Significant Efforts Have Been Made to Improve Information Reporting for Foreign Persons, But Substantial Work Remains

 

September 2001

 

Reference Number: 2001-30-181

 

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

 

September 27, 2001

 

 

MEMORANDUM FOR COMMISSIONER, LARGE AND MID-SIZE BUSINESS DIVISION

†††††††††††††††††††††††††††††††††††††††† COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION

 

 

FROM:††††††††††††††††††††††††††† Pamela J. Gardiner /s/ Pamela J. Gardiner

†††††††††††††††††††††††††††††††††††††††† Deputy Inspector General for Audit

 

SUBJECT:†††††††††††††††††††† Final Audit Report Ė Significant Efforts Have Been Made to Improve Information Reporting for Foreign Persons, But Substantial Work Remains

††††††††††††††††††††††††††††††††††††††††

 

This report presents the results of our review of efforts taken by the Internal Revenue Service (IRS) to address the tax compliance of foreign persons.The overall objective of this review was to follow up on previously identified conditions in a prior IRS Inspection Service (now the Treasury Inspector General for Tax Administration (TIGTA)) report[1] and determine whether the actions taken have corrected problems or whether risks still exist.We also evaluated the effect of new withholding regulations[2] (effective January 1, 2001) for United States (U.S.) source income paid to foreign persons.[3]

 

In summary, the IRS has taken substantial actions in several areas to address conditions identified in the prior report.For example, the IRS identified the need to develop an improved system to address data quality problems that were occurring in the processing of the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (Form 1042), and Foreign Personís U.S. Source Income Subject to Withholding (Form 1042-S).The system will eventually allow computer matching of payments to foreign persons with related tax returns.The IRS also developed the Individual Taxpayer Identification Number (ITIN) Program, which assigns an identifying number to foreign individuals who are not eligible for Social Security Numbers (SSN), but do have some U.S. tax-related transactions.

 

However, the IRS needs to take additional actions to better ensure the compliance of foreign persons.Specifically, the IRS did not completely resolve the data quality problems identified in our prior report.For example, invalid income codes were still accepted by the processing system in effect at the time of our audit.As a result:

 

         The IRS cannot determine the correct withholding rate since different withholding rates apply to different income types (i.e., interest, dividends, etc.).

         The IRS provides potentially inaccurate Form 1042-S data to its treaty partners under the Routine Exchange of Information Program (REIP).[4]

         Any Form 1042-S data currently used in examinations may not be reliable because of the existing computer processing control weaknesses.[5]

 

Compliance issues with the Form 1042-S information documents affect both the payee and the payer.To address the first issue, payee compliance, an information system with a proposed completion date of March 2004 will allow computer matching of withholding reported on Form 1042-S to a foreign personís tax return.However, at this time, there is no system with IRS-wide accessibility for examination, collection, and research purposes.Computer analysis of Form 1042-S data has not regularly occurred, and there are no specific plans for this type of analysis until the new system is implemented.

 

The second compliance issue concerns payers.The IRS still cannot determine whether withholding agent compliance has improved.IRS examinations of withholding agents found that most interest income was paid to foreign financial institutions serving as intermediaries for the actual account holders.Foreign financial institutions filed withholding exemption forms in their own names, and not in the names of the account holders.In some cases, interest was not reported on the Forms 1042-S and withholding exemption forms were not obtained.Consequently, the IRS cannot determine whether the account holders are foreign persons entitled to the withholding exemption for certain interest income, or U.S. persons evading taxation.

 

The IRS is still at risk because there is no effective system to monitor and encourage taxpayer compliance.The ITIN provision does not eliminate the compliance risks.Under the new withholding regulations, an identification number is not required when certain interest income is reported, so the IRS is unable to identify the recipients of the income.This prevents the IRS from systemically cross-checking Forms 1042-S with foreign personsí tax returns before issuing refunds.In addition, the risk of U.S. persons claiming withholding exemptions they are not entitled to still exists.Finally, the Qualified Intermediary Program places the IRS at risk since compliance checks to verify foreign status will be completed by third party auditors and the identities of the actual account holders are not disclosed to the IRS.

