Apr 5th 2013
By Frank Byrt
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The IRS is often unable to process tax payments made in foreign currencies on a timely basis or at favorable exchange rates, according to a report from the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA said, as a result, foreign currency payments that are not processed timely or are processed at lower exchange rates can cause undue burden on taxpayers and additional work for the IRS, and there is increased risk that taxpayer payments and information could be lost, stolen, or misused; taxpayers could be unnecessarily burdened; and the federal government could be charged with excessive or incorrect check conversion fees.
Since currency exchange rates can fluctuate daily, taxpayers who submit checks in a foreign currency to satisfy tax liabilities with the IRS do not always receive the amount in US dollars as anticipated. TIGTA said, "Taxpayers who receive fewer US dollars than expected will have to pay more taxes and submit additional payments to satisfy the debt, while those receiving a higher amount will likely get a refund."
"However, some taxpayers still send foreign currency payments because they are either unable or unwilling to convert their payments to US dollars," TIGTA reported.
According to IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad, "Taxpayers must pay their taxes in their functional currency. The US dollar is the functional currency for all taxpayers paying US federal income taxes."
The audit is part of TIGTA's Fiscal Year 2013 Annual Audit Plan and addresses the major management challenge of globalization.
TIGTA'S testing of 393 checks totaling $1.4 million submitted in a foreign currency identified the following internal control issues that adversely affected the processing of the payments:
- Procedures did not exist for the type of documentation to maintain for taxpayer receipts and other information collected and processed by the Manual Deposit Unit in the five Submission Processing Centers.
- Procedures did not exist to ensure that taxpayers were provided with accurate foreign currency exchange rate information when submitting checks in a foreign currency.
- Collection notices were not always suspended after taxpayers submitted payments to fully satisfy outstanding liabilities.
- Procedures were inadequate for monitoring whether taxpayer payments were timely processed and credited to their accounts.
- Procedures did not exist to verify the accuracy of bank processing fees charged to the IRS.
TIGTA made the following recommendations to the IRS:
- Require employees to retain source documentation and create and maintain documentation of the corrective actions taken on rejected payments.
- Ensure that no collection notices are issued to taxpayers while their foreign currency check payments are being processed.
- Assess the benefits of initiating follow-up actions sooner to address contractor processing delays.
- Provide taxpayers with additional information on determining foreign currency exchange rates.
- Explore the feasibility of establishing a process to verify foreign currency check processing charges.
In a February 28 letter to TIGTA, IRS officials agreed with all of TIGTA's recommendations and indicated the agency had taken, or plans to take, corrective actions.
"We agree that controls can be strengthened to improve document retention related to the payments made in foreign currencies, and actions can be taken to improve deposit accuracy and timeliness," wrote Peggy Bogadi, commissioner of the IRS' Wage and Investment Division. "Procedures have been updated to ensure accounts are appropriately marked to forestall collection activities while foreign currency payments are being processed, and to require follow-up actions when deposit acknowledgements are not received within one week."
Bogadi noted that the IRS provides resources and links on IRS.gov to help taxpayers determine the proper conversion rates for transactions conducted in foreign currencies.