IRS not strict enough on fraudulent tax refunds to nonresident aliens

Introduction

The Internal Revenue Services needs to strengthen its review of tax refunds to nonresident aliens before they are sent out of the country, according to an inspector general report. The IRS review found 40 questionable refunds that totaled over $2.3 million.

“As long as proper controls are not in place, the risk of fraudulent returns and refunds is substantial,” the report said. The likelihood of recovering fraudulent refunds from foreigners after they leave the country is very low.

Additionally, the inspector general found that tax treaty provisions regarding the taxation of gambling income are not being applied consistently. For example, Canadian and Japanese citizens are exempt from paying taxes on gambling winnings, while most other foreigners must pay 30 percent of gambling winnings won in the United States in taxes.

Last year, the IRS started reviewing high—income tax returns for foreigners allowed into the country but who later fail to meet residency standards. It withheld refunds on 94 returns, which amounted to $8.1 million, almost $87,000 per return.

“If the IRS does not take immediate steps to address these control weaknesses, the problem could increase substantially if more unscrupulous individuals learn of the control weaknesses,” the report said.

FAST FACT: Total taxes withheld from nonresident alien income tax returns totaled $2.4 billion and amounted to refunds of more than $712 million in 2009. There are certain cases when nonresident aliens owe no taxes and are entitled to a refund, such as if income was paid by a U.S.-based corporation but the funds were earned outside the country.

Following are other new watchdog reports released by the Government Accountability Office (GAO), various federal Offices of Inspector General (OIG), and other government entities.

NATIONAL SECURITY

• The Federal Emergency Management Agency received $150 million in stimulus funds for a program that protects transportation infrastructure from terrorism and disasters. The program has abided by funding regulations appropriately, but failed to implement a system to measure the effectiveness of the program. (OIG Department of Homeland Security)

HEALTH

• A program run by U.S. Agency for International Development focused on gender-related HIV/AIDS activities in South Africa failed to set HIV testing targets by gender. Young women aged 20-24 have HIV/AIDS rates four times higher than men the same age. (OIG US Agency for International Development)