Nonresident aliens cannot take some credits and  deductions available to residents and citizens. As with U.S. citizens and residents, nonresidents must have a taxpayer  identification number in order to file a tax return. 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. Departing Alien Income Tax Statement). 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. 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. 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. 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. Also, some paid tax return preparers may not be familiar  with nonresident alien tax rules. 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 thecompensation they earn while in the U.S. In discussing this exemption, th Senate noted that the lack of a threshold had created ill will  disproportionate to the small amount of revenue raised by taxing fo residents making short bus iness trips to the U.S.
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. Raising the threshold amount could result in lost tax revenue. 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. 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. 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. 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. To identify the availability of compliance data, we  reviewed IRS documentation on the National Research Program and  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 any  burdens and challenges associated with filing, we reviewed IRS tax forms,  guidance, and outreach materials.
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.

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.