This is the accessible text file for GAO report number GAO-10-429 
entitled 'Tax Compliance: IRS May Be Able to Improve Compliance for 
Nonresident Aliens and Updating Requirements Could Reduce Their 
Compliance Burden' which was released on May 14, 2010. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Report to the Chairman, Subcommittee on Select Revenue Measures, 
Committee on Ways and Means, House of Representatives: 

United States Government Accountability Office: 
GAO: 

April 2010: 

Tax Compliance: 

IRS May Be Able to Improve Compliance for Nonresident Aliens and 
Updating Requirements Could Reduce Their Compliance Burden: 

GAO-10-429: 

GAO Highlights: 

Highlights of GAO-10-429, a report to the Chairman, Subcommittee on 
Select Revenue Measures, Committee on Ways and Means, House of 
Representatives. 

Why GAO Did This Study: 

Every year, the U.S. receives millions of legal visits by foreign 
individuals. Nonresident aliens—who are neither U.S. citizens nor 
residents—may be required to file a federal tax return if they earn 
U.S.-source income, and their noncompliance can contribute to the tax 
gap. As with U.S. citizens and residents, the Internal Revenue Service 
(IRS) is responsible for ensuring that nonresident aliens fulfill 
their tax obligations. GAO was asked to (1) identify what data are 
available on nonresident alien tax filing and compliance, (2) provide 
information on guidance IRS provides to nonresident aliens and third 
parties on tax requirements and any challenges associated with filing, 
and (3) assess actions IRS takes to enforce nonresident alien tax 
compliance. To meet its objectives, GAO examined IRS and other federal 
agency documentation, reviewed tax filing and other data, and 
interviewed IRS officials and other third parties. 

What GAO Found: 

For tax year 2007, nonresident alien individuals filed about 634,000 
Forms 1040NR, the U.S. Nonresident Alien Income Tax Return. IRS has 
not developed estimates for the extent of nonresident alien tax 
noncompliance because it often lacks information to distinguish 
between nonresident aliens and other filers, and examinations can be 
costly and difficult since many nonresident aliens would depart the 
country before IRS could examine their returns. 

IRS’s outreach and education efforts have focused on presenting 
information on nonresident tax issues to a variety of audiences and 
making information available on its Web site and in its publications. 
Nevertheless, some nonresidents, their employers, and paid preparers 
may not be aware of nonresident alien tax rules, according to 
representatives of groups that work with employers and nonresidents to 
assist them in fulfilling their tax obligations. Other filing 
challenges exist. For example, individuals filing Forms 1040NR cannot 
file electronically. Also, nonresidents in the U.S. for less than 90 
days who earn over $3,000 in compensation for services paid for by a 
foreign employer will likely have to file Form 1040NR, even if they 
owe no tax. The $3,000 exemption threshold, enacted by Congress in 
1936 to lessen the tax compliance burden on nonresident aliens and 
never adjusted for inflation or other purposes, likely results in a 
greater proportion of nonresident aliens having a filing requirement 
today than in 1936. 

IRS has expanded its nonresident alien enforcement efforts over the 
past decade. However, IRS does not have a program to automatically 
identify nonresident aliens who improperly file Form 1040 instead of 
Form 1040NR, which can result in lost tax revenue when these taxpayers 
take unallowed deductions. IRS may be able to use taxpayer information 
to identify this type of noncompliance systematically. Finally, some 
nonresidents must file a certificate of compliance, referred to as a 
sailing permit, before departing the U.S. to ensure that tax 
obligations have been satisfied. The requirement is difficult to 
enforce and few nonresidents fulfill it, potentially leading to 
broader noncompliance if individuals assume the lack of enforcement 
extends to other tax rules. 

Table: Nonresident Alien Filing Statistics, Tax Years 2003 through 
2007: 

Form 1040NR filers: Number of filers (in thousands); 
2003: 627; 
2004: 638; 
2005: 648; 
2006: 636; 
2007: 634. 

Form 1040NR filers: Total income reported (dollars in billions); 
2003: $7.8; 
2004: $9.3; 
2005: $11.2; 
2006: $13.4; 
2007: $12.8. 

Form 1040NR filers: Total tax liability reported (dollars in billions); 
2003: $1.5; 
2004: $1.8; 
2005: $2.1; 
2006: $2.5; 
2007: $2.5. 

Source: IRS. 

[End of table] 

What GAO Recommends: 

GAO suggests that Congress consider raising the exemption threshold 
for income paid by a foreign employer and eliminating the certificate 
of compliance, or sailing permit, requirement. GAO also recommends 
that IRS determine if creating an automated program to identify 
improper filing of Form 1040 by nonresident aliens would be a cost-
effective means of improving compliance. In commenting on a draft of 
this report, IRS agreed with our recommendation. 

View [hyperlink, http://www.gao.gov/products/GAO-10-429] or key 
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Several Hundred Thousand Individuals File Form 1040NR and It Would Be 
Difficult to Measure Nonresident Alien Tax Noncompliance: 

IRS Has Recently Expanded Nonresident Outreach and Education Efforts, 
but Nonresidents Still Face Challenges in Fulfilling Their Tax 
Obligations: 

IRS Has Increased Nonresident Alien Tax Enforcement but May Be Able to 
Identify Additional Noncompliant Taxpayers: 

Conclusions: 

Matters for Congressional Consideration: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Internal Revenue Service: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Examples of Nonresident Aliens Earning U.S.-Source Income: 

Table 2: Nonresident Alien Filing Statistics, Tax Years 2003 through 
2007: 

Table 3: Comparison of Selected Filing Statistics from Forms 1040NR 
and 1040, Tax Year 2007: 

Table 4: Central Withholding Agreements, Fiscal Years 2007 through 
2009: 

Figure: 

Figure 1: Number and Total Reported Tax Liability of 1040NR Filers by 
Income Bracket, Tax Year 2007: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

April 14, 2010: 

The Honorable Richard E. Neal: 
Chairman: 
Subcommittee on Select Revenue Measures: 
Committee on Ways and Means: 
House of Representatives: 

Dear Mr. Chairman: 

Every year, the U.S. receives millions of legal visits by foreign 
individuals, some of whom have U.S.-source income or are engaged in a 
U.S. trade or business. Individuals who are neither U.S. citizens nor 
residents are known as nonresident aliens for tax purposes and may be 
required to file federal tax returns to report their U.S.-source 
income.[Footnote 1] Nonresident aliens' failure to comply with their 
tax requirements can contribute to the tax gap--the difference between 
taxes paid on time and what should have been paid. The Internal 
Revenue Service (IRS) last estimated a gross tax gap of $345 billion 
for tax year 2001. IRS estimated that it would eventually collect, 
through various enforcement efforts, about $55 billion of the gross 
tax gap, leaving a net tax gap of $290 billion. As it is for U.S. 
citizens and residents, IRS is responsible for helping nonresident 
aliens to understand their tax obligations and ensuring compliance 
with such obligations. 

In response to your request, this report provides information on 
nonresident alien tax obligations and compliance. Specifically, this 
report (1) identifies what data are available on nonresident alien tax 
filing and compliance, (2) provides information on guidance IRS 
provides to nonresident aliens and associated third parties on tax and 
filing requirements and any burdens and challenges associated with 
filing, and (3) assesses actions IRS takes to enforce nonresident 
alien tax compliance. 

