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MSP #15: INTERNATIONAL

The IRS’s Approach to Credit and Refund Claims of Nonresident Aliens Wastes Resources and Burdens Compliant Taxpayers

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #15-1

Compile and internally publish data relating to the results of manual review of frozen Form 1042-S credits and use this data to better understand and identify the sources and income stratifications generating increased risks of noncompliance.

IRS RESPONSE TO RECOMMENDATION: We instituted new processes in February 2017 based on problems identified in prior years and will continue to analyze data as resources become available and more forms are filed electronically.

Update: Weekly Reports are produced on all frozen refund accounts.  These are reviewed by analysts and management to ensue frozen accounts are worked timely and to identify any anomalies.  There is no further automated work in this area.

CORRECTIVE ACTION: We instituted new processes in February 2017 based on problems identified in prior years and will continue to analyze data as resources become available and more forms are filed electronically.

TAS RESPONSE: As discussed above, the approach adopted in February 2017 brings substantial improvements to the matching program. Only systematic quantitative analysis, however, can accurately gauge the ultimate effectiveness of these steps and provide a useful road map for future policies and procedures.

The National Taxpayer Advocate is sensitive to resource limitations in all areas of tax administration. Nevertheless, the compilation and analysis of quantitative data are indispensable tools for determining the best means of utilizing these resources. The National Taxpayer Advocate requests that the data and analysis associated with the results of manual review of frozen Form 1042-S credits based on the “new processes” instituted in 2017 be shared with her when complete.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #15-2

Implement a policy that relies on data as the basis for developing effective programs and systems for validating the credit and refund claims of those relatively few Chapter 3 and Chapter 4 filers for whom such scrutiny is statistically justified.

IRS RESPONSE TO RECOMMENDATION: ​​We implemented policies and procedures for granting withholding credits that are similar to processes currently in place with respect to other matching programs.

CORRECTIVE ACTION: N/A

TAS RESPONSE: In implementing policies and procedures for granting withholding credits that are similar to processes currently in place with respect to other matching programs, LB&I has generally acted in accordance with TAS recommendations made in prior MSPs. Moreover, the February 2017 program changes result in a focus of attention and resources on those Form 1042-S filers presenting the greatest risk for noncompliance and lost tax revenue. The National Taxpayer Advocate urges that these improvements remain in place and that their efficacy be tested and refined by in-depth quantitative analysis.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #15-3

Energetically enforce the withholding, reporting, and remittance obligations of withholding agents, rather than attempting to shift this obligation to nonresident taxpayers in ways that create hazards of litigation.

IRS RESPONSE TO RECOMMENDATION: ​​​In addition to compliance examinations of withholding agents conducted by the Foreign Payments Practice area of Withholding International Individual Compliance, the IRS is developing a compliance program directed toward U.S. and foreign withholding agents.

LB&I introduced the Forms 1042/1042s Compliance Campaign in May 2018. The objective of this compliance program campaign is to address Withholding Agent noncompliance and errors. The Internal Revenue Service will address this through reviews and examination, and by providing outreach to external stakeholders. LB&I plans to use the LB&I Taxpayer Registry to capture feedback along with other data indicating the compliance impact of this campaign.

Withholding Agents must perform several actions to satisfy all their duties, including documenting U.S. vs. foreign status of beneficial owners; applying the correct withholding rate to the payments; depositing the tax withheld; and reporting on Forms 1042 and 1042-S.

Some Forms 1042/1042-S compliance issues noted so far include: 1042 liability does not reconcile to sum of all 1042-S withholding credits and payments; 1042 liability does not reconcile to available credits and deposits on 1042 module; and Withholding Agent files 1042-Ss but does not file the 1042.

CORRECTIVE ACTION: In addition to compliance examinations of withholding agents conducted by the Foreign Payments Practice area of Withholding International Individual Compliance, the IRS is developing a compliance program directed toward U.S. and foreign withholding agents.

TAS RESPONSE: The National Taxpayer Advocate commends the IRS for beginning to develop a compliance program directed toward U.S. and foreign withholding agents. Along with compliance examinations, this program may improve the reporting and remittance behavior of withholding agents and reduce the compliance burden of Form 1042-S filers. It will also identify the challenges withholding agents face when complying with the law, and may result in process improvements.

Withholding agents, not Form 1042-S filers, should be responsible where reporting and remittance failures are attributable to those withholding agents. A rebalancing of the enforcement scales and increased collaborative outreach to withholding agents are necessary so that Form 1042-S filers are subject to refund delays or additional compliance burdens only on account of their own noncompliance, not that of their withholding agents, over which they generally exercise no control.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #15-4

Consider more effective ways of discouraging noncompliance by, and collecting unremitted funds from, foreign withholding agents, including exploring cooperative agreements with foreign jurisdictions.

IRS RESPONSE TO RECOMMENDATION:

The IRS is developing a compliance program directed toward U.S. and foreign withholding agents.

Currently, there are no avenues to collect funds from foreign persons. Agreements with foreign jurisdictions pertain to the FATCA registration/certification requirement established in IGA agreements where the countries report compliance with FATCA rules to US and we publish a monthly list of FFIs certified to be compliant with FATCA.

Refund requests are frozen through Campaign 666 and 817 for 1120F and 1040 NR respectively. Campaign 816 freezes refund claims over $ 5K where the withholding agent’s copy of 1042-S filed with the IRS is matched with 1040NR income and payments/credits on record before the refund claim is released. Campaign 666 freezes 1120F refund claims over 500K and ensures 1042-S from withholding agent matches income reported and reported payments/credits reported on the 1120F before refund claim is released.

Campaign 817 will be working to address compliance issue with the withholding agents with the 25 filters. 25 Filters for potential non-compliance have been written and sent to LB&I Assistant Deputy Commissioner Compliance Integration (ADCCI) Compliance Planning and Analysis (CP&A) to develop SQLs and testing procedures to ensure the identified compliance risk in each filter is addressed.   Compliance issues notated thus far include:  1042 liability does not reconcile to sum of all 1042-S withholding credits and payments; 1042 liability does not reconcile to available credits and deposits on 1042 module; and Withholding Agent files 1042-Ss but does not file the 1042.;

CORRECTIVE ACTION: The IRS is developing a compliance program directed toward U.S. and foreign withholding agents.

TAS RESPONSE: This proposed compliance program constitutes a positive step aimed at increasing the accountability of withholding agents for their reporting and remittance obligations. The National Taxpayer Advocate commends LB&I for these efforts. As discussed above, an effective compliance program will place equal emphasis on ensuring that withholding agents and Form 1042-S filers adequately undertake their respective responsibilities and will allocate compliance burdens, oversight mechanisms, and enforcement activities accordingly.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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