International Compliance Nonresident Alien Tax Treaty Exemption IRS Tax Credits

Published: Jun 15, 2018
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In alerts dated February 6, 2017; December 4, 2017; and March 19, 2018; we reported on the IRS Large Business and International division’s first three sets of campaigns under its issue-based audit approach. On May 21, the division announced an additional six campaigns, making a total of 35. They are as follows:

Interest Capitalization for Self-Constructed Assets

When taxpayers engage in certain production activities they are required to capitalize interest expense under IRC Sec. 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of “designated property.” Designated property under IRC Sec. 246A(f) is defined as (a) any real property; or (b) tangible personal property that has (i) a long, useful life (depreciable class life of 20 years or more); (ii) an estimated production period exceeding two years; or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1 million. This campaign is intended to ensure taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate.

Form 3520/3520-A Non-Compliance

This campaign is intended to improve compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts.

Form 1042/1042-S Compliance

Taxpayers who make payments of certain U.S.-source income to foreign persons are required to comply with related withholding, deposit and reporting requirements. This campaign addresses withholding agents who make such payments but do not meet all of their compliance duties.

Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien, individual tax treaty exemption claims related to both effectively connected income and “fixed, determinable, annual periodical income.” As indicated in this IRS announcement, some nonresident alien taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents, or rely on incorrect information returns provided by U.S. payers to improperly claim treaty benefits and exempt U.S. source income from taxation.

Nonresident Alien Schedule A and Other Deductions

This campaign is intended to increase compliance in the proper deduction of eligible expenses by nonresident alien individuals on Form 1040NR Schedule A. Nonresident alien individuals may either misunderstand or misinterpret the rules for allowable deductions under the previous and new Internal Revenue Code provisions, do not meet all of the qualifications for claiming the deduction, and/or do not maintain proper records to substantiate the expenses claimed.

Nonresident Alien Tax Credits

Increased compliance in nonresident alien individual tax credits is the subject of this campaign. Nonresident aliens who either have no qualifying earned income, do not provide substantiation or proper documentation, or do not have qualifying dependents may erroneously claim certain dependent-related tax credits. Further, some nonresident alien taxpayers may also claim education credits (only available to U.S. persons) by improperly filing Form 1040 tax returns.