The General Accountability Office (GAO) published a report entitled, "TAX COMPLIANCE: IRS May Be Able to Improve Compliance for Nonresident Aliens and Updating Requirements Could Reduce Their Compliance Burden." [GAO-10-429, April, 2010]. GAO's conclusions and recommendations are extracted below:
ConclusionsMuch has changed since Congress developed the tax rules for nonresident aliens. The world economy is increasingly interconnected and the number of aliens entering the U.S. for business purposes has increased accordingly. Congress passed legislation in 1936 to lessen the tax compliance burden for nonresidents paid by foreign employers in the U.S. for short periods of time. However, inflation has eroded the effect of the dollar threshold Congress established and nonresidents increasingly may have to file tax returns if they are in the U.S. for business for only a few days.
Another requirement that has been effectively eroded by the increase in travel to the U.S and other tax laws is the requirement that aliens obtain certificates of compliance, otherwise known as sailing permits. For nonresidents working for U.S. employers, withholding has supplanted sailing permits as the primary way to minimize compliance risk. Nonresidents working for foreign employers may not have substantial tax liabilities because of tax treaty benefits. Further, few nonresidents obtain sailing permits. IRS does not enforce the requirement, and it likely could not effectively enforce the requirement given the volume of foreign individuals departing the country daily. A lack of enforcement may also lead taxpayers to conclude that IRS does not enforce other filing requirements. Taken together, these conditions call into question whether the sailing permit requirement is still necessary to ensure compliance.
Despite an increased focus on nonresident alien tax enforcement, IRS may be missing an opportunity to identify more potentially noncompliant taxpayers because it does not systematically identify nonresidents filing the incorrect type of tax return. If IRS were able to identify taxpayers who should have filed Form 1040NR instead of Form 1040 by using information reported on tax returns or ITIN applications, it may be able to cost-effectively address this form of noncompliance for some taxpayers. Without further study, IRS cannot know if this type of enforcement action would be cost-effective.
Matters for Congressional ConsiderationGiven the increasing extent of business travel to the U.S. and the eroding effect of inflation, Congress should consider raising the amount of U.S. income paid by a foreign employer that is exempt from tax for nonresidents who meet the other conditions of the exemption. Also, given the difficulty of enforcing the requirement for aliens to obtain certificates of compliance - sailing permits - before departing the country and the existence of withholding requirements and tax treaties, Congress should consider eliminating the sailing permit requirement.
Recommendation for Executive ActionWe recommend that the Commissioner of Internal Revenue determine if creating an automated program to identify nonresident aliens who may have improperly filed Form 1040 instead of Form 1040NR by using ITIN information would be a cost-effective means to improve compliance.
Agency Comments and Our EvaluationIn a March 31, 2010, letter responding to a draft of this report, IRS's Deputy Commissioner for Services and Enforcement stated that IRS agreed to study the feasibility of an automated system to identify nonresident aliens who improperly file Form 1040 instead of Form 1040NR, including whether information from ITIN applications can be effectively analyzed with such an automated system. The letter also stated that IRS would continue to look for ways to improve nonresident alien tax compliance through enforcement and outreach. For the full text of IRS's comments, see appendix II.