Refunds of Withheld Taxes For Non Resident Aliens
March 14, 2018
If you’re a non-resident alien living in the states today - or NRA - you will likely face significant issues when trying to obtain refunds of withheld IRS taxes that are rightfully yours. A recent IRS freeze on credits that were claimed on Form 104NR (or the Non-Resident Alien Income Tax Return), which did not match the data filed on forms 1042 by tax withholding agents, is responsible for creating many of these issues, and the Taxpayer Advocate have been challenging this move.
Who are ‘The Taxpayer Advocate’?
The TAS is an independent organisation that has been formed within the IRS, and their role is to help make sure that tax payers receive fair and just treatment, and that they are fully aware of, and understand, their rights as tax payers. They can help you to resolve any issues that you might have with your taxes and recommend changes that the IRS can implement to prevent future issues from occurring.
General information about non-resident aliens and their taxes:
NRA’s are taxed in a different way to other citizens and tax residents of the U.S., and those persons of foreign origin of whom the IRS considers to being earning an income that is “effectively connected” with a U.S. business or trade – often referred to as ECI, or effectively connected income - are subjected to taxes at a graduated rate on a net basis, unlike U.S. tax payers.
NRA’s are also often taxed on U.S source ‘FDAP’, or fixed, determinable, annual or periodic) income, which can encompass such things as rent, interest, royalties and dividends. Any income derived from this is taxed on a gross basis at a rate of 30% by way of withholding at source by the U.S. payer, who takes sole responsibility as the withholding agent to collect, deposit and report the tax to the IRS. Hefty penalties can easily be incurred when this process is not strictly adhered to and will apply to both the U.S. and foreign person.
How to claim credit for over withholding as an NRA:
It is often possible to reduce the 30% withholding tax rate mentioned previously on FDAP income, such as if the NRA resides in a country that has a current tax treaty with the U.S. Portfolio income on some U.S. registered bonds and bank accounts may also be considered as an exception from withholding.
For NRA’s to be able to benefit from a lower withholding tax rate, they must give the withholding agent sufficient documentation to provide justification for the lower rate, such as that which is given on a Form W-8BEN. If this is not given or received in time by the withholding agent, then they will have no choice but to withhold at the standard 30% rate. However, NRA’s do have the possibility of claiming a credit for the over withheld tax when they file the Form 104NR, which is the Non-Resident Alien Income Tax Return, for the year that the FDAP income was earned and received. In some circumstances, this can lead to a refund for the NRA, provided the form was filed correctly and in a timely manner.
If you’re a non-resident alien and are confused about the entire tax withholding process, or just need general advice about paying your taxes, don’t try to second guess things, always seek professional help to ensure that you get the most accurate and up to date information and guidance. This will also help you to avoid costly penalties should you not follow the correct process.