In a May 21, 2018 statement, the IRS’s Large Business and International Division (LB&I) announced it will be launching campaigns focused on nonresident individuals. These initiatives aim to improve compliance in reporting effectively connected income, tax credits and deductible expenses, and withholding tax.
The complex U.S. international tax rules include denial of benefits and the imposition of draconian penalties for errors and missteps by taxpayers. Read on to learn how each aspect of the LB&I’s new initiatives will impact you, so you can avoid financial pitfalls and position yourself for financial success.
Exception To The Rule: Nonresident Alien Tax Treaty Exemptions
Nonresidents in receipt of U.S. sourced income may be sheltered from U.S. tax; however, in order to qualify for the exemptions you often must meet complex technical and procedural requirements. Failure to meet these requirements may cause the IRS to deny the benefits of an applicable tax treaty, which could result in an effort to recover taxes, penalties, and interest.
“Some nonresident alien (NRA) taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by U.S. payors to improperly claim treaty benefits and exempt U.S. source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations,” the announcement says.
The Deductions You Want To Know About
In an effort to demystify deductibility rules, the LB&I is launching a campaign to improve compliance, using methods such as outreach/education and traditional examinations. Currently, many nonresident individuals misunderstand or misinterpret the deductibility rules, both previous rules and new Internal Revenue Code provisions enacted under the Tax Cuts and Jobs Acts of 2017. In some instances, they do not meet the requirements for claiming the deductions and/or do not maintain proper records to substantiate the expenses claimed.
The Streamlined Approach To NRA Tax Credits
In a separate campaign, the LB&I will address nonresident individuals’ claims of tax credits. “NRAs who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents may erroneously claim certain dependent related tax credits. In addition, some NRA taxpayers may also claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns,” states the announcement.
Similar to the other campaigns, this initiative addresses nonresident individuals’ claims of tax credits and will involve multiple approaches, including audits.
Important Details on Form 3520/3520-A Compliance and Campus Assessed Penalties
The LB&I will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of informational returns reporting ownership of and transactions with foreign trusts. The department will achieve this through a variety of treatment streams, including focused examinations and penalties assessed by the IRS center when the forms are late or incomplete.
Must-know information regarding Forms 1042/1042-S Compliance
Another campaign targets U.S. payers and withholding agents who make payments of certain U.S.- source income to nonresident individuals. The LB&I will undertake audits and other enforcement approaches to deal with noncompliant or partially compliant payers and withholding agents.
As the IRS focuses its attention on the cross-border activities of individual taxpayers, it becomes imperative that experts in international tax, such as those in Friedman’s International Tax Group, be called upon to ensure compliance.
If you have further questions about navigating the byzantine rules regarding the taxation of nonresident individuals, please contact Liz McGrath at firstname.lastname@example.org or your Friedman advisor.