IRS to Verify Refunds for Nonresident Aliens

The Internal Revenue Service should take immediate action to strengthen its controls over the processing of refunds issued to nonresident aliens to prevent such individuals from receiving erroneous refunds, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that failure to address the problem could result in significant losses to the federal government as the questionable refunds issued to nonresident aliens are high and the probability of recovering fraudulent refunds from nonresidents living outside the U.S. very low.

“If the IRS does not take immediate steps to improve its ability to verify refunds to nonresident aliens before the refunds are sent out of the United States, the problem could increase significantly,” warned TIGTA Inspector General J. Russell George in a statement. “TIGTA discussed the control weaknesses we identified with the IRS and it is working on actions to address them.”

Nonresident aliens who receive U.S. sources of income must report and pay taxes on that income and file the U.S. Nonresident Alien Income Tax Return (Form 1040NR) with the IRS. This income is also subject to income tax withholding. In 2009, the IRS processed approximately 598,000 Forms 1040NR for tax year 2008. The total taxes withheld on these returns amounted to more than $2.4 billion and refunds amounted to more than $712 million.

TIGTA performed an audit to determine whether IRS controls ensured that only eligible nonresident aliens receive refunds. TIGTA found that inaccurate and fraudulent Forms 1040NR were not detected during processing. As a result, TIGTA identified a significant number of control weaknesses in the processing of refunds claimed on Forms 1040NR. In some 40 cases of questionable refunds issued to nonresident aliens, the refunds were very high, totaling more than $2.3 million.

TIGTA made six recommendations to the IRS in its report, and the IRS agreed with all of those recommendations.

The public version of the report redacted some of those recommendations, but they included a recommendation that the commissioner of the IRS’s Large and Midsize Business Division should use the foreign country codes on Forms 1040NR to systemically verify that the correct rate of tax is applied according to the applicable tax treaty and should work with the IRS’s Forms and Publications function to clarify the instructions on what constitutes U.S source income in regard to income from multi-level marketing companies.

2 out of 5 Americans Feel Less Financially Secure

When asked to compare their financial situation to last year, 42 percent of Americans say they feel less secure now, according to a new Harris Poll.

The poll, of 2,331 adults surveyed online between Dec. 6 and 13, 2010, by Harris Interactive, found that about one-third (36 percent) feel just as secure while one in five (19 percent) say they now feel more secure.

Looking ahead, one-quarter of Americans (26 percent) say they expect the economy to get worse in the coming year while three in 10 (29 percent) expect it to get better and 45 percent say it will stay the same. Last month, 34 percent said they thought the economy would be getting better, 41 percent said it would stay the same, and 25 percent believed it would get worse.

In looking at the job market, just over one in three Americans (13 percent) rate the job market in their region of the country as good while three in five (63 percent) rate it as bad and one-quarter (24 percent) say it is neither good nor bad.

Looking ahead, one-quarter of U.S. adults (25 percent) say they expect the job market to be better over the next six months, one in five (22 percent) say it will be worse and over half (54 percent) believe it will remain the same.

Looking to what people may be doing with regard to their finances in the coming year, half of Americans (49 percent) say they will cut back on their household spending. Two in five say they will pay down their level of debt (41 percent) and save more in the year ahead (40 percent). One in five U.S. adults say they will get rid of one or more credit cards (22 percent) and save more for retirement (22 percent) while 13 percent say they will undertake home improvements that increase the value of their home.

Less than one in 10 say they will invest in less risky investments (8 percent), refinance their mortgage (6 percent) or take out a home equity line of credit (2 percent). And, one in five Americans (18 percent) say they do not expect to do anything differently financially in 2011.