Managementís Response:In response to our report, IRS management agreed to take corrective actions for most of the audit recommendations.However, IRS management did not agree to pursue revised regulations for identification numbers on all foreign investment income reporting documents.IRS management responded that this proposal was previously considered by the IRS and Treasury but not pursued because of the adverse effect that requiring an identification number could have on foreign investments in the United States.We have included the IRSí response and our comments in the main body of this report where appropriate.The full text of managementís response to the draft report is included as Appendix IV.

 

Copies of this report are also being sent to the IRS managers who are affected by the report recommendations.Please contact me at (202) 622-6510 if you have questions or Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.

 

Table of Contents

Background

Many Positive Steps Have Been Taken to Improve the Overall Program for Foreign Personsí Compliance

Effective Processing of Foreign Personís United States Source Income Subject to Withholding (Form 1042-S) Is Needed to Ensure the Accuracy of Data

Recommendation 1:

Foreign Personsí Data Could Be Better Used in Compliance Efforts

Recommendation 2:

The Program to Monitor the Compliance of Withholding Agents Could be Strengthened

Recommendation 3:

Enforcement Efforts Are Needed to Encourage Taxpayer Compliance

Recommendation 4:

Appendix I Ė Detailed Objective, Scope, and Methodology

Appendix II Ė Major Contributors to This Report

Appendix III Ė Report Distribution List

Appendix IV Ė Managementís Response to the Draft Report

 

Background

One of the major strategies of the Internal Revenue Serviceís (IRS) Large and Mid-Size Business (LMSB) Division is to build a tax administration to effectively deal with globalization.This strategy includes addressing specific areas of non-compliance, promoting customer satisfaction by understanding issues from the taxpayerís viewpoint, and enabling development of appropriate new tax legislation.

Generally, a foreign person is subject to United States (U.S) tax on U.S. source income.A foreign person can be a nonresident alien individual, a foreign corporation, a foreign partnership, a foreign trust, a foreign estate, or any other person that is not a U.S. person.Most types of U.S. source income are subject to U.S. tax of 30 percent, unless a lower rate is established by an income tax treaty.U.S. source income reported on the Foreign Personís U.S. Source Income Subject to Withholding (Form 1042-S) has grown significantly from $79 billion in Tax Year (TY) 1990 to over $124 billion in TY 1998.

The chart was removed due to its size.To see the chart, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

The IRS issued new regulations,[6] effective January 1, 2001, related to the withholding of tax and reporting of U.S. source income paid to foreign persons.These regulations represent significant changes in the way withholding taxes are collected and information is reported.Prior withholding regulations required the person (U.S. withholding agent[7]) paying the income to withhold the appropriate tax amount.Under the new regulations, certain foreign intermediaries may assume responsibility for reporting and withholding the tax and for maintaining proper documentation to support reduced rates of withholding.

Generally, withholding agents are legally responsible for proper withholding and reporting.However, under the new regulations, foreign financial institutions that meet the IRSí requirements can agree to withholding and reporting conditions normally required of U.S. withholding agents.

A 1994 IRS Inspection Service (now the Treasury Inspector General for Tax Administration) report[8] identified areas where the IRS could improve payer and payee compliance with U.S. tax laws and regulations.The report identified significant weaknesses in how the IRS processes and uses Forms 1042-S to ensure compliance.

The IRS identified foreign personsí compliance as a material weakness for financial reporting purposes in 1994 as required under the Federal Managersí Financial Integrity Act (FMFIA) of 1982.[9]The material weakness was closed in 1998 because the IRSí Office of the Assistant Commissioner (International)[10] stated that steps to address this weakness were taken and a compliance problem no longer existed.

We performed this audit at the LMSB Divisionís Office of Pre-Filing and Technical Guidance between January and May 2001.The audit was conducted in accordance with Government Auditing Standards.Detailed information on our audit objective, scope, and methodology is presented in Appendix I.

