2012 Taxpayer Experience of Individuals Living Abroad: Service Awareness, Use, Preferences, and Filing Behaviors

1. 2012 Taxpayer Experience of Individuals Living Abroad: Service Awareness, Use, Preferences, and Filing Behaviors New Research on Tax Administration: An IRS-TPC Conference June 21, 2012

2. Background of International Taxpayer Research • Wage & Investment Research and Analysis (WIRA) has conducted several studies on the unique needs, preferences, and behaviors of international taxpayers, including: • Demographic and tax filing profiles of international taxpayers from tax years (TY) 2006 through 2010 • Focus groups with tax practitioners who service international taxpayers • Interviews with tax attachés working with taxpayers overseas • 2009 IRS Survey of International Taxpayers • Collaboration with gatekeepers of U.S. Department of State (DoS) Passport Data and Certificate of Loss Nationality Data • Effect of IRS Printing and Postage Budget Reduction (PPBR) on direct mailings to embassies and taxpayers living abroad • 2011 IRS Survey of Individuals Living Abroad

3. Availability of IRS Service to International Taxpayers • IRS Phone Representatives • IRS Toll-Free Line (1-800-849-1040) available for Puerto Rico, Guam, Bahamas, and Virgin Islands • International Telephone Line (1-267-941-1000) available for taxpayers outside of the U.S. • Taxpayer Assistance Center (TAC) in Puerto Rico • Permanent TAC in Guaynabo and Temporary TAC in Ponce • Tax Attachés Located in London, Frankfurt, Paris, and Beijing • In-Person; Telephone; and Mail, Fax, and E-mail Correspondence Services • Outreach Events in Various Countries • IRS.gov website • Embassy websites • Electronic Tax Law Assistance (ETLA)

4. Survey Methodology2011 IRS Survey of Individuals Living Abroad • The sample for the 2011 IRS Survey of Individuals Living Abroad consisted of three distinct populations of international taxpayers: • Filers • Civilian, Military, and Non-Resident Alien Filers • Non-Filers • Non-Filers with a perceived filing obligation were identified through the IRS Non-Filer Database and matched against U.S. DoS Passport Data • Non-Filers with no perceived filing obligation were identified through information associated with their TY 2008 return1 • Expatriates • Expatriates were identified through the Large Business & International (LB&I) Expatriate Database comprised of IRS as well as DoS data • The 2011 IRS Survey of Individuals Living Abroad had a 32% response rate with 1,753 unique responses from individuals living in 81 countries. 1All Non-Filers with no perceived filing obligation had no record of filing a tax return for the tax year prior to the TY 2008 Economic Stimulus (i.e., TY 2007) as well as no record of filing a tax return for the tax year following the TY 2008 Economic Stimulus (i.e., TY 2009).

5. International Taxpayers Prefer IRS.gov2011 IRS Survey of Individuals Living Abroad • 66% of Filers prefer to get information on IRS.gov rather than call the IRS. • 76% of Filers prefer to consult IRS.gov before calling the IRS regarding tax law questions. • Only 19% of Filers reported being more confident with information received from the telephone line compared to IRS.gov; 50% disagreed. Filers’ Agreement with Statements About IRS Telephone Line and IRS.gov Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011.

6. 31% 69% International Taxpayers Prefer Improved Online Services2011 IRS Survey of Individuals Living Abroad • Nearly 70% of respondents leaned more heavily toward supporting improvements to the online services over improvements to the telephone service. “The IRS would like to focus its resources on improving the support it provides to U.S. taxpayers living abroad. Based on your own experiences and preferences, where should the IRS devote more resources?” Participants were instructed to select one circle that best reflected their priorities IMPROVING THE ONLINE SERVICES Improve website interactivity specific to international tax issues IMPROVING THE TELEPHONE SERVICE Improve access by providing an international toll-free line Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011.

7. International Taxpayers Reported Use of IRS.gov2011 IRS Survey of Individuals Living Abroad Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011. • The majority of Filers (84%) who visited IRS.gov agreed that it was more convenient for them than calling the IRS. • Nearly 60% agreed that it was easy to find relevant tax-related information on IRS.gov; however, only 41% found the international tax topics on IRS.gov easy to understand.