To provide data on nonresident alien tax filing and compliance, we 
obtained and reviewed IRS data from nonresident alien income tax 
returns (Form 1040NR) filed for tax years 2003 to 2007, the 5 most 
recent years for which data were available. We compared the Form 
1040NR data to published data on other individual taxpayers from IRS's 
Statistics of Income program. We also interviewed IRS research and 
compliance officials. To provide information on guidance IRS provides 
to nonresident aliens and associated third parties on tax and filing 
requirements and associated burdens and challenges, we reviewed IRS 
tax forms, guidance, and outreach materials. We also interviewed IRS 
officials responsible for conducting outreach efforts and 
representatives from groups that work with employers and nonresidents 
to assist them in fulfilling their tax obligations, such as paid tax 
return preparers, accounting and law firms, and university business 
officers. To assess actions that IRS takes to enforce nonresident 
alien tax compliance, we used IRS's goal in its 2009-2013 strategic 
plan of increasing resource allocation to priority areas as criteria. 
We reviewed data from IRS's enforcement programs, reviewed related 
documentation, and interviewed IRS enforcement officials to determine 
whether resources were increased for nonresident alien compliance 
efforts and what results IRS had achieved. 

We conducted this performance audit from July 2009 through April 2010 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. For more 
information on our scope and methodology, see appendix I. 

Background: 

For federal tax purposes, non-U.S. citizens are categorized as either 
resident or nonresident aliens and are subject to different tax and 
filing requirements. Generally, a nonresident alien is an individual 
who (1) does not possess a permanent resident card, known as a green 
card, or (2) has not established a substantial presence in the U.S., 
which is generally determined by the number of days an individual 
spends in the U.S. over a 3-year period, though other considerations 
apply.[Footnote 2] Resident aliens are generally subject to the same 
federal tax requirements as U.S. citizens, which include paying U.S. 
taxes on worldwide income and filing an individual tax return (Form 
1040). On the other hand, nonresident aliens generally pay U.S. taxes 
only on income derived from U.S. sources and may be required to report 
income on the nonresident alien individual tax return (Form 1040NR). 
[Footnote 3] Nonresident aliens cannot take some credits and 
deductions available to residents and citizens. However, nonresidents 
may qualify for reduced tax rates or exemptions as a result of tax 
treaties between the U.S. and their countries of residence.[Footnote 4] 

Generally, the tax rate nonresident aliens are to pay varies by both 
the types of income earned and the individuals' countries of 
residence. Nonresident aliens earning income effectively connected to 
a U.S. trade or business, such as employee wages, are generally taxed 
at the same graduated rates as U.S. citizens and residents, though 
some tax treaties offer certain exemptions on this type of income. The 
U.S.'s tax treaty with China, for example, exempts from taxation 
certain income earned from the performance of personal services if the 
nonresident alien is in the country for no more than 183 days. 
[Footnote 5] Income not effectively connected to U.S. trade or 
business, such as certain types of investment income, is generally 
taxed at 30 percent. However, nonresidents with income such as 
interest payments on deposits with a U.S. bank, or who are covered by 
a tax treaty may qualify for income exemptions or lower tax treaty 
rates. For example, residents of Mexico earning dividends from U.S. 
companies may qualify for a 10 percent or lower tax rate on this 
income instead of the flat 30 percent rate. 

Nonresidents with income effectively connected to a U.S. trade or 
business are generally required to file Form 1040NR even if they owe 
no taxes because of a tax treaty or deductions. Conversely, 
nonresident aliens not engaged in a U.S. trade or business and whose 
tax liability was satisfied by the withholding of tax at the source do 
not have to file.[Footnote 6] A filing exemption also holds for 
nonresidents meeting certain other criteria, such as the following. 

* Nonresidents whose only U.S.-source income is wages in an amount 
less than the personal exemption amount--$3,650 for tax year 2009--do 
not have to file if they have no other need to file, such as to claim 
tax treaty benefits or a refund.[Footnote 7] 

* Income of $3,000 or less paid by foreign employers for personal 
services performed in the U.S. is not considered to be from U.S. 
sources for nonresidents in the country for 90 days or less.[Footnote 
8] An individual with only this type of U.S.-source income would not 
need to file a return. This $3,000 threshold has not changed since its 
inception in 1936 and would equate to over $46,000 in 2009 dollars if 
adjusted for inflation. 

Table 1 lists examples of nonresident aliens earning U.S.-source 
income and the potential tax treatment in each scenario. 

Table 1: Examples of Nonresident Aliens Earning U.S.-Source Income: 

Income effectively connected to a U.S. trade or business: 

Nonresident alien: Foreign visitor on nonimmigrant work visa; 
Example of income earned and potential tax treatment: An individual 
earns wages while employed by a U.S. entity. The income is generally 
taxed at the same graduated rates as for U.S. citizens and residents. 

Nonresident alien: Foreign short-term business traveler to U.S.; 
Example of income earned and potential tax treatment: Employee of a 
foreign corporation travels to U.S. for a conference, meetings, or 
other business matters and earns more than $3,000 in wage income 
during work days spent in the U.S. The wages are taxed at graduated 
rates unless exempted via tax treaty. 

Nonresident alien: Foreign athlete or entertainer performing or 
competing in U.S.; 
Example of income earned and potential tax treatment: Foreign 
athletes' and entertainers' income is taxable in the same manner as 
income derived by other nonresident aliens: income for performances 
within the U.S. is taxed at graduated rates on a net basis, and income 
such as royalties is subject to a 30 percent withholding tax. Tax 
treaties generally provide special exemptions for specific amounts of 
income earned for these performances. 

Nonresident alien: Foreign student in U.S. on scholarship; 
Example of income earned and potential tax treatment: Students in 
certain visa classes are nonresident aliens for at least the first 5 
years spent in the U.S. Scholarship income may be excludable if the 
student is a degree candidate and uses the funds to pay tuition or 
other course-related expenses. 

Nonresident alien: Employee of foreign government or international 
organization; 
Example of income earned and potential tax treatment: Generally 
considered a nonresident regardless of the number of days spent in the 
U.S. Salaries from foreign governments and certain international 
organizations may be exempt from U.S. taxes. 

Income not effectively connected to a U.S. trade or business: 

Nonresident alien: Foreign investor in U.S. companies; 
Example of income earned and potential tax treatment: An individual 
realizes a capital gain from trading stocks or securities through a 
U.S. broker. The income is generally tax exempt. Dividend income that 
is not effectively connected to a U.S. trade or business is taxed at a 
flat 30 percent or lower treaty rate. 

Nonresident alien: Foreign investor with U.S. bank deposits; 
Example of income earned and potential tax treatment: An individual 
receives interest from bank deposits with a U.S. financial 
institution. The interest income is from U.S. sources but is generally 
tax exempt. 

Source: GAO analysis. 

Note: Examples have been simplified for the purposes of illustration; 
exceptions may apply. 

[End of table] 

As with U.S. citizens and residents, nonresidents must have a taxpayer 
identification number in order to file a tax return. Foreign 
individuals authorized to work in the U.S., such as individuals 
traveling on a nonimmigrant temporary worker visa, must apply for a 
Social Security number (SSN). Individuals who do not qualify for a SSN 
but have a valid filing requirement under the Internal Revenue Code 
may apply to IRS for an individual tax identification number (ITIN). 
For example, certain short-term foreign business visitors earning 
wages from foreign employers while in the U.S. and foreign investors 
would generally apply for an ITIN. 

