Scholarships awarded to Nonresident Alien Students

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1 Scholarships awarded to Nonresident Alien Students IRS Compliance Issues Doug Podoll Georgia State University

2 General Rule Section 1441 of the Internal Revenue Code states that a withholding agent is required to withhold federal income tax from all payments made to or on the behalf of a nonresident alien, and Treasury Regulation requires all such payments to be reported to the IRS.

3 Is the IRS watching? Do they care? First audits: Harvard & Wisconsin Sample Penalties UAB $5 million Michigan a measly $2 million+ UNC & Duke ~ $1 million each Georgia State >$1/3 million Morehouse in the six figures Plus the 8 36 month cost of hosting the IRS on your campus

4 What are your risks? Can you account for every scholarship payment made in 2003? 2004? What other scholarships or prizes might not be reported? What about the outstanding math undergraduate for Spring 2007? Do you have a foundation that is involved in your compliance and reviewing all of its payments?

5 The withholding agent will be liable for any tax not withheld, penalties, and interest not the payee. (Different than for residents.)

6 Payment Types Student Aid - Scholarships and Fellowships Prizes and Awards

7 Working Through a Situation What is the payee s U.S. tax residency status? What type of payment is being made? What is the source of the income? Is the payment subject to tax withholding? Is an income tax treaty exemption possible?

8 Working Through a Situation At what rate should taxes be withheld? Is the payment FICA tax exempt? Is the payment reportable? How should the payment be reported? How should information about the payment be maintained?

9 Determine Status: Resident Alien versus Nonresident Alien (for tax purposes) U.S. citizen Green Card test Calculate an accurate Substantial Presence Test But beware exempt individuals

10 Substantial Presence Test 31 days during the current year, and 183 days during the three year period that includes the current year and the two years immediately before that counting: current year times 1, = days first preceding year times 1/3, = days second preceding year times 1/6 = days Total days in U.S. = days

11 Exempt Individuals F, J, M, & Q student status holders 5 year exemption (lifetime) J & Q teacher or trainee status holders 2 years of most recent six years Foreign gov t employees & professional athletes during charity exhibitions

12 Banner: SPAPERS General Person Form Citizenship A: Nonresident Alien C: U.S. Citizen R: Resident Alien Who is defining these terms on your campus and who is doing data entry? You may also look at GOAINTL for details, but there s not enough to do tax analysis.

13 Does SEVIS help with this? No, not directly. The SEVIS data does not move in the direction of the institution just the other direction. It does help by forcing the school to maintain current records, but where it fails tax analysis is that you do not have the nonimmigrant s full immigration history.

14 Semantics Scholarship No past, present, or future services allowed otherwise it is compensation Fellowship Stipend: not a term used by the IRS Critical issue is whether or not services are required Recipient must be a candidate for a degree Liberal definition: attend accredited institution Post-docs always nondegree

15 Semantics RAs room & board = compensation Sec 119 exclusion applies for room, rarely for board Travel reimbursements May be wages if related to services, or May be scholarship if related to studies or research where no service is required

16 Student Aid for NRAs Scholarships/Fellowships Qualified Scholarships Mandatory Tuition, Fees, & Books 2001 no reporting or withholding requirements Prior to 2001 a reporting requirement However, students must still have documentation Non-Qualified, Taxable Scholarships Room & Board and other scholarships Report on a 1042-S and withhold 14% All cash payments are non-qualified

17 Student Aid for NRAs Treaty Benefits Available Form W-8BEN For Audit File Requires a TIN Report on 1042-S Code 15 Beware of encumbered scholarships

18 Employment Eligibility Verification Form I-9 Section 1 A citizen or national of the United States A Lawful Permanent Resident (Alien #A ) An alien authorized to work until / / (Alien # or Admission #) You now have material evidence of nonresident status. Who s doing these forms and are they doing them correctly? Where are you keeping the data?

19 Withholding & Reporting RA: no withholding and no reporting NRA: withhold 30% unless an exception 14% for certain F & J NRAs Candidate for a degree Tax treaty exemption

20 Payment to IRS If tax paid by grantor gross up required Time the payment based on when student s account credited or cash given See IRS Pub 515, Deposits

21 Report to Student Student receives 1042-S by 15 March for Non-qualified scholarships only Best if issued with W-2 Scholarships income code 15 Can do multiple income lines on student s copy Treaty exempt scholarship exemption code 4

22 Applying for an ITIN Must have a required form to file to apply for an ITIN (W-8BEN, 1040NR, etc.) Need only the foreign passport to apply Certified Acceptance Agent status not as helpful as before, but still a good idea Application to IRS, return ITIN at time of applying for an SSN

23 Solution Team Controller s Office Student Aid Accounts Payable Payroll Office Information Systems Human Resources International Office Departments

24 Miscellaneous Solution Issues Centralize Avoid redundant data a single data source and consistency in applying rules Who s the expert? How many folks can you afford to keep up-to-date in this area?

25 Certified Acceptance Agent Revenue Procedure VCAP: Voluntary Compliance on Alien Withholding Program

26 Where do you go for help? Aliens-L NRA tax listserve Arctic International ( Nonresident Alien Tax Compliance: A Guide for Institutions Making Payments to Foreign Students, Scholars, Employees, and Other International Visitors Nonresident Alien Tax Compliance: A Practical Approach to Income Tax Treaties Training Programs CINTAX & Glacier

27 Where do you go for help? Windstar Technologies ( U.S. Tax Guides for Foreign Persons and Those Who Pay Them: 1042S, B and J and other publications Visa Manager Tax Navigator Training programs Listserv IRS and University sponsored programs: NACUBO, St. Norbert s U, Indiana State U

28 Where do you go for help? UGA: Bob McGee, Susan Caldwell, GA State: Jean Pearson, Ivan Ivanov, Raymond Lanier, Emory: Carol Carter & Mary Chenault

29 Ahmed is a Rotary scholarship recipient on an F-1 from Egypt. Augusta State provides a tuition waiver scholarship and the rest of tuition and fees are paid by Rotary. An Augusta club is providing housing in town. What s happening with this one?

30 Marie is an F-1 majoring in business. She is named the outstanding undergraduate business major at the end of the year and receives a $250 award. What are Georgia State's obligations? What are Marie s obligations?

31 Sam(antha) is a soccer player on a full scholarship. She is getting tuition, fees, $300 for books per semester and room and board in the residence halls. Sam transferred from a private high school in Florida and is from France. What are Kennesaw State s obligations? What are Sam s obligations?