A recent case, Boeri  v. United States, No. 2012-5102 (Fed. Cir. 7/31/13), provides a cautionary tale for nonresidents who have never lived nor worked in the U.S. but nevertheless may have had taxes erroneously withheld on non-taxable payments.

 In Boeri, the plaintiff (P) was an Italian citizen that never worked nor lived in the United States. P worked for Company X, a global telecommunications company, in Italy, Brazil, Argentina and the Dominican Republic. In 2004, P received two payments totaling $244,177 from X’s  management voluntary separation plan, from which, notwithstanding that P provided what appears to be correct claims of exemption from U.S. income tax,  X withheld approximately $70,559 in income, Social Security, and Medicare tax, despite the fact that P never lived nor worked in the U.S.  Over five years, as outlined in at least two court cases, P repeatedly received incorrect information and was subject to incorrect handling of his situation by the plan administrator and his employer.

On March 10, 2009, P filed a nonresident alien return for 2004 seeking a refund of all taxes withheld by X as the payments were foreign-source benefits not subject to U.S. taxes. The IRS denied the refund on the grounds that it should have been requested within three years of April 15, 2005. P sued in the U.S. Court of Federal Claims, which also denied his refund on the grounds that the request was not made within the 3-year “look-back” period of §6511(b)(2)(A). P again appealed.

The Federal Circuit affirmed the Court of Federal Claims’ decision, explaining that §6511(a) and (b)(1) require a taxpayer to bring a refund claim within three years of filing a return, regardless of the return’s actual due date. While P took this step, i.e., his return was also his refund claim, the so-called “look-back” provisions of §6511(b)(2) limited P’s refund to taxes paid within the applicable 3-year period immediately preceding the filing of the March 2009 refund claim. Noting that the withheld taxes were “deemed paid” on April 15, 2005, eleven months before the start of the look-back period on March 10, 2006, the Federal Circuit concluded that there simply were no taxes paid within P’s 3-year look-back period to which he was entitled.

The clear take away from this decision is that, when one has been subjected to erroneous withholding, one should not rely on an employer’s or plan administrator’s promises to correct the error.  Tax regulations establish a specific, and short, period of time within which an employer can correct an error, after which withholding and the correct amount of tax owed become a matter between the employee and the IRS.  If a  problem is not corrected within a fairly short period of time, at least consult an advisor who can opine on proper tax withholding rules, identify any tax filing deadlines, and file any necessary forms to claim a refund.