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