Many Positive Steps Have Been Taken to Improve the Overall Program for Foreign Personsí Compliance

The IRS has taken significant actions in several areas to address conditions identified in the prior report.These actions included:

         Forming a task force to address the concerns identified in the 1994 audit report.The task force issued written results in 1995 outlining corrective actions taken and planned.

         Adding computer processing controls, including data validity and consistency checks,[11] for TY 1994 returns processed by the IRS in 1995 to ensure higher quality information entered the system.

         Ensuring that the Form 1042-S database was provided annually to its International function.This functionís Foreign Payments Division provided assistance in obtaining Form 1042-S information in specific examination situations.The Foreign Payments Division also took steps to educate withholding agents, examiners and tax agents in foreign personsí withholding issues.

         Developing a regulation to require a Taxpayer Identification Number (TIN) be reported on all returns filed with the IRS. This required that the IRS establish the Individual Taxpayer Identification Number (ITIN) Program to assign an identifying number to foreign individualswho are not eligible for Social Security Numbers (SSN), but do have some U.S. tax-related transactions.Foreign individuals are required to furnish either an SSN or an ITIN on tax returns filed after December 31, 1996.

         Identifying the need for a new processing system with IRS-wide accessibility.The system is currently being developed and will be implemented in phases with the first phase scheduled for completion March 2002. The first phase will address how foreign personsí withholding documents are posted to the IRSí Information Returns Master File (IRMF).IRMF contains data from third party sources and is used for compliance purposes.Upon completion in March 2004, the new system will allow the computer matching of payments to foreign persons with related tax returns.

         Revising the foreign withholding tax regulations extensively.

         Redesigning withholding forms including the Certificate of Foreign Status (Form W-8) and revising Publication 515, Withholding of Tax on Nonresident Alien and Foreign Corporations to satisfy and explain the new documentation requirements.

         Developing Revenue Procedure 2001-20[12] that describes the Voluntary Compliance on Alien Withholding Program (VCAP), which allows certain colleges and universities to resolve issues arising from the underreporting of taxes on payments to foreign individuals.

These positive efforts have helped address some of the conditions identified in the prior report.However, the IRS needs to take additional actions to better ensure the compliance of foreign persons.

Effective Processing of Foreign Personís United States Source Income Subject to Withholding (Form 1042-S) Is Needed to Ensure the Accuracy of Data

As previously stated, the IRS added computer processing controls, including data validity and consistency checks, for TY 1994 returns processed in 1995.The IRS also lowered the rate of errors allowed in the computer system when Forms 1042-S were filed magnetically.A lower acceptable error rate increases the quality of information entering the computer system because data with errors above the acceptable rate are not processed until the errors are corrected.When errors are identified, the IRS notifies the filers that the Form 1042-S data submitted need to be corrected and resubmitted.

However, the added computer processing controls did not completely resolve the data quality problems identified in the prior report.The IRSí Statistics of Income (SOI) function identified problems with the Form 1042-S data after the processing changes took effect, including duplicate records and invalid or incorrect codes.For example, invalid income codes were still accepted by the processing system in effect at the time of our audit.Consequently, the IRS cannot determine the correct withholding rate since different withholding rates apply to different income types (i.e., interest, dividends, etc.).

The General Accounting Officeís (GAO) Standards for Internal Control in the Federal Government require that systems include controls that are designed to help ensure the completeness, accuracy, and validity of all transactions during processing.

There were two primary reasons that additional computer processing controls were not programmed.First, the International functionís requests to modify the existing system or develop a new system were initially denied because of funding shortages and other priority projects.Also, the International function anticipated having to redesign a new processing system because of the changes in the withholding regulations and waited to incorporate additional processing controls in the new system.

As a result, the IRS provides potentially inaccurate Form 1042-S data to its treaty partners under the Routine Exchange of Information Program (REIP).[13]In addition, any Form 1042-S data currently used in examinations may not be reliable because of the existing computer processing control weaknesses.The scope of this audit did not include specific tests to identify inaccurate data provided to the REIP or for examinations.Therefore, the extent of any inaccurate data that may have been provided is not known.

