8 Dec 2015, 12:28pm
Income Tax

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A foreign person’s U.S. source income is subject to 30% withholding tax by the withholding agents.

Withholding agents of foreign persons’ income tax could be their employers, payroll processors, financial institutions, property management company etc. These agents have the responsibility to collect 30% withholding tax on the gross income and remit it to IRS on time using Form 1042 and Form 1042-S.

Foreign persons’ are also given a copy of 1042-S by the withholding agents and they can use the forms to claim credit of taxes paid on their 1040NR or 1120F tax returns. Since the tax withheld in advance is on gross income, and actual tax is based on net income, most of the foreign person tax filer end up with a refund form IRS.

Under the HIRE Act of 2010, the IRS has 180 days to review tax refunds claim 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 has decided to stretch out the time period for up to an additional 180 days to give the tax returns a closer look, although IRS will pay interest on refund claims beyond the initial 180 days. Many of the returns seem to involve workers paid as independent contractors.
IRS admits, “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 put foreign persons’ tax payers 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% 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.”

It is advisable that if you are expecting a tax refund on your 1040NR, to provide all your support documents along with your tax return and paper file your return to the correct mailing address. Collect the phone and fax number of the office you are filing your tax return, and archive all correspondence from IRS in your file. If your refund is delayed, you or your agent can contact IRS to expedite the refund time and provide any additional support documents for IRS to make a decision on your tax filing.

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