8. International Taxpayers Still Call After Visiting IRS.gov2011 IRS Survey of Individuals Living Abroad • International callers to the IRS telephone line were most likely to have found the number on the IRS website or in an IRS notice/letter. • Among Filers who called the IRS, 43% did so after failing to find the information on IRS.gov while 31% did not visit the website before calling. Although they reported finding the information they needed on IRS.gov, 20% called to confirm or clarify the information. Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011. Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011.

9. Cost Not a Major Factor in Decision to Call the IRS2011 IRS Survey of Individuals Living Abroad Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011. • Only 22% of Filers cited telephone cost as a factor influencing their decision to not call the IRS. Among Filers who called the IRS, 33% reported not personally paying for the call.

10. Using Latent Class Analysis (LCA), five unique segments of Filers were identified from behavioral and attitudinal measures of telephone and electronic support: Segmentation of Filers Based on Latent Class Analysis2011 IRS Survey of Individuals Living Abroad Do-It-Yourself (DIY) Tech – 9% • Defining characteristics: Self-prepares taxes; uses tax software; files electronically; prefers web Do-It-Yourself (DIY) Paper – 30% • Defining characteristics: Self-prepares taxes; files by paper; prefers web; considers phone a barrier; moderate to high awareness of federal resources Hire Out, Involved – 27% • Defining characteristics: Does not prepare own taxes; moderate to high awareness of IRS resources, non-IRS federal resources, and non-federal resources Hire Out, Uninvolved – 16% • Defining characteristics: Does not prepare own taxes; does not have reason to contact the IRS; generally less aware of IRS services, but is aware of personal accountant/bookkeeper Phone First – 19% • Defining characteristics: Prefers improvement to phone service; web not convenient; low awareness of IRS website and IRS telephone line

11. Overall satisfaction with U.S. Federal Resources1 varied by segment, with the highest satisfaction among DIY Tech, DIY Paper, and Hire Out, Involved. Satisfaction With Federal Resources Varies by Segment2011 IRS Survey of Individuals Living Abroad Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011. 1 U.S. Federal Resources refers to IRS resources as well as non-IRS federal resources, such as those from a U.S. embassy or consulate.

12. To determine filing requirements, Filers and Expatriates were most likely to consult a personal accountant/bookkeeper/tax preparation company (44% and 54%, respectively), compared to 22% of Non-Filers. Non-Filers were most likely to report not consulting anyone (37%). Approximately 18% of Filers used an IRS resource while only 8% of Non-Filers used an IRS resource. High Use of Non-Federal Resources to Determine Filing Req.2011 IRS Survey of Individuals Living Abroad Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011.

13. Increased Use of IRS.gov During Filing Season • For FY 2011, IRS operations data consistently reveals a greater number of page views of the IRS.gov International Taxpayer site when compared to the number of Services Provided at the International Telephone Line. • The significant increase in number of Page Views during the filing season is not mirrored in the trend of Services Provided. • Sources: • “IRS.gov Site Usage Reports (Monthly),” Online Services SharePoint, accessed January 5, 2012. • Aspect Application Activity, Joint Operations Center (JOC) ETD Quick Links, accessed January 5, 2012.

14. Rapid Growth of International E-Mail Inquiries Electronic Tax Law Assistance (ETLA) Inquiries • ETLA allows taxpayers to e-mail non-account related tax law questions to the IRS. • The most common types of inquiries are from non-resident aliens and U.S. citizens living abroad. • For FY 2011, ETLA received 8,333 international inquiries (37% of all ETLA inquiries). • International inquiries have grown 147% in just 5 years. • E-mail is most expensive service delivery channel.1 Source: “ETLA Access to Historical Reports,” The IRS Intranet, through 05/31/12. “Deletes” were excluded from Total to determine the percent of International Inquiries from All Inquiries. Electronic Tax Law Assistance (ETLA) International Inquiry Case Types Source: “National Quality Review System Report,” IRS, 10/01/2010 – 09/30/2011. 1 W&I Finance estimates the unit cost of e-mail to be approximately $116.66 (May 10, 2012).

15. Consistency in Preferences and Reported/Actual Use Reported Preferences vs. Reported Use • Confidence in information received from the telephone vs. IRS.gov • Visiting IRS.gov before calling the IRS • Convenience of IRS telephone line’s hours of operation Reported Use vs. Actual Use • The comparison of Services Provided to Page Views as well as ETLA data support international taxpayers’ reported preferences and reported use of IRS.gov over the IRS telephone line. • In summary, there is a consistent alignment between international taxpayers’ reported preferences, reported use, and actual use of IRS services.

