Generally, a non-U. Instead of filing the Form , the foreign taxpayer files the Form NR. Read more below on the Form NR reporting obligation. Under this test, an individual will be considered a U. As such, John should not be considered a U. Instead, he should be considered a nonresident alien for U.
|Published (Last):||11 December 2008|
|PDF File Size:||19.47 Mb|
|ePub File Size:||15.39 Mb|
|Price:||Free* [*Free Regsitration Required]|
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document. Redaction Legend:. Final Report issued on September 15, Control weaknesses in the processing of refunds issued to nonresident aliens could result in significant revenue losses to the United States U.
The probability of recovering fraudulent refunds from nonresidents living outside the U. The objective of this audit was to review the processing of U. Nonresident Alien Income Tax Returns Form NR and determine whether controls are in place to ensure taxpayers receiving refunds are entitled to those refunds.
Although a statistical sample of Tax Year returns indicated that control weaknesses discussed in this report had not been exploited to a significant extent, a judgmental sample of Tax Year and returns revealed significant control weaknesses in the processing of refunds claimed on Forms NR.
For example:. If the Internal Revenue Service IRS does not take immediate steps to address these control weaknesses, the problem could increase significantly. TIGTA also found that tax treaty provisions regarding the taxability of gambling income are not being applied consistently by the IRS, and that clarification is needed regarding the designation of certain income earned through U.
TIGTA recommended that the Commissioner, Large and Mid-Size Business Division, ensure that plans, developed during the course of this audit to address control weaknesses discussed in this report, are implemented. The Commissioner should also use the Foreign Country Codes on Forms NR to systemically verify the correct rate of tax is applied according to the applicable tax treaty and should work with the Forms and Publications function to clarify instructions on what constitutes U.
In their response to the report, IRS officials agreed with the recommendations and are taking appropriate corrective actions. September 15, Deputy Inspector General for Audit. This report presents the results of our audit to review the processing of U. Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. Please contact me at if you have questions or Michael E. Table of Contents.
Results of Review. Recommendations 1 and Recommendation Recommendations 5 and Appendix IV — Outcome Measures. Employer Identification Number. Individual Master File. Internal Revenue Service. Individual Taxpayer Identification Number. Social Security Number. Taxpayer Identification Number. Tax Year. United States.
Individuals who are nonresident aliens of the United States U. This income is also subject to income tax withholding. Nonresident aliens also file Form NR to request refunds of amounts over withheld. The U. In some cases, the nonresident involved owes no taxes because the income was paid by a corporation based in the U. In those cases, the nonresident must file a Form NR to claim a refund of the amounts withheld. We initiated this review as a result of another audit  in which we identified claims for refunds of withheld amounts on Forms NR that appeared to be questionable based on the associated tax withholding documents, Forms S.
We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.
Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II. As long as proper controls are not in place, the risk of fraudulent returns and refunds is substantial. This judgmental sample included return characteristics which we deemed to be of high risk. From our statistical sample of TY returns, there did not appear to be a significant percentage of returns which exploited the control weaknesses detailed in this report.
However, from our judgmental sample of TY and TY returns, we identified significant control weaknesses in the processing of refunds claimed on Forms NR. The control weaknesses referred to in this report were all identified in our judgmental sample.
In general, casinos are required to withhold 30 percent on the winnings from gambling and issue a Form S at the time the winnings are paid to nonresident aliens. When these individuals file their tax returns, they could have tens or even hundreds of Forms S to attach to their returns.
Businesses who withhold income taxes from income paid to nonresidents are required to remit the amounts withheld to the IRS and report the amounts withheld to the IRS and to the nonresident, generally on Forms S.
This process identifies certain questionable items but it is not designed to identify all questionable refunds. IRS actions to address control weaknesses. During this audit, we discussed these control weaknesses with the IRS and it is working on actions to address them. These actions include the following:. If the IRS does not take immediate steps to address these control weaknesses, the problem could increase substantially if more unscrupulous individuals learn of the control weaknesses.
Notwithstanding these actions, additional steps are necessary to ensure that questionable refunds claimed on Forms NR are identified and stopped prior to issuance. None of the issues discussed previously in this report appeared in our statistical sample of TY returns. This indicates that the occurrence of these questionable or fraudulent refunds is not yet widespread. However, the questionable refund amounts in the cases that we identified in our judgmental sample appear to be very high.
Based on their analysis of cases provided by the Treasury Inspector General for Tax Administration, a Unified Work Request will be submitted by January 15, , to add a document identification number as an additional validation criteria. Since the requested action will be subject to funding and resource prioritization by the Modernization and Information Technology Services organization, submission of the Unified Work Request will complete the corrective action.
A team with members from the Large and Mid-Size Business Division International function, Chief Counsel, and other appropriate functions will be formed to consider the feasibility of requiring payers issuing multiple Forms S to issue a single summary Form S. The team will issue a report that outlines either the actions needed to implement this requirement, or the reasons why it is not feasible and alternative actions to minimize the risks to the Government and minimize taxpayer burden. From the judgmental sample previously identified, we determined that claims for the refund of amounts withheld on gambling winnings are being processed inconsistently.
There are a number of tax treaties between the U. For example, Japanese citizens are not required to pay tax on U. The treaties can also dictate how the winnings are to be taxed. Canadian citizens can deduct gambling losses from their winnings, but only to the extent of their winnings. We found that personnel at the Austin Submission Processing Center are not consistently applying these tax treaties when processing Forms NR.
IRS guidance requires that nonresident aliens filing Form NR indicate their country of citizenship. The IRS should use the Foreign Country Code to perform validity checks on key Form NR data to ensure that the proper amount of tax is collected according to the applicable treaty.
As part of the E-trak withholding database, an automated internal consistency check of issued Forms S is being instituted, Foreign Country Codes will be used. In addition, income codes, exemption codes, withholding percent, and potentially other fields from the Form S will be used. The Collection function will assist with this effort. Once the assessments are determined, the IRS will take appropriate actions to recover the refunds. Detailed Objective, Scope, and Methodology.
The overall objective of this audit was to review the processing of U. To accomplish this objective, we:. Government Accountability Office audit reports.
Interviewed responsible IRS management personnel. Determined what controls are in place to ensure wage, withholding, and refund information on Forms NR is accurate. Obtained access to and analyzed the IRS Form S database also referred to as Chapter Three Withholding or CTW to determine its usability in matching wage and withholding information submitted from employers to tax return information claimed by taxpayers on their Form NR returns.
We validated the accuracy and completeness of the data received by comparing 30 records to IRS IMF data for each tax year. Reviewed the judgmental sample to identify any questionable claims or refunds.
We considered the following in identifying these returns:. Forms S that contain information that appears to be fabricated, incomplete, or questionable. Forms S that contain withholding amounts that appear unreasonable or inaccurate.
Wage and withholding amounts claimed on the Forms NR that do not match the amounts provided on the Forms S. D by asking the employer to validate the information provided. Determined whether the proper amounts of wages, withholding, and refunds are claimed by taxpayers on Forms NR. Reviewed the statistical sample to determine if any of the returns appeared to be fraudulent.
We included the following tests:. Matched the total withholding amounts claimed on the return to the amounts claimed on the individual Forms S and noted any discrepancies. Internal controls methodology. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance.
Nonresident Alien Income Tax Return