Government Orders HSBC to Halt RALs for H&R Block

KANSAS CITY, MO – H&R Block shares fell Monday after it received notice from HSBC that the bank is immediately terminating refund anticipation loans and refund anticipation checks for Block as a result of a regulatory directive from the Office of the Comptroller of the Currency.
The two parties had signed a long-term contract under which HSBC would provide all of H&R Block’s refund anticipation loans and some of its refund anticipation checks. As a result of the order from banking regulators, HSBC told the tax prep giant Friday that it would no longer provide RALs or RACs to H&R Block clients. At the same time, HSBC’s exclusive right to provide such products has also ended, thereby enabling H&R Block to enter into other partnerships for financial products that were previously precluded.

The contract termination is the result of a directive from the OCC, HSBC’s banking supervisory agency, immediately prohibiting HSBC from offering any form of RALs. Shares of H&R Block were down about 8 percent in mid-morning trading on Monday.

H&R Block said it would continue to offer all its customers its traditional RACs that do not require any out-of-pocket costs by taxpayers at the time the tax return is filed. In addition, the company provides direct deposit accounts through its Emerald Card program that allow customers to avoid the delay and cost of paper checks and check-cashing charges through electronic transfers of tax refund proceeds.

H&R Block also provides various other programs to its tax preparation clients, such as its Emerald Advance revolving line of credit product that has been used by more than 4 million customers.

“As a result of the OCC’s decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives, without the slightest benefit to the solvency of HSBC or the banking system in general,” said H&R Block president and CEO Alan Bennett in a statement. “While we are very disappointed by this decision, we have been preparing for the loss of RALs, so we have several other financial products available and under development for this tax season. We are working around the clock to give our company and franchise teams the best tools we can to fill the void for our clients created by the OCC’s action. The OCC’s 11th hour timing will make it difficult for us to put alternative products in place at all of our locations in time for the early part of the 2011 tax season, but we will spare no effort to do so. Our clients, our tax preparers and our franchisees deserve nothing less.”

Block had filed suit against HSBC in October when the bank tried to end their arrangement, saying it could not provide funding for the RALs and RACs because the IRS had decided to stop providing a debt indicator next tax season that would say whether a taxpayer has liens outstanding, and that would make the loans too risky to provide (see H&R Block Sues HSBC over RALs). HSBC has been in the process of withdrawing from the RAL business since 2007 and Block is its only remaining customer. The two sides later entered discussions to settle the lawsuit (see Block in Talks with RAL Provider HSBC).

Prior to the OCC’s recent action, H&R Block and HSBC had reached agreement on a proposal that would have allowed HSBC to honor its contractual obligations to H&R Block during tax season 2011. Under the revised terms agreed upon by both parties, H&R Block would have in effect covered essentially all credit defaults experienced by HSBC, thereby making H&R Block’s credit rather than the taxpayer’s refund the ultimate source of repayment to HSBC. The proposed new terms would have made it nearly impossible for HSBC to suffer any financial losses, according to Block.

In addition, H&R Block agreed at its own expense to fund “Instant RALs” at a substantially reduced rate to consumers. The total cost to the consumer of a $1,500 Instant RAL under the proposed terms rejected by the OCC would have been $46, which is approximately 62 percent less expensive for consumers than the products being offered this year by competitors through a few banks that are regulated by the Federal Deposit Insurance Corporation that will apparently continue despite the OCC directive to HSBC.

At NFS, we can electronically file your tax return and have your refund direct deposited in as little as three days. Call me for details.

IRS Says Tax Season Will Be Delayed for Some

WASHINGTON DC – Following last week’s tax law changes, the Internal Revenue Service announced Thursday the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns.

In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

• Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.

• Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.

• Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.

Updated information will be posted on IRS.gov. This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on IRS.gov.

In addition, the IRS reminds employers about the new withholding tables released Friday for 2011 (see IRS Issues Withholding Details for Payroll Tax Cut). Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov before year’s end.

The IRS also provided a list of forms affected by the extender provisions.

If there is any confusion or if you have any questions as to whether you fall into one of the above categories for delayed filers, please do not hesitate to contact me at 800-560-4NFS or jeff@nfsnet.com