Every year, the United States receives millions of legal visits by foreign individuals, some of whom have income from a U.S. source or are engaged in a U.S. trade or business. Individuals who are neither U.S. citizens nor residents are known as nonresident aliens for tax purposes and may be required to file federal income tax returns to report their U.S.-source income. For 2007, individuals filed about 634,000 nonresident alien income tax returns, reporting about $12.8 billion in income and $2.5 billion in tax.
Nonresident aliens' failure to comply with their tax requirements can contribute to the tax gap, which is the difference between the amount of taxes owed and the amount paid voluntarily and timely and was last estimated to be $345 billion. As it is for U.S. citizens and residents, the Internal Revenue Service (IRS) is responsible for ensuring that nonresident aliens comply with their tax obligations. IRS has not developed estimates for the extent of nonresident alien tax noncompliance because it often lacks information to distinguish between nonresident aliens and other filers.
IRS may be missing an opportunity to identify more potentially noncompliant nonresident alien taxpayers because it does not systematically identify nonresidents filing the incorrect type of tax return. Nonresidents who file the individual tax return for U.S. citizens and residents (Form 1040) instead of the return for nonresidents (Form 1040NR) may claim credits or take deductions to which they are not entitled, such as the earned income credit, which may lead to reduced tax revenue. IRS has generally conducted face-to-face examinations of nonresident aliens through special projects that focus on particular types of taxpayers, such as individuals employed by foreign embassies or consulates and international organizations in the United States. Through its examinations, IRS has found that some nonresidents improperly file Form 1040 instead of Form 1040NR. However, IRS does not have a program to automatically identify taxpayers who may have made this type of error.
IRS may be able to systematically identify nonresidents who improperly file Form 1040 instead of 1040NR. As with U.S. citizens and residents, nonresidents must have a taxpayer identification number in order to file a tax return. Nonresidents who do not qualify for a Social Security number but have a valid filing requirement may apply to IRS for a 9-digit individual tax identification number to use in lieu of a Social Security number in filing a tax return and are to indicate if they are resident or nonresident aliens, or a spouse or dependent of either, on their applications.
If IRS were able to identify taxpayers who should have filed Form 1040NR instead of Form 1040 by identifying tax returns filed with an individual tax identification number and using information from individual tax identification number applications, it may be able to cost-effectively address this form of noncompliance for some taxpayers and increase tax revenue. For example, IRS may be able to examine potentially noncompliant taxpayers through correspondence, which would be less time consuming, complex, and costly than the face-to-face examinations IRS has traditionally conducted for nonresident aliens. Without further study, IRS cannot know if systematically identifying and addressing nonresidents who filed an incorrect type of tax return would be cost-effective.
GAO recommended in April 2010 that IRS determine if creating an automated program to identify nonresident aliens who may have improperly filed Form 1040 instead of Form 1040NR would be a cost-effective means to improve compliance. IRS has formed a team to study the feasibility of such a program, which it plans to complete by December 2011. GAO plans to follow up on this issue to assess progress in completing the study as well as to identify potential revenue increases.
The information contained in this analysis is based on the related GAO product listed under the "Related GAO Products" tab.
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