Treasury Inspector General for Tax Administration Calls on IRS to Improve Nonresident Alien Refund Verification
Failure to address the problem could result in significant losses to the federal government as the questionable refunds issued to nonresident aliens are high and the probability of recovering fraudulent refunds from nonresidents living outside the U.S. very low.
In an audit released on December 29, 2010, the Treasury Inspector General for Tax Administration (TIGTA) called for the IRS to strengthen its controls over the processing of income tax refund checks issued to nonresident aliens to prevent such individuals from receiving erroneous refunds. (Audit Report No. 2010-40-121). “Failure to address the problem could result in significant losses to the federal government as the questionable refunds issued to nonresident aliens are high and the probability of recovering fraudulent refunds from nonresidents living outside the U.S. very low,” TIGTA said.
Nonresident aliens of the U.S. who receive income from U.S. sources must report and pay taxes on that income and file the U.S. Nonresident Alien Income Tax Return (Form 1040NR). This income is also subject to income tax withholding. According to the TIGTA audit, in 2009, the IRS processed approximately 598,000 Forms 1040NR for tax year 2008, and the total taxes withheld on these returns amounted to more than $2.4 billion and refunds on these returns totaled some $712 million. Auditors found that inaccurate and fraudulent Forms 1040NR were not detected by the IRS during processing, and were able to identify a significant number of control weaknesses in the processing of refunds claimed on Forms 1040NR.
In just 40 cases of questionable refunds issued to nonresident aliens, the refunds totaled more than $2.3 million. “If the IRS does not take immediate steps to improve its ability to verify refunds to nonresident aliens before the refunds are sent out of the United States, the problem could increase significantly,” said J. Russell George, the inspector general. The audit “also found that tax treaty provisions regarding the taxability of gambling income are not being applied consistently by the IRS, and that clarification is needed regarding the designation of certain income earned through U.S.-based, multi-level marketing companies as U.S. source income.” The TIGTA audit report is available at