The Internal Revenue Service has extended its hold on certain tax refunds for returns filed by nonresident aliens and other foreign taxpayers on Form 1040NR beyond the usual 180-day limit in order to give extra scrutiny to the refund claims, leaving many undocumented immigrant workers waiting up to 360 days to get the tax refunds they filed this year.
Under the HIRE Act of 2010, the IRS has 180 days to review tax refunds for foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments and international organizations before it needs to pay interest. However, the IRS is stretching out the time period for up to an additional 180 days to give the tax returns a closer look, although it will pay interest on refund claims beyond the initial 180 days. Many of the returns seem to involve workers paid as independent contractors, including foreign entertainers who perform in the U.S.
“Due to the complexity of some of these refund claims, the IRS needs additional time to review these credits and has extended the hold on the refunds for some taxpayers,” according to the IRS, in response to an inquiry from Accounting Today. “Those taxpayers will be notified by mail if additional time is needed. The extension can be up to an additional 180 days. However as credits are verified, refunds will be released and any interest owed will be paid.”
That situation has been putting some accountants in a bind. One New York City CPA who specializes in nonresident returns contacted Accounting Today and explained the frustration.
“Starting about May of this year, the IRS has withheld refunds on Form 1040NR for those individuals paid as independent contractors,” he wrote. “The mandatory withholding at 30 percent frequently produces largish refunds. I've never seen any figures, but a few thousand dollars would be a very believable figure. Multiply that by a few thousand returns by 50 states (although the largest states probably are where the bulk of the people worked), and you are in the range of half a billion dollars. The true figure may be a multiple of that. In May the IRS changed their guidelines for agents to respond to 'Where's My Refund' queries for this class of returns from three months to six months. In early fall, that was lengthened to a year.”
The CPA, who asked not to be identified, heard from the IRS that the agency is still trying to verify the information, although he has his doubts.
“The given reason is that the withholdings were being verified, although I also know the controllers/heads of finance where my people have worked, and they assure me that no one from IRS has contacted them to verify any information,” he said. “My conclusion is that this is all for show and it’s quite possible that no verification is taking place at all. A more cynical view would be that this is a class of taxpayer that for sure doesn’t vote and there is no downside to keeping the federal government afloat on their money. Take your pick.”
He noted these are non-employees who, if they were “American persons,” would receive a 1099-MISC and report that income on a Schedule C. As non-resident aliens, their income is reported on Form 1042-S and it then gets reported on a Schedule C.
The IRS confirmed to Accounting Today it has not been contacting employers, payroll processors and financial institutions to explain the delay or to provide additional information because withholding agents are supposed to have already provided the information to the IRS.
“Withholding agents are not being contacted by the IRS for this verification of credits,” according to the IRS. “Withholding agents should have already filed the necessary forms with the IRS to allow verification of the credit as required in the instructions for the Form 1042 and Form 1042-S. Only portions of the refunds related to these credits may be delayed. Taxpayers receive the rest of their credits via normal processing.”
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