Recommendation

1.      The Submission Processing function of the Small Business/Self-Employed (SB/SE) Divisionís Customer Account Services organization should ensure the accuracy of the foreign personsí data from the new processing system.If inaccuracies in the data are identified after the new system is implemented, the causes of the inaccuracies should be identified, and system enhancements should be requested to resolve any further processing weaknesses.

Managementís Response:The Commissioner, LMSB Division responded that the IRS formed the Chapter Three Withholding (CTW) Working Group which has restructured the entire CTW Processing System.The IRS expects to implement Phase I of the new Chapter Three Withholding programs by April 1, 2002.The Submission Processing function of the SB/SE Divisionís Customer Account Services will perform random data verification throughout the implementation, which will include those areas involving data input, program consistency, validity accuracy, and posting progress.In addition, the Submission Processing function submitted a placeholder Request for Information Services to address Phase II processing and to refine those areas identified as not meeting the specifications requested in Phase I.IRS has revised the Internal Revenue Manual to include the new program specifications and processes.The Submission Processing function staff will monitor the implementation of the new processing system.

Foreign Personsí Data Could Be Better Used in Compliance Efforts

The prior report recommended that the International function increase efforts to measure, examine, and enforce compliance with Form 1042-S requirements because of the significant income involved.For TYs 1995 through 1999, the recommended additional tax and penalties resulting from examinations of the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (Forms 1042) have ranged from $45 million to $189 million per year.[14]The prior report also recommended that computer analysis and trending of Form 1042-S data be used to identify large-dollar transactions and unusual trends that may require additional actions to verify the payee income reported.At this time, computer analysis and trending of Form 1042-S data have not occurred on a regular basis and there are no specific plans for this type of analysis until the new system is implemented.

The GAOís Standards for Internal Control in the Federal Government state that internal control should provide reasonable assurance that the objectives of an agency are being achieved.These encompass the effectiveness and efficiency of operations, including the use of the entityís resources, and compliance with applicable laws and regulations.

The International function submitted two requests for the development of a system for compliance purposes.These requests were denied because of funding shortages and other priority projects.

A system with IRS-wide accessibility for examination, collection, and research purposes does not exist.The IRS cannot develop and implement strategies to accomplish business needs and objectives without an effective system to analyze and trend Form 1042-S data.This is significant because foreign personsí income reported on Forms 1042-S has increased from over $79 billion in TY 1990 to over $124 billion in TY 1998.Yet, despite a statutory tax rate of 30 percent on foreign personsí income, withholding amounts have decreased from approximately 2.75 percent of TY 1990 income to 1.93 percent of TY 1998 income.

Recommendation

2.      The LMSB Divisionís Office of the Director, International, which will be responsible for the Foreign Payments Program as of September 2001, should ensure the data from the new processing system provide useful information that will meet the IRSí business needs and objectives.The information should be distributed to all IRS offices that would require the information to carry out their duties.

Managementís Response:The Commissioner, LMSB Division responded that the LMSB Divisionís Strategy, Research and Program Planning function will receive information from the Form 1042 and Form 1042-S databases.That function will be responsible for developing objectives, examination plans, and criteria for audit selection of cases.Information will also be shared with the SB/SE Divisionís planning staff and distributed to the appropriate IRS offices once the new processing system is implemented.The Foreign Payments Team will work with the Strategy, Research and Program Planning function and the SB/SE Division to ensure Form 1042 and 1042-S databases are used to develop effective return classification programs and examination plans.

The Program to Monitor the Compliance of Withholding Agents Could be Strengthened

The IRS still does not have an effective program to monitor payer compliance.This condition involving withholding agent compliance with laws and regulations was identified in the prior review and has not improved since 1994.

The IRS removed foreign personsí compliance issues from its list of FMFIA material weaknesses in September 1998 after concluding that a compliance problem no longer existed in this area.Among the steps taken to reach that conclusion, the IRS examined Form 1042 returns filed by 10 of the largest withholding agents.These withholding agents were financial institutions including banks and brokerage houses.

