The Internal Revenue Service has continued to delay issuing tax refunds for nonresident alien/foreign taxpayers upon the filing of applicable Form 1040NR. The true reason behind the delay is up for speculation, with the IRS stating that additional “verification and related processes/procedures” are being performed prior to their issuing any tax refund/credits.
The relatively high withholding rate (30%-plus in some cases) coupled with the extended processing time can be summed up as a real problem with no clear resolution in sight – excessively tying up funds associated with income earned by foreign taxpayers.
As a quick recap, and further described in IRS Pub 515, Form 1042 is used by withholding agents/intermediaries to report tax withheld with respect to U.S. source income of foreign individuals. Specifically – the form is used to report the following:
- Tax withholdings for certain income of foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts,
- The tax withheld on withholding payments,
- The tax withheld due to specified procurement payments,
- Payments that are reported on Form 1042-S
Starting in July 2014, and absent any existing Form W-8BEN that would allow for reduced tax withholding due to treaty benefits, withholding agents were required to withhold 30% of the payments made to certain foreign entities.
The foreign person/nonresident alien will then claim the U.S. source income and applicable withholding from the Form 1042 on their 1040NR. As previously mentioned, the non-resident alien and foreign individuals are experiencing prolonged delays in receiving refunds for taxes withheld. Under the Hire Act of 2010, the IRS was given 180 days to review tax refunds for foreign persons, nonresident aliens, foreign corporations, foreign trusts, foreign estates, and foreign governments before it needs to pay interest. When checking on refund status, taxpayers could see a message similar to the following:
“If you requested a refund of tax withheld on a Form 1042-S Foreign Person’s U.S. Source Income Subject to Withholding by filing a Form 1040NR Nonresident Alien Income Tax Return, we will need additional time to process the return. Please allow up to 6 months from the original due date of the 1040NR return or the date you actually filed the 1040NR, whichever is later to receive any refund due.”
However, in many cases, additional time is required to review/verify the refund request, which could extend up to an additional 180 days. In those instances, the IRS will issue tentative refunds and release and interest owed to the taxpayer. The IRS has indicated that the taxpayers in question should receive correspondence from the IRS to verify their information (and presumably issue the refund).
As previously mentioned, the true reasons behind the IRS’s delay in processing these refunds are all speculative. With that said, taxpayers should not expect to receive anticipated refunds in an expedited fashion and therefore should plan accordingly. U.S. citizens living abroad should also be wary – likely due to similar issues.