IRS Slammed Over Non-Resident Refunds

by Mike Godfrey, Tax-News.com, Washington

31 December 2010

The United States Internal Revenue Service (IRS) should take immediate action to strengthen its controls over the processing of refunds issued to non-resident aliens to prevent such individuals from receiving erroneous refunds, according to a report released by the Treasury Inspector General for Tax Administration (TIGTA).

The TIGTA pointed out that failure to address the problem could result in significant losses to the federal government as the levels of questionable refunds issued to non-resident aliens are high while the probability of recovering fraudulent refunds from non-residents living outside the US is very low.

Non-resident aliens who receive US sources of income must report and pay taxes on that income and file the US Non-resident Alien Income Tax Return with the IRS. This income is subject to income tax withholding, and, in 2009, the IRS processed approximately 598,000 such returns for the 2008 tax year. The total taxes withheld on these returns amounted to more than USD2.4bn, while refunds amounted to more than USD712m.

The TIGTA performed an audit to determine whether IRS controls ensured that only eligible nonresident aliens receive refunds. It found that inaccurate and fraudulent tax returns were not detected during processing and, as a result, the TIGTA identified a significant number of control weaknesses in the processing of refunds claimed.

“If the IRS does not take immediate steps to improve its ability to verify refunds to non-resident aliens before the refunds are sent out of the United States, the problem could increase significantly,” warned J. Russell George, the TIGTA. “TIGTA discussed the control weaknesses we identified with the IRS and it is working on actions to address them.”

The IRS has agreed with recommendations that TIGTA made in its report, one of which was that the IRS should use the foreign country codes on the tax returns to verify the correct rate of tax is applied according to the relevant double taxation agreement.

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