Office of Audit
CONTINUED EFFORTS ARE NEEDED TO ADDRESS BILLIONS OF DOLLARS IN REPORTING AND PAYMENT DISCREPANCIES RELATING TO TAX WITHHELD FROM FOREIGN PERSONS
Final Report issued on June 17, 2020
Highlights of Reference Number:† 2020-40-021 to the Commissioner of Internal Revenue.
IMPACT ON TAXPAYERS
In most cases, foreign persons are subject to U.S. tax of 30 percent on their U.S. source income.† This tax owed is generally withheld by a withholding agent.† For Tax Year 2017, withholding agents withheld $528 billion.
WHY TIGTA DID THE AUDIT
Withholding agents are required to file Forms 1042-S, Foreign Personís U.S. Source Income Subject to Withholding, to report income and withholding for each foreign person and annually file a Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, to report the cumulative amount of all taxes withheld.† The overall objective of this review was to determine whether the IRS has adequate controls in place to ensure that the amounts reported as withheld on Forms 1042-S are reported on Forms 1042.
WHAT TIGTA FOUND
In response to our prior recommendations, the IRS has implemented processes to improve its identification of reporting discrepancies for Federal tax withheld on U.S. source income paid to foreign individuals.† However, these processes did not identify some withholding tax discrepancies.† Our review identified that IRS processes did not identify 1,919 withholding agents with reporting discrepancies totaling $182.7 million.† The IRSís filter criteria compares incomplete or inconsistent data listed on Forms 1042-S to Forms 1042.† In addition, our review identified 366 withholding agents that claimed $506 million more in credits for tax withheld than was reported on the Forms 1042-S.
In addition, in response to our prior report, the IRS developed a systemic process to identify withholding agents that are not filing required Forms 1042-S.† For example, the IRSís filter identified 1,569 withholding agents that had not filed a Form 1042-S.
Finally, our review identified 7,910 Forms 1040NR, U.S. Nonresident Alien Income Tax Return, which claimed withholding credits that were not supported by a Form 1042-S.† These returns were not selected for IRS verification because the claim amounts were under the IRSís return selection threshold.† The IRS cannot systemically verify these claims because withholding agents are not required to provide a payee Taxpayer Identification Number for all Forms 1042-S.
WHAT TIGTA RECOMMENDED
TIGTA made 12 recommendations, including that the IRS modify its filter criteria to ensure that all withholding agents that do not file Form 1042 are identified and modify procedures to ensure that the withholding credit claimed on Form 1042 matches the withholding reported on Forms 1042-S.
IRS management agreed with five recommendations and disagreed with seven recommendations.† The IRS did not agree to review the Forms 1042 and 1042-S TIGTA identified with potential reporting discrepancies.† The IRS also did not agree to modify Campaign 817 filter criteria to ensure that information used is consistent or modify Error Resolution function procedures.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number ††/† 202-622-6500
E-mail Address †/† TIGTACommunications@tigta.treas.gov
Website†††††† ††††††/† https://www.treasury.gov/tigta