16. Significant Service Opportunities and Challenges • Survey results strongly indicate that international taxpayer service needs may best be served through investments and improvements in the International section of IRS.gov, specifically in three key areas: • Searchability – Improve relevance of search results relating to international tax topics on IRS.gov. • Organization – Improve ease of navigation through international pages on IRS.gov. • Content – Improve ease of understanding information on international tax topics on IRS.gov. • While international taxpayers as a whole may best be served through investment and improvements to IRS.gov and/or online services, the challenge of providing service to facilitate compliance can not be overlooked.

17. Significant Service Opportunities and Challengescontinued . . . • Although the vast majority of Filers and Expatriates reported having Internet access at home (93% and 91%, respectively), only 58% of Non-Filers reported home Internet access. • Non-Filers were also less likely to look for information on IRS.gov before calling the IRS (55%) or prefer getting information on IRS.gov (52%) compared to Filers and Expatriates.1 Improved voluntary compliance with international tax provisions and a reduction in the tax gap attributable to international transactions will require a strategic balance of both service and enforcement initiatives grounded in targeted, relevant outreach and the effective use of technology. 1 Approximately 76% of both Filers and Expatriates agreed that if they had a tax question they would consult IRS.gov before calling the IRS. Additionally, 66% of Filers and 62% of Expatriates indicated they preferred to get information on IRS.gov rather than calling the IRS.

18. Acknowledgements • Directors and Management • Mark E. Pursley, Director of WIRA • Gwen M. Garren, Acting Director of WIRA • Karen D. Truss, Former Chief of WIRA Research Group 4 • Javier A. Framinan, Chief of WIRA Research Group 4 • Core Project Team • Tiffanie N. Bruch, Tax Analyst • David C. Cico, Technical Lead Social Scientist • Saima S. Mehmood, Social Scientist • Julie Thompson-Evans, Contracting Officer Representative (COR) • Contributing Researchers • Kathleen P. Holland, Chief of WIRA Research Group 1 • Maria Celina Iglesia, Operations Research Analyst • Robert P. Thomas, Social Scientist • Jennifer D. Turner, Statistician • Survey Contractor Assistance • Pacific Consulting Group • ICF Macro

19. Appendix A: Profile of International Taxpayers • Total International Returns – For tax year (TY) 2010, 1,485,359 international returns were filed. In 2011, the U.S. State Department estimated that 6.32 million American citizens were living abroad. • Age – About 44% of international taxpayers are between the ages of 25 and 44, compared to 37% of non-international taxpayers. • Preparation Method – Of international filers, 44% self-prepared their returns, with only 34% of these self-preparers filing electronically. In comparison, 43% of non-international taxpayers self-prepared their returns, with 70% of this group filing electronically. • Filing Method – International returns were less likely to be filed electronically. Approximately 81% of non-international returns were filed electronically, compared to only 30% of total international returns.1 • Adjusted Gross Income (AGI) – Approximately 64% of total international taxpayers reported an AGI of $50,000 or less on Form 1040, with a median AGI of $11,770.2 Non-international taxpayers, in contrast, had a median AGI of $32,126.3 • Refund Owed – Nearly 60% of international returns resulted in a tax refund, compared to 80% of non-international returns. Also, while 24% of international taxpayers had even returns (neither refund owed nor balance due), only 4% of non-international taxpayers had even returns. 1 Contributing to the low electronic filing rate of international taxpayers is the inability of non-resident alien returns to be filed electronically. Non-resident aliens comprise 35% of total international returns. 2 Excludes returns filed using Form 1040PR or Form 1040SS, as these forms do not include a line item for AGI. 3 International wages can be reduced by the international income exclusion on Form 2555, Foreign Earned Income. The median wage reported on Form 2555 for TY 2010 was $65,400.

20. Appendix B: Response Rates and Survey Mode Used2011 IRS Survey of Individuals Living Abroad Response Rate = Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011.

21. Appendix C: Tax Preparation and Filing Among Filers2011 IRS Survey of Individuals Living Abroad • On average, Filers reported spending nearly 12 hours and over $400 on activities and expenses related to their most recent U.S. federal tax return. • Over 64% of Filers reported filing their return by regular or express mail, compared with 26% who filed electronically. Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011. Source: 2011 Survey of Individuals Living Abroad: Top Line Report. ICF Macro, September 16, 2011.