A Worm's-Eye View of IRS Tax Collection Practices vs. Some Aliens

By David North on April 13, 2011

A single Border Patrol agent, dealing with, say, a five-mile stretch of the southern border, may not have a good understanding of the nation's immigration enforcement policy, but he certainly knows how it plays in his own turf.

Similarly, I do not have a good grasp of IRS policies, generally, regarding the collection of taxes from aliens, but I do have a pretty comprehensive knowledge of how they work vis-a-vis foreign graduate students. This is the case because I have been running, for 12 years now, a volunteer program to help graduate students at a major D.C.-area university with their income tax filings. Most of our clients are from overseas.

Based on this accumulation of, admittedly, anecdotal evidence, I would say:

  1. IRS places a very low priority on screening, even casually, these returns; and

  2. IRS could, with minimal effort, increase its collections from alien populations.

As background, most foreign students, with the exception of some Chinese on fellowships, pay more income taxes than American students, because the law is designed to make that happen. The foreign students, during their first five years in this country, are supposed to file a 1040NR ("Non-Resident") rather than the customary 1040; the former document gives them fewer tax breaks than permanent residents and citizens obtain with a 1040. These tax breaks for residents are often in the $500 to $1,000 a year category, assuming the same income for both resident and non-resident grad students. Thus, the losses to the Treasury for the incorrect filings of the 1040 by foreign students are comparable.

One problem is that some foreign students wittingly, and others unwittingly, file the 1040 and get smaller taxes and bigger refunds than they deserve, a phenomenon I mentioned in a CIS backgrounder entitled "Charging More for Immigration: Closing Financial Loopholes in the U.S. Migration Process."

A related problem is that IRS, apparently, from my worm's eye observations, rarely screens the filings of foreign students. In all my years of doing this work, often with people I have helped in prior years, I have seen exactly one IRS notice to an alien telling that person that they had made an improper filing. (In this one case the IRS was wrong, having not handled the complex tax treaty with China correctly.)

As I do NOT tell the students, the chances of IRS picking up a wrongful 1040 filing when a 1040NR is called for are very small. Part of this relates to the agency's priorities – think of the uncollected taxes that may be found in a major corporate filing, rather than that of a low-income grad student – and part of it relates to IRS' own public relations failures.

I am aware of the 1040 vs. 1040NR problem because we, at the university, have had dozens of conscientious international students come to us saying that they had filed a 1040 earlier this year, usually on the web, when they should have filed a 1040NR, and could we help? We can, and we show them how to file a corrected return on a document IRS calls the 1040X. They then file this form and send IRS a check.

What should be done? Ideally DHS would send to IRS each year a computer file on newly admitted aliens who can get work permits (including foreign students) and IRS would run that against its list of people filing income tax returns. It would then find aliens not filing, who perhaps should, and people filing the wrong form.

Getting this interdepartmental effort accomplished, of course, is about as easy as the zoo manager persuading a homosexual male elephant (if there is such a thing) to breed with a lesbian lady elephant (if there is such a thing.)

Far more likely, if somewhat less productive, would be a modest campaign with these elements:

Redesign the 1040: Adding a line to the 1040 is probably more difficult than adding a billion dollars to the tight federal budget; the two-page form is quite simply a magnificent design job. On the other hand, there is nothing in the current 1040 that would tell an IRS reviewer that the form should not be filed by the filer. Look at this document and you can see that there is nothing about the civil status, or place of birth, of the filer; and there is precious little space for such entries.

However, in the lower left hand corner of the form, under the heading "Adjusted Gross Income", there is a totally empty white space about an inch wide and about two inches high. I would place within that space the following text: "If you are not a citizen or a permanent resident of the U.S. write the year that you arrived in the U.S. below ______."

This tidbit of information would give IRS reviewers a chance to sort out the incorrect filings of the 1040, as a nonresident routinely has to be in the U.S. for five years before they are eligible to file the 1040. There is nothing on the 1040 now that offers any help to IRS reviewers on this point.

Stamp the Passport: Another useful innovation would be for DHS inspectors at ports of entry to stamp on the passports of new arrivals with visas that can allow employment these words: "Caution, if you have an earned income during your first five years in the U.S., it is highly likely you should file a 1040NR form with the Internal Revenue Service, not a form 1040."

The problems with this suggestion are twofold: first, the language is not the legalese preferred by the government, and secondly, it would involve a tiny bit of effort on the part of DHS to help another government agency. Agencies routinely do not want to spend that kind of effort to meet the needs of other agencies.

Alert the University Officials: It is to the long-term benefit of university officials that foreign grad students are not seen as disobeying the tax laws. IRS should reach out to specialized publications like the Chronicle of Higher Education, and to associations such as NAFSA, the national association of people once called "foreign student advisers", to get across the 1040NR vs. 1040 message. There might also be an association of grad student governments.

My sense is that the intricate tax laws that apply to foreign students with income are largely beyond the ken of almost all university officials.

That's my view from my metaphorical five-mile stretch of the border.