News: Relief Coming to Foreign Students Caught in Refund Dispute

Tax Notes: Relief Coming to Foreign Students Caught in Refund Dispute

By Fred Stokeld

Posted June 9, 2016

The IRS says it will provide relief and take corrective steps in response to unjustified denials of withholding tax refunds to foreign students in the United States.

IRS Commissioner John Koskinen made the assurance in a June 6 reply to House Ways and Means Committee member Lloyd Doggett, D-Texas, who in April asked the commissioner about difficulties faced by thousands of foreign students trying to obtain refunds of withholding tax reported on Form 1042-S, "Foreign Person's U.S. Source Income Subject to Withholding."

The IRS denied the refunds because it said information provided by the students does not match information provided by their schools, Doggett said, adding that if disallowing the withholding credits leads to unpaid balances on students' tax returns, students are billed and receive notices of levy from the IRS.

In response, Koskinen told Doggett the IRS instituted several controls for tax year 2014 in an effort to ensure that refunds to nonresident aliens are legitimate. But an IRS review of the controls found they might be too restrictive in some areas, forcing the agency to review and validate returns that show little risk of fraudulent or erroneous refunds.

To address the problem, the IRS is working to identify affected taxpayers and will issue them refunds, with interest if due, Koskinen said. Students whose withholding credits were denied will have them restored, thereby eliminating any balance due and stopping the notices of levy, he added.

Also, the IRS will redesign its process for detecting fraudulent or questionable returns and refunds, according to Koskinen. "Our goal is to balance appropriately our responsibility to promptly process and pay legitimate refund claims with our responsibility to protect the government against fraudulent refunds claims," he said.

The IRS also addressed the matter in a June 7 statement .

The National Association of College and University Business Officers (NACUBO) welcomed the announcement. "NACUBO is pleased that the IRS is helping students come to resolution and ensuring they receive their 2014 and 2015 refunds," Liz Clark, director of federal affairs at NACUBO, said in a statement. "The root cause and extent of the problems related to 1042-S processing remain unclear. We hope IRS is taking the necessary steps to ensure this situation is not repeated in the future."

Karin Johns, director of tax policy at the National Association of Independent Colleges and Universities, also expressed approval. The association "is pleased to see that the IRS has recognized the problem of failing to issue refunds of withholding tax amounts on income reported on Form 1042-S for foreign students attending our institutions, and is taking the proper measures to correct the backlog and issue refunds as appropriate," she said. "We remain concerned that these students were somehow unfairly targeted, and should not have caused any red flag compliance concerns in the first place. We look forward to the problem being corrected fairly and expeditiously."