Tax law also requires that both resident and nonresident aliens obtain 
a certificate of compliance, known as a sailing permit, to ensure that 
their outstanding U.S. tax obligations have been satisfied prior to 
departing the country.[Footnote 9] First enacted in 1921, the 
requirement stipulates that most aliens permitted to work in the U.S. 
must visit an IRS office 2 weeks to 30 days prior to departing the 
country, provide documentation to support any claims of taxable income 
and prior tax payments made, and complete either a Form 1040-C (U.S. 
Departing Alien Income Tax Return) or Form 2063 (U.S. Departing Alien 
Income Tax Statement). An alien is to file Form 1040-C to report all 
income received or expected to be received during the tax year and 
generally is to pay any outstanding U.S. tax liability at the time the 
form is filed. Form 2063 is to be filed when the departing alien has 
no taxable income for the tax year or when tax collection will not be 
hindered by the alien's departure from the country. Certain frequent 
travelers between the U.S. and Mexico or Canada, alien students and 
exchange visitors, and visitors for business admitted on a class B-1 
or B-1/B-2 visa with no taxable income and in the country for no more 
than 90 days are generally exempted from the sailing permit 
requirement. 

Finally, entities making income payments to nonresidents are required 
to withhold taxes at either graduated or fixed rates, depending on the 
type of income earned, except when the payee can verify the 
individuals are entitled to an exemption. For example, a nonresident 
alien earning wages from a U.S. employer would generally be subject to 
graduated withholding in a manner similar to that of U.S. citizens and 
residents. On the other hand, a financial institution disbursing U.S.-
source investment income to a foreign-based individual would generally 
withhold at a fixed 30 percent rate, unless the entity could verify 
that the nonresident was entitled to a reduced treaty rate. In both of 
these examples, the employer and financial institution are required to 
report income payments and withholding to IRS on information returns, 
such as Form W-2 (Wage and Tax Statement) or Form 1042-S (Foreign 
Person's U.S.-source Income Subject to Withholding). In certain 
circumstances with nonresident alien athletes and entertainers, IRS 
enters into arrangements that set withholding rates for income earned 
from specific events, often at less than the 30 percent otherwise 
required. These arrangements, called Central Withholding Agreements, 
specify the amount and timing of U.S. tax payments and take into 
account expenses associated with the income earnings. 

Several Hundred Thousand Individuals File Form 1040NR and It Would Be 
Difficult to Measure Nonresident Alien Tax Noncompliance: 

According to IRS data, nonresident alien individuals filed about 
634,000 Forms 1040NR for tax year 2007, a small number compared to the 
143 million Forms 1040 other individual taxpayers filed for that year. 
[Footnote 10] These nonresident filers reported $12.8 billion in 
income, resulting in a $2.5 billion tax liability.[Footnote 11] The 
number of Form 1040NR filers varied little from 2003 to 2007, the 
latest years for which data were available. However, total income and 
total tax liability reported increased during this period, as shown in 
table 2. Total income and tax liability reported on Form 1040NR 
increased by 64 percent and 71 percent, respectively, compared to 
increases in reported income (40 percent) and tax liability (48 
percent) reported on Form 1040 from tax year 2003 to tax year 2007. 
[Footnote 12] The $5 billion increase in total income reported on 
Forms 1040NR for this period is largely due to increases among higher 
earners, since the total income that nonresidents with $100,000 or 
more in income reported on Form 1040NR increased from $3.8 billion to 
$8.1 billion (111 percent). 

Table 2: Nonresident Alien Filing Statistics, Tax Years 2003 through 
2007: 

Form 1040NR filers: Number of filers (in thousands); 
2003: 627; 
2004: 638; 
2005: 648; 
2006: 636; 
2007: 634. 

Form 1040NR filers: Total income reported (dollars in billions); 
2003: $7.8; 
2004: $9.3; 
2005: $11.2; 
2006: $13.4; 
2007: $12.8. 

Form 1040NR filers: Total tax liability reported (dollars in billions); 
2003: $1.5; 
2004: $1.8; 
2005: $2.1; 
2006: $2.5; 
2007: $2.5. 

Source: IRS. 

[End of table] 

Form 1040NR filing data do not represent the full population of 
nonresident alien taxpayers, however. Certain foreign investors 
earning U.S.-source investment income with sufficient taxes withheld 
at the source, for example, are not required to file Form 1040NR. 
Also, nonresidents married to U.S. citizens or residents can choose to 
be treated as residents and jointly file Form 1040 with their spouses. 
[Footnote 13] Other nonresident aliens may incorrectly file Form 1040, 
meaning their tax return information is not reflected in the Form 
1040NR data. 

IRS data also allow for comparison of nonresident alien filing 
characteristics to those of U.S. citizen and resident filers, as shown 
in table 3. 

Table 3: Comparison of Selected Filing Statistics from Forms 1040NR 
and 1040, Tax Year 2007: 

Filing statistic: Forms with no tax liability; 
Percentage of filed forms: Form 1040NR: 53; 
Percentage of filed forms: Form 1040[A]: 25. 

Filing statistic: Forms reporting tax balance due; 
Percentage of filed forms: Form 1040NR: 8; 
Percentage of filed forms: Form 1040[A]: 20. 

Filing statistic: Forms reporting a refund due; 
Percentage of filed forms: Form 1040NR: 67; 
Percentage of filed forms: Form 1040[A]: 77. 

Filing statistic: Forms prepared by a paid preparer; 
Percentage of filed forms: Form 1040NR: 64; 
Percentage of filed forms: Form 1040[A]: 56. 

Source: GAO analysis of IRS data. 

[A] Figures for Form 1040 are estimates. 

[End of table] 

As shown in table 3, 53 percent of Form 1040NR filers reported no tax 
liability for tax year 2007, in contrast to an estimated 25 percent of 
Form 1040 filers. Some nonresidents qualify for tax treaty income 
exemptions which may contribute to the higher proportion of Form 
1040NR filers with no tax liability.[Footnote 14] Requiring a 
nonresident with no tax liability to file a U.S. return creates some 
burden on the taxpayer, yet there are reasons why it may be 
beneficial. For example, for individuals filing exclusively to claim a 
treaty exemption, IRS may use that information to review and 
potentially dispute claims. Additionally, some nonresidents may not 
know if they have a tax liability until they go through the process of 
preparing a tax return.[Footnote 15] 

Also as shown in table 3, a smaller percentage of Forms 1040NR than 
Forms 1040 reported a tax balance or refund due for tax year 2007. 
These differences could be due to various factors, such as some 
nonresidents having no tax liability as a result of tax treaties. 
Also, a greater proportion of Forms 1040NR than Forms 1040 were 
prepared by a paid tax return preparer, a disparity which may be due 
to several factors, such as the complexity of nonresident tax law and 
that some employers with employees traveling internationally may hire 
tax professionals to assist in preparing employees' returns. 

Figure 1 below shows that a small proportion of filers accounted for 
the majority of reported tax liability. For example, about 20,000 
filers (3 percent of all Form 1040NR filers) reported over $100,000 in 
total income, yet this population contributed 76 percent ($1.9 billion 
of $2.5 billion) of reported tax liability reported for tax year 2007. 
Conversely, 72 percent of nonresidents reported $10,000 or less in 
income, with these returns accounting for 1 percent of all reported 
tax liability ($29 million out of $2.5 billion). One reason why most 
nonresidents reported low income amounts might be that some are in the 
country for only part of the tax year. 

Figure 1: Number and Total Reported Tax Liability of 1040NR Filers by 
Income Bracket, Tax Year 2007: 

[Refer to PDF for image: 2 vertical bar graphs] 

Total income: Less than $0; 
Number of filers in thousands: 30; 
Reported tax liability, in billions: $0. 

Total income: $0; 
Number of filers in thousands: 87; 
Reported tax liability, in billions: $0. 

Total income: $1 to $10,000; 
Number of filers in thousands: 336; 
Reported tax liability, in billions: $0.03. 

Total income: $10,001 to $25,000; 
Number of filers in thousands: 90; 
Reported tax liability, in billions: $0.12. 

