Form 1040-NR is often required for nonresident aliens who are engaged in a business or trade in the U.S. or otherwise generate income from sources in the U.S. A non-resident alien is somebody who lives abroad and is not American yet earns a taxable income in the United States. In most cases nonresident aliens are non–U.S. citizens who do not pass either the green card test or substantial residency test.
CASE STUDY
Introduction:
The following case study is about a problem that an SDG client encountered and the steps that were taken to solve the problem. When it comes to cross-border tax issues, our accountants in Toronto are knowledgeable and trustworthy. This is a cross-border taxation issue involving gambling income. The client in need here is a Canadian couple who travels to the United States every year to gamble. The client is preoccupied with their own work and desired that the issue be resolved as quickly as possible so that they could receive their refunds, which had been delayed for roughly 5 years. SDG Accountants recognized the couple in need and were ready to assist; we assured the client that the reason for the delay would be investigated, and the client would be kept up to speed on where they stood. The client came to us with high hopes of finally recovering hundreds of thousands of dollars they had been waiting for for years.
Problem:
The client had another accountant handle their US taxes, but the accountant was unable to settle the issue, so they came to us. Refunds for the tax years 2016, 2017, and 2018 were not being processed, and the IRS was requesting additional information for assistance. Form 1040-NR, US Non-resident Alien Income Tax Return, is the tax form used by non-resident aliens to report gambling income. Taxpayers are given 1042-s slips at the end of the fiscal year, which show their income and how much tax was withheld. All of these slips must be submitted along with your Form 1040-NR to receive your refund. All Canadians earning gambling income in the United States are liable to a 30% withholding tax on the whole win, as opposed to Canada, where gambling income is not even taxable.
When filing your US Form 1040-NR returns, you must have an ITIN number. Individual Taxpayer Identification Numbers are tax identification numbers issued to taxpayers who are unable to obtain a Social Security Number. If your ITIN has expired, you must renew it before your tax return can be processed. The main issue with one of the client’s returns was that her ITIN number had expired, which caused the return to be processed late. The IRS issued her a letter asking for an ITIN renewal and missing 1042-S documents for her partner’s return.
Analysis:
When SDG Accountant was notified of the situation, our first step was to obtain all necessary and supporting documentation from the client. We performed a thorough review of all three returns once they were received to ensure there were no errors in filing and that the IRS had the correct information. When investigating a problem like this, it is critical to know if our reference is correct, so this should always be the first step.
We spoke with the IRS after reviewing the tax returns since they are the ones who seek clarity. It is usually preferable to speak with the IRS to understand exactly what they are looking for to avoid delays.
It was now necessary to file a W-7 Form, which is the ITIN renewal application, in order for the client’s return to be processed. The processing time for the W-7 application is about 6-7 weeks. When the ITIN was renewed, the refunds were still not processed; this is when we turned to our go-to solution for problems like these. The 1042-S slips for the remaining returns that required additional information were eventually handled. However, the refunds had yet to be recovered. SDG’s experienced cross-border tax accountants prove to be very helpful at times like this.
Results:
SDG Accountant was finally able to recover the refunds for the client for all three years after going through all the necessary steps to resolve the situation. Because the refunds had been withheld for almost five years, their recovery had a significant influence on the client’s needs. The client had a warm and welcome experience with SDG and was pleased with the results.
If you are currently experiencing this or any other cross-border tax issue, please do not hesitate to contact us. We have several solutions for our clients’ cross-border tax concerns and are always willing to assist. To get started, contact our Toronto Tax Accountant today or schedule a free initial consultation.
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA, CGA, MBA
