flat rate of 26 percent. Under the municipal tax, each municipal council sets its tax rate annually. For 2009, municipal taxes are levied at flat rates ranging from 16.5 percent to 21.0 percent of earned income and averaging 18.6 percent. Individuals who are members of the Evangelical-Lut |
2,387 | heran Church or the Orthodox Church pay a church tax. For 2009, local church communities determine the rate of tax, which is levied at a flat rate between 1 and 2 percent. Using electronic means, Finland helps taxpayers in estimating their tax withholding and by preparing an income tax return for each individual taxpayer based on third-party information returns. The on-line Tax Card system, established in 2006, is an Internet-based system to help Finnish taxpayers estimate the withholding rate for individua |
2,388 | l income tax. The Tax Card covers national taxes, municipality tax, social security tax, and church tax. Taxpayers access the Tax Card through the Web sites of their bank or the Finland Tax Administration. Using the Tax Card system, taxpayers can update their withholding rate as many times as needed throughout the year to adjust for events that increase or decrease their potential tax liability. For example, if the taxpayer takes a job with a higher salary, the taxpayer can estimate the change on his or her |
2,389 | income tax liability by using the Tax Card system. Taxpayers enter information provided by the employer, based on payroll information, to estimate their adjusted withholding. Annually, 1.6 million taxpayers, about a third of those using the Tax Card, change their tax withholding rate. When the Tax Card has been completed, employees provide the withholding tax rate to their employer through regular mail or in person. If the employer is not notified of any withholding rate, the employer must withhold at the |
2,390 | top marginal rate in Finland for all types of taxes—which is 60 percent of gross pay. Employers manually enter the withholding rate into their payroll systems. According to Tax Administration officials, some social benefits can complicate the estimation of the tax due and may not be accurately estimated during the tax year. For example, Finland has a deduction for the cost of travel between a residence and work. If the taxpayer does not accurately estimate the deductions or make changes as the year progress |
2,391 | es, the Tax Card withholding rate will be inaccurate. Finland has been operating a tax-return preparation system since 2006. The Finnish Tax Administration prepares an income tax return for each individual taxpayer based on third-party information returns. According to Tax Administration officials, Finland uses information from over 30 types of information-return filers (e.g., employers, banks, and securities brokers). Tax Administration officials said that they have found very little misreporting on the in |
2,392 | formation returns used to prepare the tax returns. They use many ways to try to verify the information. Some taxpayers will correct information returns when reviewing their prepared tax returns. Third parties can be penalized for inaccurate information and Finnish tax officials said those penalties are regularly assessed. The system prepares the return each tax year, which ends on December 31. According to Tax Administration officials, the individual tax returns are mailed for review during April. The taxpa |
2,393 | yer has until May to make changes to the paper return. Taxpayers can mark up the paper return for revisions and mail it to the Tax Administration whose staff keys in or electronically scans in the changes. Also, taxpayers can choose to make the changes to the return online, using the taxpayer’s account with the Tax Administration. According to Tax Administration officials, typically about 3.5 million people do not ask to change their tax return and about 1.5 million request a tax change. About 400,000 taxpa |
2,394 | yers will revise their return using the Tax Administration’s Internet portal. Typically, the average taxpayer takes about half an hour to do the adjustments online. One deduction, the commuting adjustment, is not reported on an information return. This adjustment accounts for changes to about 800,000 prepared returns. Overall, taxpayers need to show some proof to support the change to the prepared return, including any changes they make to the information returns the Tax Administration used to prepare the r |
2,395 | eturns. For example, taxpayers showing deductions for mortgage interest that were not reported on information returns would need to show they own a house and the mortgage interest was paid. Or, if an information return reports interest as income, but taxpayers deduct the interest as paid on a loan, the taxpayers need to document the reason for their deduction claims. Finland does not prepare tax returns if individual taxpayers have business income. Rather, these taxpayers must file tax returns based on the |
2,396 | data or business records that they maintained. However, some of these taxpayers with business income may get a partially prepared return on personal income and deductions based on third party information on their wages and other personal income in Finland’s prepared return system. All businesses operating in Finland must register with the government. Providing enhanced electronic services has been widely recognized in Finland as an approach for improving taxpayer service while reducing costs. Electronic ser |
2,397 | vices provide taxpayers with constant access to assistance regardless of the time of day or distance from the tax administration office. According to Tax Administration officials, electronic systems that provide routine taxpayer assistance allows Tax Administration staff to respond to more complex taxpayer problems. Finland also moved to electronic tax administration to support national policies. As a national policy to encourage economic growth, Finland seeks to have a large private-sector workforce. Accor |
2,398 | ding to an official of the Finland’s government, a large number of citizens are nearing retirement. Thus, the government is seeking to reduce its workforce so that more workers are available for the private sector. To achieve this goal, Finland focused on making the delivery of government programs more efficient by using more electronic transactions. Another reason for electronic tax administration was to provide equal access to government services. Finnish law requires all e-services to be accessible to al |
2,399 | l Finnish citizens. With a significant segment of its population living in remote regions, according to officials, improving e- government provides more equal access to government services. To encourage equal access and use of the Internet for delivering services, Finland established standard speeds of Internet access in July 2009. Finland’s tax system is viewed positively by taxpayers and industry groups. Members of several industry and taxpayer groups told us that Finland has a simple, stable tax system, |
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