Total income: $25,001 to $100,000; 
Number of filers in thousands: 71; 
Reported tax liability, in billions: $0.44. 

Total income: Over $100,000; 
Number of filers in thousands: 20; 
Reported tax liability, in billions: $1.91. 

Source: GAO analysis of IRS data. 

Note: Form 1040NR filers could have reported less than $0 dollars in 
total income if they had losses, such as capital or business losses, 
that exceeded their income. 

[End of figure] 

IRS Lacks Comprehensive Data on Nonresident Alien Tax Compliance and 
Obtaining Data Would Be Challenging: 

IRS has not developed estimates for three types of nonresident alien 
tax noncompliance: (1) failing to file a tax return, known as 
nonfiling, (2) underreporting income on filed returns, and (3) filing 
Form 1040 instead of Form 1040NR.[Footnote 16] IRS has developed an 
estimate of overall individual taxpayer nonfiling by comparing general 
population information from the U.S. Census Bureau's Current 
Population Survey to individual income tax filing data, and matching 
data taxpayers report on tax returns to that which third parties 
report on information returns, such as wage and tax statements from 
employers.[Footnote 17] However, according to IRS research officials, 
it is not possible for IRS to parse out the nonresident portion of its 
nonfiling estimate because the agency lacks the information necessary 
to distinguish between nonresident alien and other nonfilers. Also, 
census data exclude many short-term nonresident visitors. 

IRS has excluded Form 1040NR returns from its studies of individual 
taxpayer underreporting, which it uses to estimate the tax 
gap.[Footnote 18] Those studies rely partially on face-to-face 
examinations with individual taxpayers. Sampling Form 1040NR filers in 
these studies would have been costly and difficult since many 
nonresident aliens would have departed the country by the time IRS 
examined the returns, according to IRS research officials. Given 
limited agency resources, IRS has focused its compliance measurement 
efforts on types of taxpayers that may represent greater compliance 
risks. Total lost tax revenues associated with nonresident 
noncompliance, for example, may be modest when compared with 
underreporting for other areas, such as individual income tax, 
employment taxes, or entities such as S corporations.[Footnote 19] 

Additionally, IRS has not estimated the extent to which nonresidents 
improperly file Form 1040 instead of Form 1040NR.[Footnote 20] This is 
partly because sampling and examining Form 1040 filers to identify 
nonresidents would be time-consuming and costly, given the large 
number of Form 1040 filers and the likelihood that nonresidents will 
have already departed the country. 

Generating a rough estimate of the number of nonresident aliens who 
may have a filing requirement using data from other federal agencies 
would be challenging. The Department of Homeland Security (DHS) 
reported admitting 9.7 million visitors for purposes other than 
pleasure to the U.S. in 2007, while the Department of State reported 
issuing 6.4 million nonimmigrant visas in the same year. Yet neither 
figure serves as a reliable proxy for the number of nonresident aliens 
entering the country for employment or business purposes, much less 
incurring a filing obligation. DHS's data reflect the number of 
entries into the U.S. rather than the number of individuals, thus 
overcounting individuals making multiple trips to the U.S. State data 
reflect the number of visas issued, but some were issued for strictly 
leisure purposes, some visa recipients never enter the U.S., and 
others may enter the U.S. and stay for a period of time sufficient to 
establish tax residency. Even with an estimate of the number of 
nonresident aliens entering the U.S. each year, it would be difficult 
to further determine the number incurring a tax liability. Some 
individuals may not earn sufficient income to prompt a filing 
requirement and others may be noncompliant with the filing requirement 
but not owe U.S. taxes because of tax treaty benefits. 

IRS Has Recently Expanded Nonresident Outreach and Education Efforts, 
but Nonresidents Still Face Challenges in Fulfilling Their Tax 
Obligations: 

IRS's outreach efforts have focused on presenting information on 
nonresident tax issues to a variety of audiences. In 2009, IRS began 
conducting seminars and workshops for tax practitioners on nonresident 
alien tax issues and Form 1040NR at its Nationwide Tax Forums. IRS 
also conducted two phone forums in 2008 on federal tax withholding, 
for nonresident alien athletes and entertainers, and Central 
Withholding Agreements.[Footnote 21] 

IRS has also presented annually to groups such as the American Payroll 
Association and National Association of College and University 
Business Officers and has presented periodically to the American Bar 
Association, Tax Executives Institute, and local attorney and 
certified public accountant groups. Regarding nonresident aliens, 
these presentations covered a wide array of topics, including tax 
residency rules, income sourcing rules, tax treaty issues, 
descriptions of which forms to file, and guidance on withholding on 
payments to foreign individuals. Additionally, IRS employees at 
foreign posts are available to provide guidance to nonresidents, 
although these posts generally are staffed by few employees, making 
outreach difficult. 

IRS has held preliminary discussions with the Department of State and 
the U.S. Citizenship and Immigration Service about having links to 
information on IRS's Web site on nonresident alien tax requirements 
included on sections of those agencies' Web sites that cover visa 
applications and requirements. IRS and the Department of State have 
discussed incorporating tax information within visa application 
materials. However, according to an IRS official involved with this 
effort, State was not inclined to produce this material because of the 
cost involved and because the agency did not want to be perceived as 
providing guidance on tax matters. 

According to IRS compliance officials, IRS does not engage in outreach 
to tax software providers on nonresident alien tax issues, primarily 
because Form 1040NR currently cannot be filed electronically, as 
discussed later. Software providers could conceivably insert a 
question in their Form 1040 preparation programs inquiring if the user 
is a citizen, resident, or nonresident alien. 

According to IRS officials, IRS is assessing the feasibility and cost- 
effectiveness of setting up a toll-free number that individuals can 
call from outside of the U.S. to receive tax assistance. Currently IRS 
tax assistance toll-free numbers cannot be called from outside of the 
U.S. IRS also produces various publications containing information 
relevant to nonresident aliens and includes information on nonresident 
alien tax issues on its Web site.[Footnote 22] 

Nonresident Aliens Face Challenges in Fulfilling Their Tax Obligations: 

According to representatives from groups that work with employers and 
nonresidents to assist them in fulfilling their tax obligations, 
nonresident aliens face challenges in fulfilling their tax filing 
obligations. For example and despite IRS's outreach and education 
efforts, some nonresidents and their employers may not be aware of the 
nonresident alien tax rules. Although nonresidents earning wages from 
U.S. employers would likely know that they had taxes withheld from 
their wages, they may not know they also have to file a tax return or 
which return to file. Likewise, foreign individuals in the U.S. for 
short-term business trips may be unaware that they have a filing 
requirement given that comparable requirements may not exist in their 
countries of residence. For example, in Canada, nonresidents generally 
do not have to file a tax return if they owe no Canadian tax. Also, 
some paid tax return preparers may not be familiar with nonresident 
alien tax rules. Representatives from groups we spoke with thought 
that unlicensed preparers in particular might not be familiar with the 
nonresident alien tax rules. 

Likewise, aspects of nonresident alien taxation, such as tax residency 
rules, determining whether income is effectively connected to a U.S. 
trade or business or is U.S.-or foreign-source, and applying tax 
treaty provisions, can be difficult for nonresidents to understand. 
For example, it can be challenging to answer the basic question of 
whether or not a foreign person is a nonresident or resident alien. 
Beyond the green card and substantial presence tests, noncitizen 
taxpayers or their practitioners need to consider various scenarios in 
making residency determinations. For example, individuals who would 
otherwise be treated as residents can file as nonresidents if they 
have a closer connection to a foreign country.[Footnote 23] It is also 
possible to be both a nonresident alien and resident alien in the same 
tax year and different rules apply for the part of the year an 
individual is a nonresident alien and the part of the year the 
individual is a resident alien. Although no single rule may be 
difficult to apply, that numerous rules need to be considered can make 
the residency determination a difficult and time consuming one, 
according to representatives from groups that work with employers and 
nonresidents to assist them in fulfilling their tax obligations. 