As part of their examinations of the withholding agents, the examiners reviewed the issue of portfolio interest.Portfolio interest is interest earned on qualified investments and is tax exempt if earned by a foreign person.The examiners determined that most portfolio interest had been paid to foreign financial institutions serving as intermediaries for the beneficial account holders.A beneficial account holder is the entity (individual, corporation, etc.) that ultimately receives the interest income.

The examiners noted that foreign financial institutions furnished to the withholding agents Certificates of Foreign Status (Form W-8) in their own names, and not in the names of the beneficial account holders.The Form W-8 is used to identify the beneficial account holder as a non-U.S. person for tax purposes and may qualify the account holder for a withholding exemption for portfolio interest.The examiners also noted that income items such as portfolio interest were not reported on the Forms 1042-S and that the financial institutions did not obtain Forms W-8.The IRS examiners referred to the Office of Chief Counsel the issue of whether the Forms W-8 should be in the names of the foreign financial institutions or in the names of the beneficial account holders.Chief Counsel did not issue formal guidance regarding this issue; however, the withholding regulations were subsequently rewritten.

The Internal Revenue Code[15] requires a statement that the beneficial account holder is not a United States person. Without such a statement the interest is subject to a 30 percent withholding tax.The statement may be made by the beneficial account holder or by a bank or financial institution on behalf of its customers.The IRS developed Form W-8 to serve as an acceptable statement from a beneficial account holder but did not develop a similar form for financial institutions. The IRS requires portfolio interest to be reported on the Form 1042-S even if the income is exempt from withholding.

After foreign personsí compliance was removed as a material weakness, there was a decreased emphasis on the portfolio interest issue as the IRS reevaluated the foreign personsí compliance program including the potential effect of the new withholding regulations. In addition, requests were made for the development of a computer system that would be useful in a compliance program, but the requests were never funded.

Without proper documentation of foreign status, the IRS cannot determine whether the beneficial account holders are foreign persons entitled to the withholding exemption for portfolio interest, or U.S. persons evading taxation.A 1998 IRS internal report[16] stated that the overall compliance of the financial institutions examined appeared to be good.However, the report stated that if an examining agent were to take an aggressive position in an examination situation in determining that the withholding agent lacked adequate supporting documentation, the interest and penalties could be substantial.The report also stated, in reference to one financial institution, that:

The potential adjustment related to interest and penalties could amount to 18 percent of the portfolio interest paid.Since it is common for undocumented ďportfolio interestĒ to be in excess of $200,000,000 per year, an interest and penalty adjustment would amount to $36,000,000.

Recommendation

3.      The LMSB Divisionís Office of the Director, International should increase management attention to the compliance aspects of the Program, particularly improving withholding agent compliance, in addition to the customer service aspects already being provided.

Managementís Response:The Commissioner, LMSB Division disagreed with our conclusion that the IRS still does not have an effective program to monitor payer compliance.The Commissioner, LMSB Division responded that the IRS established the Qualified Intermediary (QI) Team in the LMSB Divisionís Financial Services Industry to monitor compliance issues of financial institutions with the Foreign Withholding Tax Regulations.The IRS will staff the QI Team with subject matter experts who will assist revenue agents in their examinations of Forms 1042 filed by Financial Service Industry taxpayers.The QI Team will also review reports filed by auditors of qualified intermediaries.The Foreign Payments Team will work with the QI Team to develop a Compliance Program covering U.S. withholding agents in the Financial Services Industry and qualified intermediaries under the new regulations.The Foreign Payments Team will also assist revenue agents assigned to examine returns filed by taxpayers in other industries.

Office of Audit Comment: We concur that the LMSB Division has planned actions to address compliance issues in the future.Our conclusion, however, is based on the results of compliance efforts actually taken in recent years, not on the planned actions for the future.

