The IRS Large Business and International Division (LB&I) announced six new audit campaigns in May which, in large part, focus on how U.S. businesses with locations in other countries comply with reporting and taxation of income for employees visiting the country for business purposes.
For many U.S. businesses, international expansion and growth brings new opportunities across new markets. However, managing an internationally mobile workforce can pose significant challenges in effectively tracking where employees are working. In turn, these challenges complicate the tax and reporting obligations that arise across a diverse employee population working across borders.
From employee business trips and short-term assignments, to senior executives with global roles who routinely work in the United States, the complexity of managing international travel can be difficult for businesses to tackle. The May campaigns are intended to address areas where the IRS has identified non-compliance. Similarly, for individuals undertaking business travel here or with income sources in country, the IRS will be focusing audit efforts on reviewing accuracy of compliance filings and taxes assessed.
LB&I plans to address noncompliance through a number of approaches, known as treatment streams, including issue-based examinations, traditional examinations and education initiatives. Since launching the initiative in January 2017, the IRS has announced 40 different compliance campaigns addressing virtually all areas of tax and information reporting compliance. Of the six campaigns launched in May, the five listed below are more relevant to business travelers and short-term assignees to the United States and their employers.
- Forms 1042 and 1042-S compliance: Many individuals coming to the United States on business may not generate a federal tax liability or have withholding due. Businesses may find however, they have a range of compliance obligations to meet. There may be withholding and reporting requirements for individuals that have U.S.-sourced income for working temporarily in the country. This IRS campaign will be assessing compliance across withholding, deposit and reporting.
- Nonresident alien (NRA) tax treaty exemptions: The United States maintains a large network of double tax treaties that, in part, enable individuals to avoid being subject to tax in more than one country. The treaties help to ensure appropriate reporting of income and resolve complex multi-country taxation issues. Common claims include residency and exclusion of income from federal tax for short-term business travel or assignments. This campaign's focus will be on increasing compliance where individuals are taking treaty benefits.
- Nonresident alien Schedule A and other deductions: Individuals who are regarded as NRAs cannot benefit from the standard deduction to reduce taxable income. The IRS will increase the review of deductions claimed on Schedule A. This will ensure greater compliance with the deduction of eligible expenses by NRA individuals on Form 1040NR Schedule A.
- NRA tax credits: Some taxpayers claim dependent-related tax credits where they may not be eligible if they:
Some NRA taxpayers also claim education credits available to U.S. persons by improperly filing tax returns as residents.
- Do not have not have qualifying earned income
- Do not provide substantiation or proper documentation
- Do not have qualifying dependents
- Form 3520/3520-A non-compliance penalties: The IRS will also focus on improving compliance for this document required of foreign trusts with at least one U.S. owner, including the timely and accurate filing of returns. In addition, the proper reporting of trust ownership and transactions with other foreign trusts will be emphasized. Given the potential for significant penalties for late or incorrect returns, potentially affected individuals should closely review their investments and trust holdings.
With the increased focus on taxation and compliance regarding NRAs, employers should prioritize reviewing policies and processes for managing compliance, reporting and withholding for business travelers and short-term assignees to the United States. Failure to properly manage obligations may result in examination and compliance assessments for both employers and employees. In addition, there may be other areas of tax risk for the business, from corporate tax exposure, transfer pricing to state and local tax considerations.
Businesses may find support turning to outside professional assistance when assessing compliance risk, and proactively address the challenges of a global mobile workforce including leveraging technology and using analytics to mitigate risk in real time.
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