The inability for nonresidents to file Form 1040NR electronically is 
another challenge the groups we interviewed mentioned. Currently, IRS 
does not allow for electronic filing of Form 1040NR because it 
contains fields that cannot easily be transcribed into an electronic 
format. IRS redesigned Form 1040NR for tax year 2009, in part to 
address this problem. However, it does not plan to accommodate 
electronic filing of the form until at least 2014.[Footnote 24] 

Another set of challenges that groups we interviewed identified 
concerned obtaining ITINs, as discussed below. 

* ITIN applicants need to submit large amounts of documentation to 
IRS, some of which must be certified by going to a U.S. embassy, which 
can be time-consuming. 

* Some applicants need to prove that they cannot obtain a SSN before 
they can be assigned an ITIN and some nonresidents apply for a SSN 
just to get the rejection letter so they can then apply for an ITIN. 

* Some nonresidents unable to obtain an ITIN prior to departing the 
country may end up not filing a return, even if owed a refund. Whether 
or not they persist in the process to obtain an ITIN may depend on 
whether or not the individuals anticipate subsequent U.S. taxable 
activities. 

Finally, some groups noted it is a burden for nonresidents paid by 
foreign employers who take short business trips to the U.S. to file 
the required Form 1040NR.[Footnote 25] As previously discussed, 
personal service income of $3,000 or less paid to a nonresident by a 
foreign employer is not considered to be from U.S. sources for 
individuals in the U.S. 90 days or less who have no other compensation 
for services within the U.S. Congress established this threshold in 
1936 to permit foreign residents to visit the U.S. for business 
purposes without being subject to taxes on the compensation they earn 
while in the U.S. In discussing this exemption, the Senate noted that 
the lack of a threshold had created ill will disproportionate to the 
small amount of revenue raised by taxing foreign residents making 
short business trips to the U.S.[Footnote 26] 

Because the $3,000 threshold has not increased since 1936, it is 
likely that a greater proportion of nonresident aliens have a filing 
requirement today than when the threshold was established. For 
example, in 1936, $3,000 was 559 percent of the U.S. per capita 
personal income amount of $537. In 2008, $3,000 represented 8 percent 
of the U.S. per capita personal income amount of $39,751. Likewise, a 
nonresident would need to earn an annual salary of $12,133 to exceed 
the $3,000 threshold during a 90-day period, assuming the individual 
had no other U.S.-source income.[Footnote 27] A salary of $12,133 in 
1936 is equivalent to $187,938 in 2008 dollars. A nonresident earning 
$187,938 in 2008 would need to be in the U.S. for only 5 days for 
business purposes to trigger a filing requirement, if the individual 
earned no other U.S.-source income.[Footnote 28] This increased reach 
of the filing requirement is underscored by the advance of economic 
globalization and increase in business travel since the threshold was 
established. 

Some groups we spoke with suggested raising the $3,000 threshold to 
reduce the burden of filing tax returns on nonresidents who make short 
business trips to the U.S. and are paid by foreign employers. In 
evaluating whether to increase the threshold, either by the level of 
inflation since 1936 or another amount, various issues warrant 
consideration. For example, although the current filing requirement 
may be applicable to a broader population of nonresident aliens than 
in 1936, many nonresidents who are required to file may ultimately owe 
reduced or no taxes because of the tax treaties the U.S. has adopted. 
According to DHS data, at least 78 percent of admissions to the U.S. 
in fiscal year 2007 were of individuals residing in countries with 
which the U.S. has tax treaties. Also, raising the exemption amount 
could negatively affect U.S. residents if they do not receive 
reciprocal exemptions on income otherwise subject to tax in countries 
with which the U.S. has tax treaties. 

Raising the threshold amount could result in lost tax revenue. For 
example, IRS calculated that Form 1040NR filers who had income from 
personal services in an amount of $40,000 or less reported $222.1 
million in tax liability for tax year 2007. This amount represented 
about 9 percent of the total tax liability reported on Form 1040NR for 
that year. If the threshold had been set at $40,000 for tax year 2007, 
which is slightly less than the value of $3,000 in 1936 dollars 
inflated to 2007 dollars, the $222.1 million could have been exempt 
and not paid. However, it is not likely that all of that amount would 
have been exempt because some of the nonresidents with personal 
services income of $40,000 or less could have been paid by a U.S. 
employer or could have been in the U.S. for more than 90 days, and 
therefore would not have been entitled to the exemption. Also, some of 
that tax amount may be attributed to other types of income. 

Although increasing the exemption threshold would likely result in 
reduced tax revenue, it would also likely result in reduced burden and 
cost savings for some nonresidents and IRS. Some taxpayers would no 
longer bear the burden or cost of obtaining an ITIN and filing a 
return. IRS would likely realize cost savings from having to process 
fewer ITIN applications and Forms 1040NR. 

IRS Has Increased Nonresident Alien Tax Enforcement but May Be Able to 
Identify Additional Noncompliant Taxpayers: 

IRS has expanded its enforcement efforts over the past decade. In 
2001, IRS had two examiners who covered nonresident alien compliance 
issues. Currently, IRS's Large and Mid-sized Business division's 
International Compliance Strategy and Policy group (LMSB 
International) has 261 examiners dedicated to international compliance 
issues, including nonresident alien tax compliance.[Footnote 29] LMSB 
International plans to hire an additional 202 examiners during fiscal 
year 2010. 

LMSB International has generally conducted face-to-face examinations 
of nonresident aliens through special projects that focus on 
particular types of taxpayers. For example, LMSB International has 
examined individuals employed by foreign embassies or consulates and 
international organizations in the U.S. Although U.S.-source income 
paid to nonresident employees of foreign governments and international 
organizations may be exempt from federal income tax, the exemption 
depends on the tax treaty or consular convention between the U.S. and 
the relevant foreign governments or other U.S. tax laws. Also, 
employees of foreign governments and international organizations are 
generally considered nonresidents regardless of how long they are in 
the U.S. LMSB International found that some individuals were claiming 
income exemptions to which they were not entitled or filed Form 1040 
instead of Form 1040NR.[Footnote 30] For this project, IRS first 
contacted potentially noncompliant individuals and allowed them to 
voluntarily correct any noncompliance. IRS assessed $32.0 million in 
taxes for 4,540 taxpayers who voluntarily settled with IRS from fiscal 
year 2007 through the end of January 2010, for an average of $7,049 
per settlement. IRS then examined 3,720 taxpayers who did not 
voluntarily settle with IRS, assessing $21.8 million in taxes, for an 
average of $5,851 per examination. LMSB International is continuing 
these examinations. 

Building face-to-face examination cases for nonresidents is resource 
intensive. For example, preparing for and conducting the examinations 
of employees of foreign embassies and consulates and international 
organizations took up nearly all of LMSB International's resources 
that were dedicated to nonresident alien enforcement. LMSB 
International used State Department visa information to identify the 
nonresidents it contacted and examined. However, it is difficult and 
time consuming for IRS to use visa information to identify 
corresponding tax returns because visas do not include SSNs or ITINs, 
which are the unique identifiers included on tax returns that IRS uses 
to build examination cases. 

