IRS said to commit inaccuracies in processing nonresident tax returns

The Internal Revenue Service risks losing millions in government funds if it does not improve processing practices for tax returns filed by nonresident aliens, according to a new report.

In an audit released on Wednesday, the Treasury Inspector General for Tax Administration found that inaccurate and fraudulent Forms 1040NR, which nonresident aliens use to file their tax returns, were not detected during processing, resulting, in TIGTA's small sampling, in disbursal of more than $2.3 million in questionable refunds. Nearly 600,000 tax returns filed by nonresidents in 2009 resulted in taxes withheld of more than $2.4 billion and refunds of more than $712 million, the report said.

The government could face significant losses if the IRS fails to address the problem because of the low probability of recovering fraudulent payouts from nonresidents living outside the United States, the report said. Many of TIGTA's recommendations for solutions were redacted before publication, and the IRS agreed with them all.

Separately, the IRS last week announced that recently enacted tax legislation will cause delays in filing for some taxpayers. Those with deductions for mortgages, charitable gifts, medical expenses, state and local sales taxes and higher education, as well as teachers in kindergarten through high school with out-of-pocket expenses greater than $250, will have to wait until mid- to late-February to begin preparing their returns.

Tax season will begin on time for most people, but the IRS will have to reprogram its computers to handle both paper and electronic returns for affected categories.

"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."