Government Affairs

U.S. IRS Launches New Audit Campaigns Targeting Nonresidents

The United States Internal Revenue Service (IRS) Large Business and International Division (LB&I) announced on 21 May 2018 four new audit campaigns that will focus on nonresident individuals, seeking to improve compliance in reporting effectively connected income, tax credits, deductible expenses, and withholding tax.

LB&I is the branch of the IRS that is responsible for enforcement activities with respect to large companies, and international issues. It conducts audits based on identification of issues that it considers to be widespread, which are detailed in “campaigns” and pursued in all audits of large companies.

Related: U.S. Treasury & IRS to Address State Tax Deduction ‘Workarounds’

The new announcement identifies four issue areas relating to nonresident individual taxpayers. LB&I will seek information on those issues in all audits.

  • Form 1042/1042-S Compliance
  • Nonresident Alien Tax Treaty Exemptions
  • Nonresident Alien Schedule A and Other Deductions
  • Nonresident Alien tax credits

The first campaign addresses compliance with rules requiring that payments of U.S. source income to foreign persons must be reported, including withholding and tax deposit requirements. This issue arises in a number of contexts for U.S. companies providing services overseas.

Next, the second issue is intended to identify improper claims of treaty exemption by nonresident aliens related to income that is “effectively connected” to the U.S. or is “fixed, determinable, annual periodical income.” The IRS believes that there are significant exemption claims for such income based on misunderstanding or misapplication of treaty provisions.

The third campaign focuses on improper deductions on Schedule A of the Form 1040NR, that must be filed by nonresident alien taxpayers to report U.S. income. The IRS will look at the propriety of claimed business expenses, including whether they are properly substantiated.

Finally, the fourth campaign will address improper claims by nonresident aliens for certain tax credits, including the child tax credit. It will also look at erroneous claims of education credits, which are only allowable to U.S. persons. 

Related: U.S. Internal Revenue Service Updates Standard Mileage Guidance for 2018

How This Impacts Mobility

U.S. companies with relationships with nonresident aliens, either as employers or service recipients, must pay close attention to these activities, which may affect not only their employees but their own withholding/reporting obligations.

 

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