Because our practice is located outside the USA in Toronto Canada, we see many return refund claims of over-withholding amounts such as on real property sales (FIRPTA), foreign partner of USA partnership (8805), USA casino or financial institution (1042-S) and the like.
It is imperative for the taxpayer to ensure and check with and about the withholding agent that proper withholding was made and remitted by the withholding agent. In such case, the IRS record of withheld amount should match the return refund claim amount and the process is smooth.
When, however, the withholding agent doesn’t remit the correct withholding amount to IRS or other taxing authority (such as a state when a non-resident return was filed), things don’t go well and this is where you, the reader, want to make sure that doesn’t happen to you.
If an unscrupulous withholding agent is involved, that agent may fraudulently take part or all of the withholding funds for his/her own use while still reporting to you and/or IRS that full withholding was made, yet not actually remit such payment and thus leave no trace of proof to confirm to IRS that one is entitled to the full amount of refund claimed. Payroll withholding is unfortunately an area where such fraud occurs – where the supposed agent produces counterfeit payroll remittance statements and an unsuspecting victim only find out years later by way of a hefty IRS penalty notice demanding missing payroll tax.
Even with an honest agent, things can go wrong if such agent isn’t meticulous and makes clerical errors, or if IRS makes an error at its end. Here are two actual examples of such that came to our office.
A withholding-tax agent told the taxpayer he/she remitted funds to the government taxing authority.
The first taxpayer - here’s what transpired (I gleaned the answer to the first case from IRS transcripts I obtained for just such purpose from IRS taxpros eservices).
1040NR differed from IRS processing with a difference of USD$ 1,050 under-refunded – this was the exact amount of the FIRPTA withholding credit withholding agent supposedly withheld and remitted to IRS as a payment of tax. IRS is saying it has no record of such.
The second taxpayer - STATE accepted the return’s figures as reported, so this wasn’t an issue with taxpayer’s STATE income tax return reporting but rather with the withholding agent’s withholding remittance. STATE is saying they never received the thousands of dollars that the withholding agent reported in the non-resident tax withholding form as having been remitted to STATE. So, taxpayer (post-filing a return) needs to check with the withholding agent to uncover where the disconnect lies between STATE saying they didn’t get the money and the withholding agent giving taxpayer a form saying he/she remitted it to STATE. If the withholding agent can provide taxpayer with proof of the money trail to STATE, taxpayer should contact STATE to provide that proof, and then claim credit for the withholding tax STATE is denying taxpayer.
But, wouldn’t life be easier had the money trail and proof of payment to STATE been confirmed prior to filing the tax return – and taxpayer could even have attached such proof as a front-load to the return filing to preclude a denial by STATE of the full refund claim!?