For many businesses, international expansion and growth brings new opportunities across new markets. However, managing an internationally mobile workforce can pose significant challenges in effectively tracking where employees are working. In turn, these challenges complicate the tax and reporting obligations that arise across a diverse employee population working across borders.
Recently in the US, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) has announced six new audit campaigns. These will in large focus on how US businesses with locations in other countries comply with reporting and taxation of income for employees visiting the country for business purposes.
But how can you effectively keep track?
From employee business trips and short-term assignments, to senior executives with global roles who routinely work in the United States, the complexity of managing international travel can be difficult for businesses to tackle. The new US audit campaigns are intended to address areas where the IRS has identified non-compliance. Similarly, for individuals undertaking business travel in the US or with income sources in the country, the IRS will be focusing audit efforts on reviewing accuracy of compliance filings and taxes assessed.
LB&I plan to address noncompliance through a number of approaches, known as treatment streams, including issue-based examinations, traditional examinations and education initiatives. Since launching the initiative in January 2017, the IRS has announced 40 different compliance campaigns addressing virtually all areas of tax and information reporting compliance. Of the six campaigns launched in May, the five listed below are more relevant to business travellers and short-term assignees to the United States and their employers.
- Forms 1042 and 1042-S compliance: Many individuals coming to the United States on business may not generate a federal tax liability or have withholding due. Businesses may find however, they have a range of compliance obligations to meet. There may be withholding and reporting requirements for individuals that have US-sourced income for working temporarily in the country. This IRS campaign will be assessing compliance across withholding, deposit and reporting.
- Non-resident alien (NRA) tax treaty exemptions: The US maintains a large network of double tax treaties that, in part, enable individuals to avoid being subject to tax in more than one country. The treaties help to make sure the appropriate reporting of income and resolve complex multi-country taxation issues. Common claims include residency and exclusion of income from federal tax for short-term business travel or assignments. This campaign's focus will be on increasing compliance where individuals are taking treaty benefits.
- Non-resident alien Schedule A and other deductions: Individuals who are regarded as NRAs cannot benefit from the standard deduction to reduce taxable income. The IRS will increase the review of deductions claimed on Schedule A. This will ensure greater compliance with the deduction of eligible expenses by NRA individuals on Form 1040NR Schedule A.
- NRA tax credits: Some taxpayers claim dependent-related tax credits where they may not be eligible if they:
- do not have not have qualifying earned income
- do not provide substantiation or proper documentation
- do not have qualifying dependents.
Some NRA taxpayers also claim education credits available to US persons by improperly filing tax returns as residents.
- Form 3520/3520-A non-compliance penalties: The IRS will also focus on improving compliance for this document required of foreign trusts with at least one US owner, including the timely and accurate filing of returns. In addition, the proper reporting of trust ownership and transactions with other foreign trusts will be emphasized. Given the potential for significant penalties for late or incorrect returns, potentially affected individuals should closely review their investments and trust holdings
Increased tax risk
With the increased focus on taxation and compliance regarding NRAs, employers should prioritise reviewing policies and processes for managing compliance, reporting and withholding for business travellers and short-term assignees to the United States. Failure to properly manage obligations may result in examination and compliance assessments for both employers and employees. In addition, there may be other areas of tax risk for the business, from corporate tax exposure, transfer pricing to state and local tax considerations.
Businesses may find support turning to outside professional assistance when assessing compliance risk, and proactively address the challenges of a global mobile workforce including leveraging technology and using analytics to mitigate risk in real time.
If you would like to discuss any of the points raised in this article, please contact us.