Enforcement Efforts Are Needed to Encourage Taxpayer Compliance

The prior report recommended that the IRS improve enforcement efforts by ensuring that individuals claiming nonresident status are entitled to exemptions under the law.Critical to this effort is the use of a Tax Identification Number (TIN) to identify individual taxpayers and link all their tax-related transactions.As previously stated, the IRS established the ITIN Program to assign an identification number to foreign individuals who are not eligible for an SSN, but do have some U.S. tax-related transaction.Foreign individuals are required to furnish either an SSN or an ITIN on tax returns filed after December 31, 1996.

However, this provision does not eliminate the compliance risks.The IRS still does not have an effective program to monitor and encourage taxpayer compliance.The intent of the ITIN Program was to provide a unique identification number to foreign persons so Forms 1042-S and related tax returns could be computer matched, taxpayer compliance could be monitored, and enforcement actions could be taken if appropriate.

Under the IRSí new withholding regulations, an identifying number is not required when portfolio interest income is reported.Also, ITINs will not be provided to the IRS under the new regulationsí QI Program.In this Program, approved foreign financial institutions establish an agreement with the IRS to maintain documentation supporting withholding exemptions, but the identities of the beneficial account holders are generally not disclosed to the withholding agent or the IRS.

The GAOís Standards for Internal Control in the Federal Government state that internal control should provide reasonable assurance that the objectives of an agency are being achieved.These encompass the effectiveness of operations, and compliance with applicable laws and regulations.

Delays in finalizing the new withholding regulations, in addition to extensive amendments to the regulations, caused delays in building a new computer processing system with matching capability.Information from the computer processing system would allow the IRS to systemically monitor taxpayer compliance and take enforcement actions if necessary.

The IRS is still at risk because the ITIN provision does not allow the IRS to identify the recipients of the income.This prevents the IRS from systemically cross-checking Forms 1042-S with the foreign personsí tax returns before issuing refunds.In addition, the risk of U.S. persons claiming withholding exemptions they are not entitled to still exists.The QI provision places the IRS at risk because under the new withholding regulations, the QI Program does not generally disclose the names of beneficial account holders to the IRS.Compliance checks to verify foreign status are completed not by the IRS, but by third-party auditors.

Recommendation

4.      The LMSB Divisionís Office of the Director, International should consider pursuing revised regulations that require an identification number (ITIN or SSN) on all foreign investment income reporting documents.

Managementís Response:The Commissioner, LMSB Division responded that the IRS had previously proposed legislation to Treasury requiring backup withholding if an identification number was not provided to a withholding agent.Treasury made a policy decision not to seek legislation because of a concern that requiring a TIN would have an unnecessary adverse effect on foreign investment in U.S. marketable securities.The Foreign Payments Team will continue to identify and support efforts to promote improved taxpayer compliance.

Office of Audit Comment: We have a continuing concern that the IRS needs a system to identify individual foreign investors.

 

Appendix I

 

 

Detailed Objective, Scope, and Methodology

 

The overall objective of the audit was to follow up on the previously identified conditions in a prior Internal Revenue Service (IRS) Inspection Service (now the Treasury Inspector General for Tax Administration) report[17] and determine whether the actions taken have corrected the problems or whether risks still exist.As part of the follow-up, we evaluated the effect of new withholding regulations[18] (effective January 1, 2001) for United States source income paid to foreign persons.The scope did not include test to identify inaccurate data provided to the Routine Exchange of Information Program or for examinations. To accomplish our objective, we:

 

I.††††††††† Evaluated the status of corrective actions taken in response to the recommendations made in the prior audit report.

A.    Interviewed IRS personnel to determine the status of corrective actions.

B.     Obtained and reviewed documentation to support the status of the corrective actions for the prior report.

C.     Reviewed the IRSí report titled, Final Report of the Nonresident Alien Withholding Task Force (dated September 11, 1995).

II.                Reviewed the new withholding regulations under the Internal Revenue Code (I.R.C.)[19] and determined whether the recommendations and corrective actions from the prior audit report were still applicable.

III.             Reviewed procedures for processing foreign personsí information returns and evaluated how changes in the withholding regulations would affect future processing of foreign personsí information.