LMSB International is planning on using examiners it expects to hire 
in fiscal year 2010 to conduct additional enforcement actions against 
nonresidents that would be less time consuming and complex than face- 
to-face examinations. For example, IRS may examine potentially 
noncompliant nonresidents through correspondence, according to an LMSB 
International official. Likewise, through its Automated Underreporter 
program (AUR), IRS has begun to match information taxpayers report on 
Forms 1040NR to information third parties report to IRS to identify 
nonresident alien taxpayers who may have underreported their income. 
IRS previously concluded, through a test, that matching income items 
from Form 1040NR, such as wages, was not a prudent use of resources. 
IRS found that many of the tax returns it studied claimed tax treaty 
benefits, which can be time consuming to verify and can require 
expertise to evaluate that IRS AUR staff generally did not possess. 
However, given that LMSB International is planning to hire additional 
staff, it may be able to examine nonresident alien taxpayers whom it 
identifies as potentially noncompliant through AUR, according to the 
official. 

IRS has a broad program to identify taxpayers who failed to file a 
required tax return, including those who should have filed Form 
1040NR. The program only identifies whether individuals may have 
failed to file a tax return and cannot easily identify which form they 
should have filed (i.e., Form 1040 versus Form 1040NR). IRS may be 
able to identify during an examination that a nonfiler should have 
filed Form 1040NR. 

IRS May Be Able to Systematically Identify Nonresidents Who Improperly 
File Form 1040: 

IRS does not have a program to automatically identify taxpayers who 
may have improperly filed Form 1040 instead of Form 1040NR. According 
to an LMSB International official familiar with examinations of 
nonresidents, IRS has found that some nonresidents improperly file 
Form 1040 instead of Form 1040NR. The official told us that 
nonresidents filing the wrong tax return presents a greater compliance 
risk than nonresidents failing to file a tax return altogether because 
withholding is required for most nonresidents earning U.S.-source 
income regardless of whether they file a tax return. Also, other 
nonresidents who do not file and for whom taxes are not withheld, such 
as those working for foreign employers, may not have tax liabilities 
because of tax treaty benefits. On the other hand, nonresidents who 
file Form 1040 instead of Form 1040NR may claim credits or take 
deductions to which they are not entitled, which may lead to reduced 
tax revenue. 

IRS may be able to systematically identify nonresidents who improperly 
file Form 1040 instead of 1040NR. As previously discussed, 
nonresidents must obtain an ITIN to file a tax return if they do not 
meet the requirements to obtain a SSN. IRS can identify Forms 1040 
filed using ITINs. IRS can also identify Forms 1040 filed jointly by 
married individuals that included both an ITIN and a SSN, as 
nonresidents married to U.S. citizens or residents can choose to be 
treated as residents and file Form 1040 jointly with their spouses. 
IRS may also be able to use information from ITIN applications (Form W-
7) to further refine the identification of taxpayers who may have 
filed the wrong tax return because ITIN applicants indicate if they 
are resident or nonresident aliens, or a spouse or dependent of 
either, on that form. 

LMSB International officials told us that IRS may be able to 
effectively use such a filtering process in its enforcement efforts. 
As previously discussed, LMSB International is planning on initiating 
additional enforcement actions against nonresidents that would be less 
time consuming and complex than the face-to-face examinations it has 
traditionally conducted. The officials told us that if IRS were able 
to identify nonresidents who may have improperly filed Form 1040 
instead of Form 1040NR, IRS could examine some of those individuals 
through correspondence, for example those who took large deductions 
that would not be allowed when filing Form 1040NR. Likewise, IRS could 
review Forms 1040 filed jointly by a married couple where one filer 
used an ITIN to ensure that the return included the couple's worldwide 
income, and not just their U.S.-source income, as is required by U.S. 
tax law. The officials told us that it would be worthwhile to test the 
identification process to determine the size of the potential 
examination inventory and the cost-effectiveness of working on these 
examination cases. 

IRS Has Expanded Enforcement for Reporting and Withholding on Payments 
to Foreign Individuals: 

In 2008, LMSB designated reporting and withholding on U.S. income paid 
to foreign individuals as a high-priority issue.[Footnote 31] U.S. 
persons or entities who make payments of certain types of U.S.-source 
income to nonresidents generally must withhold tax at a rate of 30 
percent on such payments, unless there are applicable tax treaty 
provisions allowing for a reduced rate. Such payments are generally 
subject to reporting on Form 1042 (Annual Withholding Tax Return for 
U.S. Source Income of Foreign Persons) and Form 1042-S (Foreign 
Person's U.S. Source Income Subject to Withholding). The person or 
entity making these payments--generally referred to as a U.S. 
withholding agent--is responsible for the withholding and reporting. 
IRS's focus for this issue is on the compliance of U.S. withholding 
agents with regard to these reporting and withholding responsibilities. 

The impetus behind designating U.S.-source income reporting and 
withholding as a priority issue was two-fold, according to an LMSB 
International official. First, in September 2008, the Permanent 
Subcommittee on Investigations of the Senate Committee on Homeland 
Security and Government Affairs issued a report on actions foreign 
individuals take to avoid payment of taxes on U.S. stock 
dividends.[Footnote 32] The report brought attention to the problem of 
withholding agents not reporting and withholding proper amounts of 
tax. Second, IRS historically had not taken actions to enforce 
compliance with the requirements for reporting and withholding on 
payments to nonresidents. 

The U.S.-source income reporting and withholding initiative is made up 
of three components, according to LMSB International officials. 

* First, IRS is attempting to address intermediary (e.g., hedge funds' 
and other financial institutions') marketing of aggressive tax 
positions, such as through instruments like total return swaps, which 
may allow taxpayers to avoid taxation on income that would otherwise 
be taxed at 30 percent.[Footnote 33] 

* Second, IRS has begun to match filed Forms 1042-S to Forms 1040 or 
1040NR to determine if taxpayers are underreporting income. 

* Third, IRS has initiated a number of compliance projects. LMSB 
International has started a marketing campaign within IRS to increase 
focus on withholding agent compliance by, for example, encouraging 
examiners to look for taxpayers with foreign addresses when reviewing 
businesses' payroll information. LMSB International has also begun 
testing whether it can identify entities that filed Forms 5471 
(Information Return of U.S. Persons With Respect To Certain Foreign 
Corporations) or 5472 (Information Return of a 25 Percent Foreign-
Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. 
Trade or Business) but failed to report payments to nonresidents on 
Form 1042-S. IRS found for a test group of 10 corporations, 9 failed 
to report some payments. However, it was unclear if these payments 
were exempt because of tax treaties and as such appropriate to exclude 
from reporting. IRS is continuing this test. 

IRS uses Central Withholding Agreements to minimize tax compliance 
risk for athletes and entertainers, who often are high earners 
relative to other nonresident aliens. As shown in table 4, the number 
of agreements and amounts withheld has increased over the past 3 
fiscal years, although the average amounts withheld have fluctuated. 

Table 4: Central Withholding Agreements, Fiscal Years 2007 through 
2009: 

Number of agreements: 
2007: 507; 
2008: 655; 
2009: 944. 

Total withholding deposits (dollars in millions): 
2007: $53.7; 
2008: $59.2; 
2009: $70.9. 

Average withholding deposit per agreement: 
2007: $106,009; 
2008: $90,363; 
2009: $75,066. 

Source: IRS. 

