IRS Needs To Improve Non-Resident Withholding

By Editorial 08 November, 2011

An Internal Revenue Service (IRS) programme designed to foster the withholding of taxes from non-resident aliens earning income in the United States needs improvement, according to an audit report released by the Treasury Inspector General for Tax Administration (TIGTA).

The Internal Revenue Code generally requires that any US citizen or foreign person having control of certain US source income must withhold 30% of the gross income prior to any payments made to a non-resident alien (NRA) individual or partnership.

However, while a central withholding agreement (CWA) may be entered into to reduce the 30% withholding tax rate to be more in line with an NRA’s annual projected tax liability, if NRAs who enter into CWAs are allowed to reduce their withholding improperly, the federal government’s interest may not be protected.

TIGTA initiated its audit to determine whether the CWA programme is working as intended. It found that, while CWA programme management has taken positive actions to ensure sensitive information is not transmitted via email to NRAs or their representatives, managerial oversight of the programme needs improvement.

For example, it discovered that, currently, there is no managerial guidance or quality review process to ensure cases are properly processed. In many closed cases, it ascertained that tax specialists did not take timely and appropriate action, documentation was missing and/or incomplete, and there were inconsistencies in their processing.

TIGTA also found that CWA specialists lack detailed guidance to determine ordinary and necessary business expenses for justifying a reduction of income based on the proper withholding rate under CWAs, and that there was no consistency in the methodology for conducting site visits or the amount of information captured in the site visitation reports.

“While we found improvements in the CWA programme, performance goals need to be established to show whether the programme is fostering NRA compliance,” said J. Russell George, the TIGTA.

Tags: Individuals | Expatriates | Compliance | Tax | Tax Compliance | Internal Revenue Service (IRS) | Withholding Tax | United States |


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