A.    Interviewed IRS personnel responsible for developing the new processing system.

B.     Reviewed available system documentation including action plans, requests for computer support, and processing flowcharts.

IV.             Evaluated the IRSí Federal Managersí Financial Integrity Act of 1982[20] records to determine managementís justification for removing foreign personsí information documents as a material weakness.

 

Appendix II

 

Major Contributors to This Report

 

Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs)

Philip Shropshire, Director

Richard Hayes, Audit Manager

Lisa Stoy, Senior Auditor

Carole Connolly, Auditor

 

Appendix III

Report Distribution List

 

CommissionerN:C

Deputy Commissioner, Large and Mid-Size Business DivisionLM

Director, InternationalLM:IN

Director, Pre-filing and Technical GuidanceLM:PFT

Director, Customer Account Services, Small Business/Self Employed DivisionS:CAS

Deputy Chief Financial Officer, Department of Treasury

 

Appendix IV

Managementís Response to the Draft Report

 

The response was removed due to its size.To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.



[1] Review of Nonresident Alien Information Documents (Reference Number 041403, dated January 21, 1994).

[2] Treas. Reg. ß 1.1441 [Treasury Decision (T.D.) 8734, (October 1997), amended T.D. 8804, (December 1998), amended T.D. 8856, (December 1999), amended T.D. 8881(May 2000)].

[3] The report addresses the entire group of foreign person payees that include nonresident alien individuals, foreign corporations, foreign partnerships, foreign trusts, foreign estates, and any other persons that are not U.S. persons. The prior report used the term nonresident alien in lieu of the broader term foreign persons.

[4] The IRS provides Form 1042-S data to foreign tax authorities.

[5] The scope of this audit did not include specific tests to identify inaccurate data provided to the REIP or for examinations.Therefore, the extent of any inaccurate data that may have been provided is not known.

[6] Treas. Reg. ß 1.1441 [Treasury Decision (T.D.) 8734, (October 1997), amended T.D. 8804, (December 1998), amended T.D. 8856, (December 1999), amended T.D. 8881(May 2000)].

[7] A withholding agent is any U.S. or Foreign entity (individual, corporation, partnership, etc.) that has control, receipt, disposal, custody, or makes a payment of any income to a foreign person that is subject to withholding.

[8] Review of Nonresident Alien Information Documents (Reference Number 041403, dated January 21, 1994).

[9]The Federal Managersí Financial Integrity Act of 1982, 31 U.S.C. ßß 1105, 1113, and 3512 (1994 & Supp. IV 1998) requires that all federal agencies establish processes for the evaluation and improvement of financial and internal control systems to ensure that management control objectives are met.A material weakness is a significant control deficiency of sufficient importance to be reported annually to the Office of Management and Budget.

[10] Foreign personsí withholding issues were the responsibility of the Office of the Assistant Commissioner (International) but were transferred to the LMSB Division when it was established in June 2000.

[11] These checks are controls built into a computer system to identify unacceptable data.

[12] IRS Revenue Procedure 2001- 20, Voluntary Compliance on Alien Withholding Program issued February 26, 2001, Internal Revenue Bulletin No. 2001-9.

[13] The IRS provides Form 1042-S data to foreign tax authorities.

[14] We obtained these statistics from the IRSí Examination Program Monitoring Reports.

[15] Internal Revenue Code ß 871(h)(2)(B)(ii)(1999).

[16] Financial Institutions Withholding on Payments to Nonresident Aliens, dated June 1, 1998, prepared by the International functionís Foreign Payments Division and Examination functionís Coordinated Examination Program.

[17] Review of Nonresident Alien Information Documents (Reference Number 041403, dated January 21, 1994).

[18]Treas. Reg. ß 1.1441 [Treasury Decision (T.D.) 8734, (October 1997), amended T.D. 8804, (December 1998), amended T.D. 8856, (December 1999), amended T.D. 8881(May 2000)].

[19] I.R.C. ßß 1441-1464, 6041-6050N.

[20] 31 U.S.C. ßß 1105, 1113, and 3512 (1994 & Supp. IV 1998)