[End of table] 

Few Nonresidents Obtain Sailing Permits and IRS Does Not Enforce the 
Sailing Permit Requirement: 

The number of sailing permits filed annually has decreased 
substantially over past decades. As we reported in 1988, the number of 
Form 1040-C sailing permits filed dropped from about 176,000 in 
calendar year 1960 to 1,245 in fiscal year 1986.[Footnote 34] 
According to an LMSB International official, about 1,000 Forms 1040-C 
were filed for tax year 2006. Likewise, neither IRS nor the U.S. 
Customs and Immigration Service have enforced the sailing permit 
requirement for departing aliens for decades, according to LMSB 
International officials. These officials told us that IRS cannot 
realistically enforce the sailing permit requirement given the volume 
of foreign individuals who depart the U.S. daily. Enforcing the 
requirement would be particularly burdensome, as IRS would have to 
check all aliens for sailing permits even though the requirement is 
only applicable to some. For example, only a portion of foreign 
individuals enter the U.S. for business purposes. According to DHS 
data, about 74 percent of visitor admissions were for pleasure rather 
than for business or other purposes in fiscal year 2007. 

That few individuals file sailing permits and IRS does not enforce the 
filing requirement may not represent a significant compliance risk. 
Tax withholding is generally required on payments of U.S.-source 
income to nonresident aliens.[Footnote 35] Such withholding reduces 
the chance that nonresidents will depart the country without paying 
taxes owed. Furthermore, although foreign employers may not withhold 
U.S. taxes on U.S-source income payments made to nonresidents, those 
individuals may not have substantial tax liabilities because of tax 
treaties. As previously discussed, at least 78 percent of admissions 
to the U.S. in fiscal year 2007 were of individuals residing in 
countries with which the U.S. had a tax treaty. 

On the other hand, there may be a downside to having a requirement 
that is not enforced. Nonresidents who recognize that IRS does not 
enforce the sailing permit requirement may assume that IRS will not 
enforce other requirements, which could lead to broader noncompliance. 
Representatives from groups that work with employers and nonresidents 
to assist them in fulfilling their tax obligations told us that they 
were aware that IRS has not enforced the sailing permit requirement in 
decades. Also, according to an LMSB International official, the 
existence of a requirement could even negatively affect overall tax 
compliance in that some foreign individuals who file the Form 1040-C 
version of the sailing permit may not realize that they have to file a 
tax return after the year's end and pay any additional tax that was 
not paid in conjunction with filing Form 1040-C. Finally, although few 
aliens file sailing permits, IRS incurs at least some cost to process 
filed permits and maintain guidance concerning the requirement. 

Conclusions: 

Much 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 Consideration: 

Given 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 Action: 

We 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 Evaluation: 

In 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. 

As we agreed with your office, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from the date of this report. At that time, we will send 
copies of the report to the Commissioner of Internal Revenue and other 
interested parties. This report will also be available at no charge on 
GAO's Web site at [hyperlink, http://www.gao.gov]. If you or your 
staff have any questions about this report, please contact me at (202) 
512-9110 or brostekm@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report are listed in 
appendix III. 

Sincerely yours, 

Signed by: 

Michael Brostek: 
Director, Tax Issues Strategic Issues Team: 

[End of section] 

Appendix I: Scope and Methodology: 

To provide data on nonresident alien tax filing, we obtained and 
reviewed statistics from the Internal Revenue Service's (IRS) 
compliance data warehouse (CDW) on Form 1040NR, the U.S. Nonresident 
Alien Income Tax Return, for tax year 2003 to tax year 2007, the last 
5 years for which complete filing data were available. To provide 
context on these statistics, we reviewed published data on other 
individual taxpayers from IRS's Statistics of Income program, which 
draws from a widely used database composed of a sample of unexamined 
income tax returns. We determined that the estimates provided had 
sampling errors of less than 1 percent. We then assessed these two 
data sources for reliability purposes. To do this, we interviewed IRS 
research officials, conducted logic testing, and compared certain CDW 
data elements received by IRS to publicly available data on Form 
1040NR filings. On the basis of our assessment, we determined that 
both sources used were sufficiently reliable for the purposes of our 
review. To identify the availability of compliance data, we reviewed 
IRS documentation on the National Research Program and interviewed IRS 
research and compliance officials. We also examined documentation on 
tax treaties, visa issuance data from the Department of State, and the 
number of annual admissions of foreign visitors from the Department of 
Homeland Security (DHS), in order to provide context as to the 
potential number of nonresident aliens with a filing requirement or 
incurring a tax liability each year. 

To provide information on guidance IRS provides to nonresident aliens 
and associated third parties on tax and filing requirements and any 
burdens and challenges associated with filing, we reviewed IRS tax 
forms, guidance, and outreach materials. We also interviewed IRS 
officials responsible for conducting outreach efforts and groups that 
work with employers and nonresidents to assist them in fulfilling 
their tax obligations. More specifically, we conducted group 
interviews with members of the American Institute of Certified Public 
Accountants, the National Association of Enrolled Agents, and the 
National Association of College and University Business Officers, and 
spoke with staff from accounting and law firms that have nonresident 
aliens or their employers as clients. 

To assess actions that IRS takes to enforce nonresident alien tax 
compliance, we used IRS's goal in its 2009-2013 strategic plan of 
increasing resource allocation to priority areas as criteria. We 
reviewed data from IRS's enforcement programs and interviewed IRS 
enforcement officials to determine whether resources were increased 
for nonresident alien compliance efforts and what results IRS had 
achieved. Specifically, we reviewed IRS data on examinations and 
Central Withholding Agreements and various IRS tax forms, and 
interviewed IRS officials to discuss potential opportunities to expand 
enforcement efforts. We then assessed these IRS sources for 
reliability by reviewing IRS documentation and interviewing agency 
officials and determined that these sources were sufficiently reliable 
for the purposes of our review. 

We conducted this performance audit from July 2009 through April 2010 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Deputy Commissioner: 
Washington, D.C. 20224: 
	
March 31, 2010: 

Mr. Michael Brostek: 
Director, Tax Issues: 
Strategic Issues Team: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Brostek: 

Thank you for providing your draft report, Tax Compliance: IRS May Be 
Able to Improve Compliance for Nonresident Aliens and Updating 
Requirements Could Reduce Their Compliance Burden (GA0-10-429), for 
our review and comments. We appreciate the time the GAO team spent 
reviewing the tax obligations of nonresident aliens and the IRS's 
efforts to enforce those obligations. 

Ensuring U.S tax compliance of nonresident aliens in today's economy 
is challenging, particularly given the increasing mobility of 
individuals. The tax laws and treaties applicable to foreign persons 
are complex and not always current. IRS's systems and processes that 
may work very well for U.S. citizens and permanent residents are often 
less effective in enforcing the tax rules governing nonresident aliens. 

We agree with the report that the IRS should tackle these challenges, 
both through enforcement and through outreach, and we will continue to 
look for improvements on both fronts. Further, we agree to study the 
feasibility of an automated system to identify nonresident aliens who 
improperly file Form 1040 instead of Form 1040NR. We will study 
whether information made available to us on filed returns or on 
Individual Taxpayer Identification Number (ITIN) applications can be 
effectively analyzed with such an automated system. 

Attached is a response to the report's recommendation. We look forward 
to receiving your final report. In the meantime, if you have any 
questions, please contact Michael Danilack, Deputy Commissioner 
(International), Large and Mid-Size Business Division, at (202) 435-
5000. 

Sincerely, 

Signed by: 

Steven T. Miller: 

Enclosure: 

[End of letter] 

Attachment: 

Recommendation: 

GAO recommends that the IRS determine if creating an automated program 
to identify improper filing of Form 1040 by nonresident aliens would 
be a cost-effective means of improving compliance. 

Comments: 

We will study the feasibility of establishing an automated program to 
identify improper filing of Form 1040 by nonresident aliens to 
determine whether it would be a cost-effective means to improve 
nonresident alien compliance. Further, we will determine whether such 
an automated system can be effectively used to analyze information 
made available to us on filed returns or on Individual Taxpayer 
Identification Number (ITIN) applications. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Michael Brostek, (202) 512-9110 or brostekm@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Joanna Stamatiades, Assistant 
Director; Jeff Arkin; Amy Bowser; Karen O'Conor; Amy Radovich; Cynthia 
Saunders; and John Zombro made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Nonresidents with U.S.-source income may also owe state income 
taxes; however, we focus only on federal taxes in this report. 

[2] Generally, aliens are resident aliens if they are present in the 
U.S. on 183 days or more in a calendar year. Individuals are also 
considered to have met the substantial presence test if they are 
present in the U.S. on at least 31 days during the current year and 
183 days during the 3-year period that includes the current year and 
the 2 years immediately before that. When calculating the 183 day 
figure, individuals are to count all the days they were present in the 
current year, one-third of the days they were present in the 
immediately preceding year before the current year, and one-sixth of 
the days they were present in the second preceding year before the 
current year. I.R.C. § 7701(b)(3). 

[3] Foreign individuals can have a U.S. tax liability without entering 
the U.S., for example if they have certain types of U.S.-source 
investment income. 

[4] The U.S. had 59 income tax treaties as of 2009. Under these 
bilateral agreements, residents of treaty countries are generally 
exempted from taxation or taxed at reduced rates on certain types of 
income they receive from U.S. sources, such as income from personal 
services, capital gains, royalties, and pensions or annuities. 

[5] Personal services can be those services performed independently by 
professional persons, such as doctors and lawyers, or dependently by 
employees for an employer. 

[6] Treas. Reg. § 1-6012-1(b)(2). Examples of income from U.S. sources 
but not effectively connected to U.S. trade or business include some 
interest earnings, dividends, rents, premiums, and annuities. 

[7] IRS Notice 2005-77 (2005-46 IRB, Nov. 14, 2005). 

[8] I.R.C. § 861(a)(3). The same exception applies when determining 
whether a nonresident alien is engaged in a trade or business within 
the United States. I.R.C. § 864(b)(1). 

[9] I.R.C. § 6851(d); Treas. Reg. § 1.6851-2. 

[10] Although Form 1040NR is filed by both individual taxpayers and on 
the behalf of nonresident alien estates or trusts, Form 1040NR data in 
this report only include figures for individual nonresident alien 
taxpayers. 

[11] The $12.8 billion in income excludes about $1.9 billion in income 
fully exempt from taxation due to tax treaties. Also excluded are tax- 
exempt interest; qualified dividends; and nontaxable individual 
retirement account distributions, pensions, and annuities on 
effectively connected income. Total income includes $1.0 billion in 
negative income so that positive income reported in 2007 was $13.9 
billion (totals do not equal due to rounding). 

[12] Total Forms 1040 filed increased 10 percent during the period. 

[13] Nonresidents married to other nonresidents generally cannot 
jointly file a tax return. 

[14] IRS data show that about 60,000 Form 1040NR filers (9 percent of 
all Forms 1040NR filed) reported treaty exempt effectively connected 
income and no tax liability for tax year 2007, with little variation 
over the preceding 4 years. 

[15] In 2007, 187,000 Form 1040NR filers reported no tax liability and 
filed a return to obtain a tax refund from IRS. 

[16] Another type of individual income tax noncompliance is 
underpayment of one's reported tax liability. 

[17] IRS's most recent estimate of the nonfiling tax gap for 
individual taxpayers was $25 billion for tax year 2001. 

[18] IRS completed a study, through its National Research Program 
(NRP), for tax year 2001 using a sample of about 46,000 Form 1040 
returns. IRS has begun to study individual taxpayer reporting 
compliance on an ongoing basis and expects to have an updated 
compliance estimate by 2013. 

[19] S corporations are corporations that elect to pass corporate 
income, losses, deductions, and credits through to their shareholders, 
who are to report these items on their personal tax returns. 

[20] Nonresident aliens who file Form 1040 instead of Form 1040NR may 
take deductions and claim credits to which they are not entitled. 
However, by filing Form 1040 instead of Form 1040NR, these individuals 
may forgo tax treaty benefits they are entitled to claim. 

[21] IRS holds phone forums for tax practitioners, attorneys, payroll 
professionals, and industry partners with the goal of facilitating the 
filing of accurate tax returns. 

[22] These publications include Publication 513, Tax Information for 
Visitors to the United States; Publication 515, Withholding of Tax on 
Nonresident Aliens and Foreign Entities; Publication 519, U.S. Tax 
Guide for Aliens; Publication 901, U.S. Tax Treaties; and Publication 
1915, Understanding Your IRS Individual Taxpayer Identification Number. 

[23] Nonresident aliens in the U.S. for less than 183 days during the 
year are considered to have a closer connection to a foreign country 
if they maintain a tax home in that country during the tax year and 
have maintained more significant contacts with the foreign country 
than with the U.S. A tax home is the general area of an individual's 
main place of business or employment, regardless of the location of 
the individual's family home. 

[24] However, since ITIN applications cannot be filed electronically, 
nonresidents filing Form 1040NR in conjunction with an ITIN 
application would not be able to file Form 1040NR electronically for 
that year. 

[25] A foreign employer is defined as a nonresident individual, 
foreign partnership, or foreign corporation or an office or place of 
business maintained in a foreign country or U.S. possession by a U.S. 
corporation, a U.S. partnership, or an individual who is a U.S. 
citizen or resident. Foreign governments are not considered to be 
foreign employers. 

[26] S. Rep. No. 74-2156, at 22 (1936). 

[27] This calculation assumes that the individual works 5 days a week 
every week of the year. 

[28] In this scenario, the individual's U.S.-source income would 
exceed both the $3,000 threshold for income paid by a foreign employer 
and the personal exemption equivalent threshold of $3,500 for 2008. 

[29] Areas for which the LMSB International group is responsible 
include nonresident aliens, U.S. citizens and residents living abroad, 
and entities that are required to report income and withhold taxes on 
payments to foreign individuals. 

[30] IRS found that some U.S. citizens and residents employed by 
foreign governments were also improperly claiming income exemptions. 

[31] Reporting and withholding on fixed, determinable, annual, 
periodical (FDAP) U.S.-source income was designated as a LMSB Tier 
One, or top, issue. FDAP income is any income other than gains from 
the sale of personal or real property or items of income excluded from 
gross income, such as tax-exempt municipal bond interest. LMSB adopted 
its issue tiering strategy in 2006 to ensure that high-risk compliance 
issues are properly addressed and treated consistently across the 
division. According to LMSB, using issue tiers provides a consistent 
framework for identifying, prioritizing, and addressing significant 
compliance risks in a nationally coordinated manner. 

[32] Permanent Subcommittee on Investigations, Committee on Homeland 
Security and Governmental Affairs, United States Senate, Dividend Tax 
Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends 
(Washington, D.C., September 2008). 

[33] An example of a total return swap is an arrangement where one 
party agrees to pay an amount equal to any appreciation in the price 
of a stock plus the amount of any stock dividends paid during the term 
of the swap, while the other party agrees to pay any depreciation in 
the stock price plus certain fees, which usually include an interest 
component. The end result is that the swap provides the first party 
with virtually all of the economic benefits and burdens of holding 
stock without taking physical possession of the shares. 

[34] GAO, Tax Administration: Opportunities Exist for Improving IRS' 
Administration of Alien Taxpayer Programs, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-88-54] (Washington, D.C.: Apr. 11, 
1988). 

[35] I.R.C. § 1441. 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site, 
[hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional 
information. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: