All right. So, I see, it is the top of the hour. For those of you just joining us, welcome to today’s webinar, Understanding Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. We’re glad you’re joining us today. My name is Anika Pompey, and I am a Senior Stakeholder Liaison with the Internal Revenue Service. And I will be your moderator for today’s webinar, which is slated for 120 minutes.
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Okay. So, welcome again, we’re glad you joined us today. Before we move along with our session, let’s make sure you’re in the right place. Today’s webinar is Understanding Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. This webinar is scheduled for approximately 120 minutes.
So, let me introduce today’s speakers, Sean Crowley is a Senior Revenue Agent in the Foreign Payments Practice. Prior to joining the IRS in 2005, he worked as a Financial Analyst in the private industry. He began his career with the IRS as a Revenue Agent for SB/SE and crossed over to LB&I in 2009. He later joined the NRA Withholding team in 2012. His background includes a BS in Business Administration from St. Michael’s College and an MBA with a Finance Concentration from Clarkson University. He is also a licensed Certified Fraud Examiner and Certified Public Accountant.
Edward Kromberg, who we refer to as Ed is a Senior Revenue Agent in LB&I Foreign Payments Practice in New York City. In this role, Ed is responsible for the Form 1042 and Form 1042-S examinations of multinational financial institutions, brokerage firms, mutual funds, insurance companies and tech companies, addressing Chapters 3 and 4, IRC Sections 1441 and 1471, and issues that encompass U.S. information reporting and withholding tax. Prior to joining the IRS in 2009, Ed was employed by a large multinational bank as a Senior Vice President in the Corporate Tax Department. Ed received his bachelor’s in economics from the City University of New York, and an MBA in Taxation from Pace University in New York City.
With that said, let’s get started, Sean over to you to begin our presentation.
Thank you, Anika, for that introduction. As stated earlier, my name is Sean Crowley, and I’ll be kicking off our presentation. Again, I’d like to thank everyone for attending today’s webinar. Over the course of the next couple of hours, Ed Kromberg and I will be presenting information to help you better understand the Form 1042-S. The overall agenda for today’s presentation involves us giving a general overview of the Form 1042-S. Then, we’ll go into the details of the Form by discussing each section line by line, as well as provide some examples of common errors when filing the Form. We’ll also provide a brief overview of the Form 1042-T. And we’ll try to get to some of your questions you may have at the end.
On the next 2 slides, you can see today’s objectives. First, I’ll be providing a general overview of the Form 1042-S, and then explain some recent developments. I’ll also go through the general reporting requirements and provide some basic rules to keep in mind as the Form 1042-S is being completed. Then, Ed and I will go through each line item on the Form and describe some of the common errors that we’ve seen and briefly discuss the Form 1042-T.
So, before we go into the details of the Form 1042-S, let’s take a step back to get a good picture of how and why the Form 1042-S comes into play. To do this, I’d like to briefly review the different information reporting and withholding regimes. This will help provide some context and some code sections when completing the Form 1042-S. Next, I’ll go over the purpose of the Form, who should file, when and where it should be filed, along with some information about the electronic filing requirements. I’ll also address some ramifications of non-compliance, and then go into some new and upcoming information related to the Form 1042-S.
As indicated on the slide, the United States has three main information reporting and withholding regimes that are relevant for purposes of Form 1042-S, Chapter 3, Chapter 4, and Chapter 61 and the backup withholding provisions. Chapter 3 imposes a reporting and withholding requirement on uncertain payments to non-U.S. persons. The requirements under Chapter 3 are in respect to payments of U.S. source income that are Fixed, Determinable, Annual or Periodic, also known as FDAP, to nonresident aliens and foreign entities. This reporting is done on Forms 1042 and 1042-S.
As you can see, there are also a number of different Internal Revenue Code sections that apply to Chapter 3 that require reporting on different tax forms. For instance, different reporting requirements apply under Section 1445, which is generally reported on Form 8288, and is the U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons, and Section 1446, which is for reporting the Partnership Withholding Tax generally on Forms 8804 and 8805.
The second regime is Chapter 4, the Foreign Account Tax Compliance Act, also known as FATCA. Chapter 4 generally imposes an obligation on foreign financial institutions and certain foreign non-financial entities around the world to report to the IRS information on their U.S. account holders and U.S. owners. Entities that fail to comply with the requirements of FATCA are subject to a 30% withholding tax on certain payments made to them. Reporting under Chapter 4 is done on Form 8966, to report information on U.S. accounts, and, if withholding applies on Forms 1042 and 1042-S. Certain taxpayers also have a reporting requirement under FATCA on Form 8938.
The third regime is Chapter 61 and the Backup Withholding provisions under Section 3406. Chapter 61 requires reporting of certain types of payments made to U.S. non-exempt recipients. It also involves reporting of any backup withholding imposed under Section 3406 with respect to undocumented U.S. non-exempt recipients. Reporting under Chapter 61 and Section 3406 is done on Forms 1099 and 945. Although, they are separate and distinct withholding regimes, Chapter 61 is included when talking about information reporting withholding requirements, with respect to payments to foreign persons, because the presumption rules may be applied in certain circumstances.
This may result in a payment to a foreign person being treated as paid as an undocumented U.S. non-exempt recipient subject to backup withholding and reporting on Form 1099, or a payment to a U.S. person being treated as made to an undocumented foreign person reported on a Form 1042-S.
So, what’s the purpose of the Form 1042-S? What’s reported on it? In a very simplified explanation, the Form 1042-S is used to report U.S. source FDAP income paid to foreign entities and foreign individuals. The Form 1042-S is filed with the IRS and the copy is also provided to the recipient. The Form 1042-S reports the type of payment being made, whether the reporting is done under Chapter 3 or Chapter 4, information about the Withholding Agent and the recipient, and details on withholding, if any, including information on the withholding rate used, possible exemptions, among other things.
We’ll go into the details of the Form 1042-S, line by line later in today’s presentation. But it’s important to note that some of the payments are subject to reporting on the Form 1042-S, are subject to withholding and others are not. That’s to say that reporting is generally required even if there’s no withholding.
For example, let’s look at return of capital. Although, the portion of the corporate distribution that’s treated as return of capital is not subject to withholding, the payment is still reportable under Section 1441, so it needs to be included on a Form 1042-S. In this case, the Withholding Agent is also required to indicate the reason for the exemption using Chapter 3 exemption code of 02 to indicate that the income paid, which is return of capital, is exempt under the provision of the IRC.
Reporting on Form 1042-S is also required when a U.S. government entity makes a federal procurement payment to a foreign person that is subject to the 2% withholding under Section 5000C. In addition, Form 1042-S is used to report payments of eligible deferred compensation items or distributions from non-grantor trusts to covered expatriates, that are subject to withholding under Section 877A. For more information about these types of payments, please see the Notice 2009-85, and the instructions to Form 1042-S.
Lastly, Form 1042-S is used to report certain distributions that are made by publicly traded partnerships under IRC 1446 as well as distributions by publicly traded trusts and qualified investment entities, as defined under Section 897(h)(4)(A) pursuant to IRC 1445.
Let’s now look at who must file the Form 1042-S. A Form 1042-S must be filed by the Withholding Agent, not the recipient. A Withholding Agent is anyone who receives, controls, has custody of, disposes of, or paid a withholdable payment of U.S. source FDAP income. The Withholding Agent can be a person or an entity, If there are multiple Withholding Agents in the chain, usually the one closest to the payment is the one responsible for the reporting and withholding, although all can be liable for any under withholding or failure to report.
One question that we’ve been asked is if the Withholding Agent is an individual, then can that individual use their social security number to file the Forms 1042 and 1042-S? The answer is no. All types of Withholding Agents are required to obtain an EIN in order to file the Forms 1042 and 1042-S. As such, an individual’s social security number or ITIN is not acceptable for purpose of filing Forms 1042 and 1042-S. It’s important to note that an individual that makes a payment to a non-U.S. person does not have a Form 1042-S reporting requirement if the payment is made is not in the course of that individual’s trade or business.
Withholding Agents filed a Form 1042-S to report payments made during the calendar year. As noted earlier, they are responsible for not only filing the Form(s) 1042-S with the IRS in a timely manner, but they also have to provide copies of the Form(s) 1042-S to the recipients to which they’re reporting the payment to. For additional guidance refer to the instructions for Form 1042-S.
Forms 1042-S are due to the IRS on March 15. Recipients must also receive the respective copies by March 15. There are 5 copies of the Form 1042-S, Copy A, B, C, D and E. Copy A is filed with the IRS, Copies B, C, and D are sent to the recipients, and Copy E is retained by the Withholding Agent. Withholding Agents are required to send all paper filed Forms 1042-S with a Form 1042-T, which is the Annual Summary and Transmittal of Forms 1042-S and that’s to the address in the Form 1042-T instructions.
A separate Form 1042-T must be used to transmit each type of Form 1042-S. For those electronically filed Forms 1042-S, submitted through the FIRE system, it is the Withholding Agent’s responsibility to verify the results of the transmission within 5 business days. The IRS will not mail error reports for files that are bad.
Withholding Agents are able to request an extension of time to file the Forms 1042-S with the IRS by filing Form 8809. For the first extension of time request, Withholding Agents are not required to explain why they need more time. If they timely file Form 8809, meaning prior to the March 15 deadline, they will automatically get 30 additional days to file the Forms 1042-S with the IRS, which will now be due on April 15. If additional time is needed, after timely submitting a Form 8809 and before that 30-day period ends, a Withholding Agent can request a second extension by submitting a second Form 8809.
Different from the first extension request, the Withholding Agent must now include an explanation for needing additional time and it’s not automatic. See the instructions to Form 8809 for additional guidance on how to complete and where to file a request for extension to file the Form 1042-S. Also see Pub. 1187, Specifications for Electronical Filing of Form 1042-S, for additional information on how to file the Form 8809 electronically.
Please note, the filing of Form 8809 to request an extension to file Form 1042-S with the IRS does not extend the time for furnishing copies of the Form 1042-S to the recipients.
But Is there an extension available to furnish the Form 1042-S to recipients as well? Yes, there is. However, this is not an automatic extension, as with the extension to file the Form 1042-S with the IRS, and there is no actual IRS Form to file to request such an extension. Instead, the Withholding Agents must fax a letter to the IRS explaining why an extension is needed and include all the information required as noted in the instructions.
The request must be submitted prior to the March 15 deadline. The IRS must approve this request and will grant a maximum of 30 days. No second extension is available for the recipient copy, so the Withholding Agent will only have a maximum of 30 days to provide the recipient copies of their Forms 1042-S.
In practice, no actual notice or letter is sent to the Withholding Agents in response to such requests. So, Withholding Agents that timely send a letter requesting an extension to furnish copies of Forms 1042-S to the recipients can assume they have a 30-day extension, absent any notice from the IRS that denies such request. Anika, I think, it’s time for a polling question.
Yeah, Sean, it is time for our first polling question. So here is our question. A Withholding Agent can request a 30-day extension to File / Furnish a Form 1042-S by sending the request to? A, the IRS; B, the recipient; C, the IRS and the recipient; or D, the payor. Take a moment and click the radio button for the best answer for the question. I’ll give you a few more seconds to make your selection.
Okay. So, we’re going to stop polling now, and let’s share the correct answer on the next slide. And the correct answer is, A, the IRS. So, let’s see how well you all did with this question. I see that 80% of you responded correctly. So, Sean, maybe we need a little clarification. So, can you provide a little more detail?
Sure. Anika, no problem. So only the IRS can grant the extension. The Withholding Agent can request a 30-day extension to file the Form 1042-S to the IRS by using Form 8809. The Withholding Agent can also request a 30-day extension to furnish the Form 1042-S to the recipient by sending a letter to the IRS listed to the address listed in the Forms 1042-S instructions.
All right. Thank you for that explanation, Sean. I’m going to hand it back over to you.
Okay. Thanks again, Anika. So, this slide shows the address of where to mail a Copy A of the Form 1042-S along with the Form 1042-T that is required to transmit all paper filed Forms 1042-S with the Service. It must be mailed in a flat envelope, not folded. It’s important to note that Forms 1042-S and 1042-T are information returns. The Form 1042 is the actual tax return. Filing a Form 1042-S or Form 1042-T does not fulfill the requirement to file a Form 1042. The Form 1042 is also mailed to the same address.
The Form 1042-S may also be e-filed using a FIRE system, FIRE stands for Filing Information Returns Electronically, or any other filing system indicated in the Form 1042-S instructions and other IRS guidance. Please note, that the Form 1042-S is required to be e-filed in certain cases, such as the Withholding Agent is a financial institution or the Withholding Agent is filing 250 or more Forms 1042-S. This will be discussed more in the next slide.
Generally, if a Withholding Agent, that’s not a financial institution, has 250 or more Forms 1042-S to file, they must be filed electronically. The 250 threshold applies separately to original and amended returns. Withholding Agents that are financial institutions are always required to file electronically regardless of the number of returns being filed. Generally, the boxes on the paper forms correspond with the fields used for the electronic file, however, if the form in the field instructions don’t match, the guidance in Publication 1187 supersedes the form instructions.
Withholding Agents are encouraged to file electronically, even if not required to do so. Withholding Agents are also cautioned not to file both electronically and on paper. Filing the same Form 1042-S electronically and by paper will result in duplicate reporting. For more information on the e-filing requirements, see Pub. 1187.
Withholding Agents can apply for a waiver from the e-filing requirement, if they can establish undue hardship. To do this, they’ll need to file Form 8508 that’s a Request for Waiver From Filing Information Returns Electronically. And this must be done at least 45 days prior to the deadline for filing the returns.
An important note we want to make here is that these requirements are expected to change for Tax Year 2023 with respect to returns required to be filed for calendar year 2022. This will be discussed later in our presentation.
So, what happens if the Withholding Agent fails to comply with its Form 1042-S reporting requirements? As the slide indicates, the Withholding Agent may be subjected to various penalties, unless the failure is due to a reasonable cause and not willful neglect.
As you can see from this slide, the penalty for the failure to timely file can be calculated depending on how late it’s filed going from $50 per form up to $290 per form, that’s a maximum of $588,500 if filed within 30 days or a maximum up to $3,532,500 if filed after August 1. Also, these penalties are adjusted annually for inflation. The term Small Businesses for purposes of this penalty is defined as businesses having an average annual gross receipt of not more than $5 million for the 3 most recent tax years.
Please note that this penalty can apply for not just the late filing of the Form 1042-S, but also if the Form 1042-S was filed timely but it’s incorrect. We’re using more data analytics for the Form 1042-S data that we’re receiving and I’ve identified many errors with the data being reported to us on Forms 1042-S. The Withholding Agents can expect to see an increase of IRS notices in the near future.
The amounts discussed in the previous slides are also the amounts applicable with respect to the penalty for failure to furnish copy of the 1042-S to the recipients.
Both penalties, the failure to file and failure to furnish, can apply with respect to the same Form 1042-S, so any non-compliance associated to Forms 1042-S can add up very quickly.
In addition to the penalties noted in the previous slide, a penalty can also apply for intentional disregard of the requirements. The applicability of this penalty is determined based on specific facts, but a pattern of late filing or incorrectly, is one of the factors taken into account. And this can be a very costly penalties considering that the 10% application as it’s calculated based on the total amount of items required to be reported. In other words, the calculation is based on the gross income amount, not the possible withholding amount and there is no cap.
The failure to file a return electronically when required to do so is treated as a failure to file the return. As such, the same penalties discussed previously may apply. IRC 6724(c) provides that the penalty for failure to timely file on magnetic media applies only to the extent the number of returns exceeds 250. For example, if a Withholding Agent was required to file 300 returns electronically, the Withholding Agent would be subject to a penalty with respect to only 50 of the returns it was required to file, which is the 300 they were required to file, less than 250 thresholds for e-filing.
Mistakes happen. Things don’t always go as smoothly as we plan.
What if things happen out of our control that don’t allow us to follow through with the procedures that we planned? These can be events that filers encounter which causes them to fail in their quest to file the information returns timely and correctly. That’s when reasonable cause comes into play. So, what is reasonable cause? The reasonable cause as defined in the regulations is an occurrence of mitigating factors with respect to the failure or that the failure of the filer was due to events beyond the filer’s control.
Details regarding the specifics of substantiating reasonable cause can be found in Section 6724 and Regulations 301.6724-1. The facts and circumstances of each case are different and therefore the IRS will review each request carefully and will also consider the frequency of non-compliance.
Every year, the Form 1042-S and instructions are updated. The first page of instructions begins by explaining any new items that affect that specific year. Always review the current year Form 1042-S instructions to make sure you’re aware of any recent developments. For tax year 2022, there are 2 new income codes, 56 and 57, as well as a new Chapter 3 status code, 38 for Publicly Traded Partnerships. There’s also a new limitation on benefits code 12, which indicates that there’s no limitation on Benefits Article and the associated tax treaty.
As we quickly mentioned earlier in the presentation, there are some upcoming changes to the electronically filing requirements. A little over a year ago, the notice of proposed regulations 102951-16 was issued, pursuant to the Taxpayer First Act of 2019. The proposed regulations would lower the threshold for filing Forms 1042-S electronically from 250 down to 10. In addition, the proposed regulations provide that all information returns that a Withholding Agent is required to file are to be counted for the 10 form threshold. This means that if a Withholding Agent has a cumulative amount of Forms 1099, W-2, 1042-S that are greater than 10, electronic filing is a requirement, even if filing just one Form 1042-S.
Also, if a partnership has more than 100 partners, it needs to file the Forms 1042-S electronically as well, even if filing less than 10 Forms 1042-S. One other change is that the amended returns will have to be e-filed if the original was e-filed as well. The threshold no longer applies separately for original and amended returns.
The proposed regulations would also require certain Withholding Agents to file the Form 1042 electronically.
The requirements from these proposed regulations are not expected to kick-in until the March 15, 2023 filing, which is when the 2022 Forms 1042 are due. Final regulations are yet to be issued. For any updates on any changes to the Forms 1042-S, see IRS.gov/Form1042S.
So what else is new? The 1042-S Data Integrity Tool is new. This is a free standalone software program that Withholding Agents can use to assist them in complying with their reporting and withholding responsibilities with respect to Form 1042-S. The tool gives the opportunity to Withholding Agents to perform a review of the 1042-S data before submission to the IRS. Withholding Agents can easily import 1042-S data, whether from the FIRE file or using some of the various templates indicated within the tool, or even through manual entry, and then they’ll receive a report that shows any possible caution or error messages, that are based on the review performed.
Now from the results of the review, the Withholding Agent can analyze the flagged data and make any corrections as needed. As of now, the Tool runs quality checks on data from 2019, 2020 and 2021. Please note that the use of the tool does not change a Withholding Agent’s obligations to file correct Forms 1042-S with the IRS and furnish a copy of the Forms 1042-S to the payee. The use of this tool or any of the tools available in the market or in-house, that review information returns for errors prior to submitting the file to the service will receive the same level of consideration regarding reasonable cause for any penalty abatement requests.
Again, this tool does not take the place of the FIRE system or any other electronic filing system. This is a tool to be used to quality check the 1042-S data before it is sent to the IRS. More information on the Form 1042-S data integrity tool can be found by clicking the link included in the slide. This slide shows a screenshot of the homepage of the Form 1042-S Data Integrity Tool.
In this slide, we’ve included a list of resources we think should be referenced when completing the Form 1042-S. Anika, I think, now would be a great time for another polling question.
I agree. So, attendees, here is our next polling question. Where can you obtain more information about Form 1042-S? Is it, A, Publication 3498; B, Notice 609; C, Form 1042-S instructions; or D, all of the above. I’ll read that one more time. Where can you obtain more information about Form 1042-S? Is it, A, Publication 3498; B, Notice 609; C, Form 1042-S instructions; or D, all of the above. Now take a moment and click the radio button that best answers the questions. I’ll give you a few more seconds to make your selection.
Okay. So, we are going to stop polling now. And let’s share the correct answer on the next slide. And the correct response is, C, Form 1042-S instructions. Now, let’s see how well you all did with this question. Okay. I see that only 38% of you responded correctly. So, Sean, it looks like we need a little help with this one. Can you provide a little bit more detail?
Absolutely, Anika. So, the 1042-S instructions are a great resource to use when trying to obtain more information about the Form 1042-S. It provides information on future developments, reminders, and general instructions.
Sean, that’s really helps. You provided a lot of valuable information there. So far, so please continue.
Thanks, Anika. We’ll do. On the next set of slides, we’ll go over the general requirements, some of the basic rules to keep in mind when completing the Form 1042-S, and then we’ll provide a line by line explanation of the Form.
And unlike Form 1099 reporting where corporations, estates and government entities are exempt from reporting, there are no foreign exempt recipients from reporting of the Form 1042-S. Does that mean that every single dollar that is paid to these foreign entities and individuals is reportable? Generally, yes. There is no de minimis threshold for reporting. Every dollar paid, if U.S. source FDAP is reportable. However, there is an exception for bank deposit interest paid to certain non-resident aliens where a threshold of $10 exists.
What’s supposed to happen when a recipient receives multiple payments from the same Withholding Agent throughout the year and some are interest payments, some are dividends, and some are royalties? All these payments cannot be combined into a single Form 1042-S and provided to the recipient and the IRS. Even if there are different rates of withholding on each of the payments and the Withholding Agent calculated the correct amount to withhold, the Withholding Agents still cannot combine all these elements into one Form 1042-S. However, each reportable payment can be combined by income type alone and included on one Form 1042-S, because all these identical payments should have the same withholding rate if made by the same Withholding Agents for the same calendar year.
Throughout this presentation I have used the term reportable payments and I’ve provided some examples. So, what exactly is a reportable payment? As discussed earlier, a reportable payment is a payment made to a foreign individual or foreign entity that is from a source that’s within the United States and that it’s Fixed, Determinable, Annual or Periodical, again FDAP. Some examples of FDAP income include: compensation for personal services, dividends, including dividend equivalent payments, interest, royalties, original issue discount, rent, taxable scholarships and fellowship grants under IRC Section 117 and other taxable grants, prizes and awards.
Reportable payments also include: certain gains from the disposal of timber, coal or domestic iron ore with a retained economic interest, certain gains from contingent payments and amounts subject to withholding other Chapter 4, generally all FDAP type payments that are financial in nature, for example, interest and dividends.
This slide includes a list of the fields on a Form 1042-S that are generally required fields, meaning that they must be completed on each Form 1042-S. But, not every data element on the Form 1042-S needs to be filled out as some may not apply. For example, a recipient that is a Foreign Entity does not need to include a date of birth, because a foreign entity is not a living, breathing person.
Anika, it’s now a good time for our next polling question.
Yeah, now is the perfect time for polling questions. So, let’s see what our polling question is. Which is not one of the required fields to be completed on every Form 1042-S? Is it, A, unique form identifier; B, social security number of the Withholding Agent; C, Withholding Agent EIN; or D, gross income paid. We’re going to read that one more time. Which is not one of the required fields to be completed on every Form 1042-S? Is it, A, unique form identifier; B, social security number of the Withholding Agent; C, Withholding Agent EIN; or D, gross income paid. So, take a moment and click the radio button that best answers the question. I’ll give you a few more seconds to make your selection.
Okay. So, we’re going to stop polling now. And let’s share the correct answer on the next slide. And the correct answer is B, social security number of the Withholding Agent. So, let’s see how you all did with this question. Okay. So only 75% of you responded correctly. We’re going to need a little bit more detail, Sean. So, can you help us out with that?
Sure, Anika. No problem. The unique form identifier, the Withholding Agents EIN, and the gross income paid are required fields on every Form 1042-S being filed. The Withholding Agent cannot have a social security number. Withholding Agents are required to obtain an EIN in order to file the Form 1042 and Form 1042-S. An individual’s social security number is not acceptable for purposes of filing the Form 1042, nor the Form 1042-S.
Okay. I think we have it now. So, thank you for that explanation. Sean, what do you have for us next?
Well, before we get started with some of the basic rules, it’s important to recognize the Withholding Agent’s responsibility. The Withholding Agent may be personally liable for any tax required to be withheld because the U.S. has joint and several liability. This means that if the Withholding Agent does not withhold and remit the correct amount of tax to the IRS, then both the recipient and the Withholding Agent are on the hook for paying that tax liability. Please note, and this is very important, that the applicable tax will be collected only once. So, if the Foreign Person satisfies its U.S. tax liability, then the Withholding Agent is not liable for that tax, however, the Withholding Agent may still remain liable for any interest and penalties for failure to withhold.
Some of the basic rules to keep in mind, as Withholding Agent prepares the 1042-S, please, when obtaining the Form 1042-S from the Tax Form Repository, don’t choose the first Form 1042-S that you see. Make sure that you’re using the right version, which would be the tax year of the Form 1042-S. Don’t cross out the Form Year or Copy letter and write another in its place. For example, don’t print out and photoshop the Copy E of the 2019 Form 1042-S and change it to look like Copy A of the 2021 Form 1042-S.
As noted earlier, the Form 1042-S and the instructions are updated every year and additional fields and codes may be added from year to year. So, it’s extremely important that Withholding Agents use the right version. Remember, the Withholding Agent is completing the Form 1042-S not the recipient. Withholding Agent is responsible for ensuring the correct copy of the Form 1042-S is sent timely to the appropriate recipient.
If the Withholding Agent attempts to file Copies B through E with the IRS instead of Copy A, it will not be processed. Make sure that the Form 1042-S is complete before filing. Don’t leave out required information. Make sure that the forms are timely filed. These forms are due to the IRS and recipient by March 15, a 30-day extension is available as long as the Withholding Agent timely requests one.
And just as with the Form 1042, rounding is a must, so make sure to round amounts so that only whole dollar amounts are reported. And, of course, the basic math check, please make sure that all computational fields are correct and not blank, if applicable.
It’s extremely important that the information reported on all the Forms 1042-S filed by a Withholding Agent for the calendar year matches the information reported on the Form 1042 that is filed by the Withholding Agent for that same calendar year. Remember that the Form 1042-S is the information return while the Form 1042 is the tax return that’s filed consolidating the information from all the Forms 1042-S that have been filed by the same Withholding Agents for the same calendar year. For example, the sum of all the gross income amounts reported in box two of all the Forms 1042-S filed for the year should match the total gross income reported on the Form 1042 Line 62.
Recognizing privacy and security concerns, Withholding Agents are allowed to truncate the recipient’s TIN on the copies that the Withholding Agent furnishes to the recipients. Specifically, the Withholding Agent can truncate the recipient’s TIN, showing only the last 4 digits, with the remaining digits being replaced by asterisks or Xs. This truncation can only be applied to the recipient copies, Withholding Agents cannot truncate on that Forms 1042-S that is filed with the IRS, copy A. The Withholding Agent’s EIN cannot be truncated.
When a Withholding Agent recognizes that an originally filed Form 1042-S contains erroneous information to the Withholding Agent should file an amended Form 1042-S to correct the error and provide copies of the amended returns to the recipients. The amended Forms 1042-S must include the same unique form identifier as the originally filed Forms 1042-S as this indicates the intent is to overwrite the information on the original with the new amended Forms 1042-S.
Also, when filing an amended Form 1042-S, it is very important to verify if the associated Form 1042 that was filed also need to be amended.
The information about each recipient is included on every Form 1042-S. How does this information get here? Where did it come from?
The answer lies with the Withholding Agent and the documentation it obtained from its recipients prior to the payment being made, for example, from the Forms W-8 series or other documentary evidence. The information that’s contained on that specific Form W-8, or documentary evidence when applicable, that was submitted to the Withholding Agent, and reviewed by the Withholding Agent, should be what’s used to populate certain fields on the Form 1042-S.
Okay. So, before we go through the 1042-S line by line, let’s just take a step back to recognize that I’ve provided an overview of the various withholding regimes, the purpose of the Form 1042-S, what, when, who and where it should be filed. I’ve explained the electronic filing requirements, ramifications of non-compliance and addressed some items that are new. I’ve also provided some resources to obtain more information and went through some general requirements and some basic rules. All this has been done to provide some context on how each data element on the 1042-S comes into play. So, let’s get into it.
This is a copy of the Form 1042-S for Tax Year 2022. It is Copy A. There are 60 data elements that can be completed on this one form but not all are applicable in every situation. The Form 1042-S is only half a page but the PDF of the form includes 8 pages. The 8 pages include all 5 copies of the Form 1042-S, Copies A through E, and the rest include brief instructions and the list of applicable codes, income, exemption, Chapter 3 and Chapter 4 status codes and limitation on benefit codes.
This slide provides an image of the top section of Form 1042-S. As we’re about to go through the detail of the Form 1042-S, I think it’s important to keep in mind what this form is for. This information return is used by the Withholding Agent to provide details on U.S. sourced income paid to foreign persons. The first field on top is unique form identifier. This is a required field. It’s a 10-digit number and cannot be the recipient’s TIN or foreign TIN. It must be unique to the specific Form being filed. If there are 100 Forms 1042-S being filed? There should be 100 different unique form identifiers, one for each Form. The first 1042-S filing is considered the original Forms 1042-S. The original Form 1042-S contains information that has not been previously reported to the IRS.
So, what happens if the Withholding Agent discovers an error with some of the original filings? The Withholding Agents need to submit an amended 1042-S for each of the erroneous originally filed Forms 1042-S. Don’t submit the original file again, because this may result in duplicate reporting. Submit only those returns that require amendments. Don’t include information returns omitted from the original file as amended returns. If you omitted an information return, it should be submitted as an original return.
As noted previously, if a Withholding Agent is filing an amended Form 1042-S, it must include the same unique form identifier that was reported by the Withholding Agent on the original Form 1042-S that’s being amended. If a Withholding Agent is filing amended Form 1042-S, the Withholding Agent must also provide an amendment number to indicate if it’s the first, second, third time that they’re amending that specific return. Each time that a Withholding Agent amends the same form, as determined by the unique form identifier, the Withholding Agent must provide the amendment number in the box provided on the Form, using, 1, for the first amendment and increasing sequentially for each subsequent amendment.
Next, Ed is going to go through the remainder of the Form 1042-S, as well as some common errors and of course, the Form 1042-T. Ed, over to you.
Thank you, Sean, for that comprehensive and informative presentation. So, let’s continue. The 2022 Form 1042-S provides the Withholding Agent with 51 income codes. You need to enter the two-position value exactly as it appears from the income code table. The income code must accurately reflect the type of income paid. Don’t enter blanks or 00 (zeros), Numeric characters only. The income code is a required field. This code is a specific, 2-digit number. The list of specific income codes can be found in Publication 515 and on the Form 1042-S itself as well as the instructions. Withholding Agents are not allowed to report multiple types of income on a single Form 1042-S.
As Sean mentioned earlier, filers must use a separate Form 1042-S for information reportable for a single type of income. Under certain circumstances, it may be necessary to submit more than one Form 1042-S for the same recipient. For example, recipient X derived income from capital gains, its income code 09 and industrial royalties, income code 10. A separate Form 1042-S must be reported for each income code. Each Form 1042-S must reflect the gross income paid and any U.S. federal tax withheld by the Withholding Agent pertaining to that income code. You may aggregate onto one Form 1042-S amounts that are attributable to the same income code, for example five interest payments, all associated with income code 01. Note, when combining payments of the same income code, the tax rate for all the payments must be the same. We’ll mention this again later.
Please note that for payments made after January 1 of 2016, a U.S. financial institution or a U.S. branch of a foreign financial institution maintaining an account within the United States is required to separately report payments of the same type of income made from multiple financial accounts held by the same beneficial owner. For example, if a U.S. financial institution pays dividend income to two separate accounts that it maintains for recipient X, a separate Form 1042-S must be reported for the payment made to each account, even if it’s going to the same recipient. Anika, I believe we have a next polling question.
That’s right, Ed. It is time for our fourth polling question. So, attendees, here we go. How many different types of income is the Withholding Agent permitted to report on a single Form 1042-S? Is it, A, 1; B, 4; C, 2; or D, 6. I’ll read that one more time. How many different types of income is the Withholding Agent permitted to report on a single Form 1042-S? Is it, A, 1, B, 4; C, 2; or D, 6. So take a moment and click the radio button that best answers the question. I’m going to give you guys a few more seconds to make your selection.
Okay, so we’re going to stop polling now and let’s share the correct answer on the next slide. And the correct response is A, one. So, let’s see how well you all did with this question. All right. So, I see that 83% of you responded correctly. So that’s a great response rate. And it looks like you’re going to continue with the remainder of the form.
Yes, thank you. Okay, continuing. This slide reflects a partial list of income codes that the Withholding Agent must choose to properly reflect the type of income paid. As mentioned previously, for 2022, there are 51 income codes from which to choose to best reflect the character of the income paid. New codes may be added every year as the form and instructions are revised. It’s important to always read the instructions and use the current version of the Form.
All income, withholding and repayment fields, must be reported in whole dollars only. Don’t enter cents in amount fields. To round amounts to the nearest whole dollar, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.00.
The gross income amounts, Box 2, must reflect pre-tax income and is the total income paid before any deduction of tax at source. A gross income amount of zero cannot be shown. Only amended returns can report zero amounts. Note, don’t report negative amounts in any amount fields, numeric characters only. The sum of gross income amounts from all Forms 1042-S that were filed by the Withholding Agent for the calendar year should be included on Line 62C of the Form 1042. If you amend a Form 1042-S from gross income of $100 down to $0, do not include $100 on Line 62C of the Form 1042.
Box 3 is for the chapter indicator. The purpose of the chapter indicator is to provide information about which withholding regime applies to the 1042-S, whether withholding was done under Chapter 3 or Chapter 4. A Withholding Agent cannot combine withholding from Chapter 3 and 4 regimes and enter the data onto 1 Form 1042-S.
In most cases, if the tax rate you entered in box 3b or 4b is zero, meaning exempt from withholding under Chapters 3 and 4, you may be required to enter the appropriate exemption code from the list of exemption codes provided in the instruction as applicable for Chapter 3 and 4 purposes. If an amount was withheld under Chapter 4, the tax rate you entered in box 4b is 30%, then enter 00 in box 4a. If the tax rate you entered in box 4b is zero, then you must enter the applicable exemption code in box 4a. If an amount was withheld under Chapter 3, the tax rate you entered in box 3b is greater than zero, enter 00 in box 3a.
Depending on the exemption code reported additional information may be required. For example, if exemption code 01 or 14, effectively connected income applies, you must enter the recipient’s U.S. TIN in box 13e if you report the income as effectively connected with a U.S. trade or business. If the recipient’s U.S. TIN is unknown or unavailable, you must withhold tax at the rate of 30%, 30.00, and then enter 00 in box 3a.
Also, when using Chapter 3 exemption code 04, exempt under tax treaty, the recipient country of residence code for tax purposes must be a valid treaty country, for example, if the recipient is a tax resident of Northern Ireland use United Kingdom. Don’t use Chapter 3 exemption code 04 unless the exemption of tax is based on a treaty claim. This slide reflects the list of Chapter 3 and Chapter 4 exemption codes that the Withholding Agent must choose to properly reflect the exemption being afforded to the recipient.
Enter the correct rate of withholding that applies to the income in box 2, gross income, or box 6 net income, as appropriate. In the case of a payment subject to Chapter 4 withholding, the correct rate of withholding is always 30.00. If the amount reported in box 2 is not subject to Chapter 4 withholding or is not a withholdable payment, then you must enter 00.00 in box 4b and provide the applicable exemption code in box 4a.
For purposes of Chapter 3 withholding, the correct tax rate should be included even if you withheld at a different rate. For example, a Withholding Agent reporting dividends paid to a beneficial owner who is exempt from withholding under Chapter 4 and is a resident of a country with which the United States does not have a tax treaty and the U.S. Withholding Agent paid the dividend and incorrectly withheld only 15% on the Chapter 3, rather than the required 30%, should nevertheless report 30.00 in box 3b. If you withheld at more than one tax rate for a specific type of income that you pay to the same recipient, you must file a separate Form 1042-S for each amount to which a separate rate was applied.
The withholding allowance box, box 5, should be completed only if the income code reported in Box 1 is 16 scholarship or fellowshipping grants, 17 compensation for independent personal services, 18 compensation for dependent personal services, 19 compensation for teaching, 20 compensation during studying and training, or 42 earnings as an artist or athlete-no central withholding agreement. If you entered an amount in this box, you must also enter an amount in Box 6 net income. The net income box should be completed only if an amount was entered in the previous box, withholding allowance. It’s actually a calculation gross income box 2 less the withholding allowance in box 5 equals net income box 6.
The following few slides will focus on boxes 7a through 11 which reports information on the tax withheld and any adjustments made. Federal tax withheld, this is the total amount of U.S. federal tax that you actually withheld in box 7a under Chapter 3 or 4. If you did not withhold any tax enter 0, box 7a must be completed in all cases even if no tax has been deposited. Applying the formulas will determine what the correct amount of withholding should be. For example, gross income multiplied by the tax rate equals U.S. federal tax withheld. If a different amount was withheld, enter the amount that was actually withheld in whole dollars only.
Box 7b A Withholding Agent that withheld tax during the calendar year and that was not required to deposit with the IRS the tax withheld during that calendar year pursuant to the escrow procedure must check box 7b, federal tax withheld was not deposited with the IRS because escrow procedures were applied. A Withholding Agent reporting payments pursuant to the escrow procedure must report such payments on separate Forms 1042-S. Box 7b must only be checked when using the escrow procedures.
Box 7c for partnerships and trusts, withholding normally occurs on actual distributions of U.S. source FDAP income to foreign partners at the time they are made. If an actual distribution is not made in the year the partnership earned the income, withholding will occur on the foreign partner’s allocable share of U.S. source FDAP income in the subsequent year. This may cause a mismatch between the time the income was earned versus when the tax was withheld. To address what’s commonly referred to as the lag method of reporting, proposed regulations issued on December 18, 2018 now allow partnerships or trusts to withhold in a subsequent year with respect to a foreign partner’s or beneficiary’s share of income for the prior year and designate the deposit of the withholding as attributable to the preceding year. Taxpayers can rely on these proposed regulations.
Check box 7c, if you are a partnership that received an amount subject to withholding during the 2021 calendar year that being the preceding year, and you are withholding on the amount includible in a foreign partner’s share after March 15 of the subsequent year 2022. Only check this box if you designated the deposit as attributable to the preceding year 2021. In such a case, the partnership will be required to report the associated income and tax withheld on Form 1042 and Form 1042-S for the preceding year. If a partnership withholds on a foreign partner’s share of income after March 15 of the subsequent year, the due date for filing and furnishing the applicable Forms 1042-S is September 15 of the subsequent year, it’s 2022.
For example, if a partnership withholds on April 1, 2022, with respect to a foreign partner’s share of undistributed income for the 2021 calendar year, the partnership may designate the deposit as made for 2021 and report the liability and tax withheld on the 2021 Form 1042 and the 2021 Form 1042-S for that partner. The partnership though must also ensure that its Chapter 3 status code on such forms properly reflects its status as a partnership, including as a withholding partnership.
This extended deadline of September 15, 2022 is also applicable when a partnership is reporting on Form 1042-S an allocation of income made after March 15 of the subsequent year to a foreign partner for the prior year, but no withholding is required on that income. In such a case, box 7c must also be checked even if there’s no withholding.
Box 8, if you are a Withholding Agent filing a Form 1042-S to report income that has already been subject to withholding by another Withholding Agent, enter the amount actually withheld by the other agent or agents in box 8. So, as a simple example, a U.S. Withholding Agent, let’s say, a broker-dealer for instance, makes it withholdable payment of U.S. source dividends to a qualified intermediary and this qualified intermediary does not assume primary Chapter 3 and Chapter 4 withholding responsibility.
The withholding statement provided by this QI allocates 100% of the dividends to a 15% withholding rate pool. The broker-dealer, the Withholding Agent here, completes a Form 1042-S for the dividends allocated to the Chapter 3, 15% withholding rate pool showing the QI as the recipient. Now, when the QI prepares its own Form 1042 and corresponding Forms 1042-S, the QI will show the tax withheld by the broker-dealer in box 8 of the Form 1042-S that the QI prepares and issues to its underlying payees.
Box 9 over-withheld tax repaid to recipient pursuant to reimbursement or set-off procedures. If you repaid the recipient during the current 2022 calendar year, do not complete box 9. Instead, reduce the amount of withholding reporting in box 7a. Box 9 should be completed only if you repaid a recipient under the reimbursement or set-off procedure during the 2023 calendar year in accordance with the time requirements as per the regulations, including the proposed regulation, that being until the extended due date for filing Forms 1042-S or, if earlier, the date on which the Form 1042-S is either filed or furnished.
Enter in box 10 the combined amount reported in box 7a, federal tax withheld; box 8 tax withheld by other agents; and box 9 over-withheld tax repaid to recipient pursuant to adjustment procedures. This is a calculation, so for example, if the box 7a amount is $600. The box 8 amount is $120 and the box 9 amount is $50. The box 10 amount will equal $670; $600 plus $120 minus $50. It’s important to make sure that the computation is reported correctly. Box 10 must be completed in all cases, even if no tax has been deposited.
Box 11, tax paid by Withholding Agent, amounts that was not withheld. Enter the total amount of tax paid by you and not withheld from the payment to the recipient. The amounts reported in box 11 should be the amounts paid by the Withholding Agent from its own funds rather than through withholding from the payment to the recipient. Any amount reported in this box must not be included in box 10.
Box 12a, the Withholding Agent’s Employer Identification Number. If the Withholding Agent is a qualified intermediary or QI; including a Qualified Derivatives Dealer, that’s QDD, or withholding foreign partnership, WP; or withholding foreign trust, WT; and is acting as such, the TIN reported must be a QI-EIN, a WP-EIN or WT-EIN and must begin with 98.
Boxes 12b and 12c, Withholding Agent’s Chapter 3 and Chapter 4 status code. Enter the Withholding Agent status codes from the list of Recipient’s Status Codes in the Form 1042-S instructions. You must enter both a Chapter 3 and Chapter 4 Withholding Agent status code that most closely apply regardless of the type of payments being made.
Box 12d enter the Withholding Agent’s name and address in the appropriate boxes. If the post office does not deliver mail to the street address and you have a P.O. box, show the box number instead of the street address.
Box 12e reflects the Withholding Agent’s Global Intermediary Identification Number or GIIN number. A GIIN is a Global Intermediary Identification Number assigned to a Participating Foreign Financial Institution, Registered Deemed-Compliant Foreign Financial Institution and Direct Reporting, non-financial foreign entities or NFFEs.
Box 12f is the country code. You must enter the code from the list at IRS.gov/CountryCodes, for the country for which the Withholding Agent is a resident under that country’s tax laws. Enter OC, other country, only when the country of residence does not appear on the list. Note however, if the Withholding Agent is a U.S. person or a foreign branch of a U.S. person enter US in box 12f, even though U.S. is not a code on the list of available country codes.
Box 12g is for the Withholding Agents to provide their FTIN, that’s Foreign Tax Identification Number. If the country in which it resides has issued one to it. Withholding Agents are to provide their complete address in box 12h including street and number, while in box 12i they are to include the rest of their address including city or town, state or province, country and zip code or postal code. The address should only show the official street address. The address should also reflect additional data such as mail stop numbers, or to the attention of information. If applicable, enter Army post office, APO, or fleet postal office, FPO.
Box 13a is for the recipient’s name. Enter the complete name of the recipient in box 13a. If you do not know the name of the recipient or are required to use the recipient status codes for an unknown recipient, enter Unknown Recipient. Note, if reporting to an Unknown Recipient withholding a 30% applies. If a Form 1042-S is being completed by a QI, a Qualified Intermediary, a WP, Withholding Partnership, or WT, Withholding Trust for a Chapter 3 withholding rate pool or Chapter 4 withholding pool, enter Withholding Rate Pool, if withholding / reporting under Chapter 3 was applied, or, if Chapter 4 withholding was applied, a description of the Chapter 4 reporting pool. For example, insert Non-Participating FFI Pool in box 13a. In the case of foreign joint owners, Form 1042-S can only list one of the owners as the recipient in box 13a. Form 1042-S must not be completed with more than one of the joint donors as the recipient.
Box 13b is the Recipient’s country code. You must enter the code for the country of which the recipient claims residency under the country’s tax laws. Enter OC, other country, only when the country of residence does not appear on the list or the payment is made to an international organization, for example, to the United Nations. If the recipient is unknown, then leave box 13b blank and enter Unknown Recipient in box 13a, the Recipient’s name.
As a reminder, if exemption code 04, exempt on the tax treaty, appears in box 3a or if a reduced rate of withholding based on a tax treaty is entered in box 3b, the country code entered in box 13b must be a country with which the United States has entered into an income tax treaty.
Boxes 13c and 13d, Recipient’s address. In most cases you must enter a foreign address in boxes 13c and 13d. However, there are limited exceptions. For example, you may enter a U.S. address when reporting payments of scholarship or fellowship grant as income code 16. If a recipient is an Unknown Recipient, or Withholding Rate Pool, no address should be present. These are the only two situations where a street address is not required.
I believe, we have another polling question, question five.
Yes, we do have another polling question. So, audience, here’s your next question. If you do not know the name of the recipient to report in Box 13a, you would insert the following? Is it, A, leave box 13a blank; B, Unknown Recipient; C, Tom Brady; or D, Name of the current IRS commissioner. I’ll read that one more time. If you do not know the name of the recipient to report in Box 13a, you would insert the following? Is it, A, leave box 13a blank; B, Unknown Recipient; C, Tom Brady; or D, Name of the current IRS commissioner. Let’s take a moment and click that radio button that best answers the question. I’ll give you guys a few more seconds to make your selections.
Okay. So, we’re going to stop polling now, and let’s share the correct answer on the next slide. And the correct response is, B, Unknown Recipient. So, let’s see how well you all did with this question. I see that 77% of you responded correctly. So, Ed, what did we miss here? Can you provide us a little more detail?
Sure. If you do not know the name of the recipient or are required to use the recipient status code for an unknown recipient, then you should enter Unknown Recipient in box 13a. So, the correct answer would have been Unknown Recipient.
Okay. So, your sounds pretty straightforward. Thank you, Ed, and I’ll turn it back over to you.
Okay. Thank you, Anika. Okay, continuing. You may be required to obtain and report a U.S. TIN for the recipients in certain cases, for example, when reporting a payment made to a QI or WP or WT, generally when applying a reduced rate of withholding pursuant to a treaty or if certain exemptions under the Code apply. See the instructions of the Form 1042-S for guidance on when a U.S. TIN is required. Even if you are not required to report a U.S. TIN, if you know the recipient’s TIN or if a foreign person provides a TIN on a Form W-8, but is not required to do so, you still must include the TIN on the Form 1042-S.
Note, if the recipient of a Form 1042-S files an income tax return, for example, a Form 1040-NR to claim a credit or refund of the tax withheld reported on a Form 1042-S he or she received, a copy of the Form 1042-S received must be attached to the tax return to support such claim. That copy of the Form 1042-S must include the recipient’s TIN.
The recipient’s Chapter 3 status must be reported on box 13f. This information will be based on the documentation, for example, Form W-8 received by the Withholding Agent. The recipients Chapter 4 status code must be reported in box 13g, if the 1042-S reports a withholdable payment of payments subject to FATCA.
Box 13h is the Recipient’s GIIN. A GIIN is assigned to a Participating Foreign Financial Institution, Registered Deemed Compliant Foreign Financial Institution, and Direct Reporting NFFEs. Note, a Withholding Agent must validate the recipient’s GIIN against the IRS FFI list. If the GIIN is not found in that list FATCA withholding at 30% will generally apply as that would indicate an incorrect status claim.
Use box 13i to enter the recipient’s Identification Number used in the recipient’s country of residence for tax purposes. You may be required to obtain and report the recipient’s FTIN, the Foreign Taxpayer Identification Number, in certain cases. See the Form 1042-S instructions for additional guidance.
Box 13j, if you are making a payment for which a beneficial owner that is an entity has claimed a reduced rate of withholding under an income tax treaty and has provided documentation that establishes the limitation on benefits, the LOB, article under which the beneficial owner qualifies, you should enter the applicable LOB code here, box 13j. See the instructions for Form W-8BEN-E for a description of each of the LOB codes.
Box 13k, if you are a financial institution reporting amounts paid to your direct account holder with respect to an account maintained by you at your U.S. office or U.S. branch, you must report the recipient’s account number in this box 13k. If the amount is paid through an NQI, a non-qualified intermediary, or other flow through entity, you are not required to use this box. Box 13l; use box 13l to enter the recipient’s date of birth. The correct format if entered is year, month, day. For example, enter 20001205 for a date of birth of December 5, 2000.
Boxes 14a and 14b is the Primary Withholding Agent’s Name and EIN. If you are an intermediary or flow through entity reporting amounts withheld by another Withholding Agent that being the primary Withholding Agent in box 8, you must provide the name and EIN of the Withholding Agent that withheld the tax. If multiple Withholding Agents withheld amounts reported on the same Form 1042-S, report the name of any one of the Withholding Agents that withheld amounts, otherwise leave blank.
Box 15 is the Pro-Rata Basis Reporting Checkbox. Withholding Agents must check box 15 to notify the IRS that a non-qualified intermediary, an NQI, that used the alternative procedures of Regulations Section 1.1441-1(e)(3)(iv)(D) failed to properly comply with those procedures. With the application of the alternative procedure, NQIs receiving reportable amounts, and for Chapter 4, must inform the Withholding Agent on its withholding statement that it’s using the procedure and the Withholding Agent must agree to the procedure.
Box 15a, the intermediary or flow-through entity’s EIN. If you are reporting payments to a recipient based on a Form W-8IMY documentation that was provided to you by an intermediary or flow-through entity, you must include the EIN of this intermediary or flow-through entity.
Box 15b Chapter 3 status code, enter the intermediary will flow-through entity’s Chapter 3 status code that relates to the EIN listed in box 15a. Box 15c Chapter 4 status code, enter the intermediary or flow-through entity’s Chapter 4 status code that relates to the EIN again listed in box 15a.
For amounts paid to a non-qualified intermediary will flow-through entity, if a U.S. Withholding Agent makes a payment to an NQI, non-qualified intermediary or a flow-through entity, other than a non-participating foreign financial institution, with respect to withholdable payment, it must complete a separate Form 1042-S for each recipient on whose behalf the NQI or flow-through entity acts as indicated by its withholding statement and the underlying documentation associated with its Form W-8IMY.
If a payment is made through tiers of NQIs or flow-through entities, the Withholding Agent must nevertheless complete Form 1042-S for the recipients to which the payments are remitted. A Withholding Agent completing Form 1042-S for a recipient that receives a payment through an NQI or a flow-through entity must include in boxes 15a through 15i of the Form 1042-S, the name, country code, address, TIN if any, GIIN if any, and status codes of the NQI or flow-through entity from which the underlying recipient directly receives the payment.
Box 15f country code, you must enter the country code for the country where the intermediary or flow-through entity is located. Box 15g is the intermediary of flow-through entity’s Foreign Tax Identification Number. Use box 15g to enter the intermediary or flow through entity’s identifying number used in the country of residence for tax purposes. Note, box 15g is optional. The Form 1042-S instructions contain several examples that illustrate the proper way to report payments made to persons who are not recipients including amounts paid to non-qualified intermediaries or a flow-through entity.
Box 16a through 16e, report the Payer’s name. TIN, GIIN and status code, include the Payer’s name, TIN and GIIN, if different from the Withholding Agent shown in boxes 12a, 12d and 12e. If payment is being made by a transfer agent or an authorized paying agent acting as a Withholding Agent on behalf of a payer, enter the Chapter 3 and 4 status codes applicable to the status of the payer in boxes 16d and 16e. An agent is an authorized agent for purposes of filing Form 1042 or making tax deposits and payments on behalf of its principal, payer, if among other requirements a Form 8655, Reporting Agent Authorization, is filed with the IRS if the agent is filing Form 1042 in its name, on behalf of the payer.
Boxes 17a through 17c, State income tax withheld and related information include in these boxes information relating to any State income tax withheld. As Sean mentioned earlier, in our session when paper filing Forms 1042-S with the IRS, filers must file the Forms 1042-S along with the Form 1042-T which is the transmittal form, you must file a separate Form 1042-T for each type of paper Form 1042-S you are transmitting.
Note the picture of the Form 1042-T. Please refer to the form for line by line instructions on how to complete this form 1042-T. The next several slides point out some common errors made by Withholding Agents when preparing and filing Forms 1042-S. To ensure that your Form 1042-S can be correctly processed, be sure that you do the following. Carefully read the information provided in Pub. 515 and these instructions. Comply with the requirements in Publication 1187, Specifications for Electronic Filing of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, if you are an electronic filer.
Consider using the Form 1042-S Data Integrity Tool to review the Form 1042-S data prior to filing Form 1042-S with the IRS. This can help identify any potential errors and avoid possible penalties for the failure to file correct information returns. Ensure that the copy of the Form 1042-S filed with the IRS is the same as the copy furnish to the recipients. Please complete all the required fields. Use only income, status, and exemption codes specifically listed in the Form 1042-S instructions.
Use only tax rates that are allowed by statute, regulations or treaty. Do not attempt to blend the rates. Instead, if necessary, submit multiple Forms 1042-S to show changes in tax rate. All information you enter when reporting the payment must correctly reflect the intent of the statute and regulations. In most cases, you should rely on the withholding documentation that you’ve collected, for example, any of the Form W-8 series or Form 8233, et cetera, to complete your Form 1042-S submissions. Also note the following: The gross income you report in box 2 cannot be zero. As I said before only amended returns and report zero amounts. The income code you report in box 1 must correctly reflect the type of income you pay to the recipients.
In case of joint owners, Form 1042-S can only list one of the owners as the recipient in box 13a. Form 1042-S must not be completed with more than one of the joint owners as the recipient. The exemption code that you report in box 3a and 4a must correctly identify the proper tax status for the type of income that you pay to the recipient. Additional information may be required to be reported based on the applicable exemption code reported, so Withholding Agents must ensure that information is also provided.
Note, if you use exemption code 04 exempt under tax treaty, the country code that you report in box 13b must be a valid treaty country. Any amended form must have the same unique form identifier as the original form that is being amended. Withholding Agents must ensure that all the information reported on all the Forms 1042-S filed for the calendar year reconcile with the information reported on Form 1042.
Under certain circumstances, it may be necessary to submit more than one form for the same recipient. Failure to provide multiple forms, when necessary, may generate math computation errors that may result in penalties being assessed. For circumstances in which more than one form would be required: Different types of income. For example, recipient X derived income from capital gains, income code 09; and industrial royalties, income code 10, a separate form must be reported for each income code.
Changing country code during the year, for example, the Withholding Agent received notification by a Form W-8BEN that the recipient’s country of residence for tax purposes changed from Country X to country Y. The amounts reported must be based on each country. Change a country’s tax treaty rate during the year. For example, effective April 1, country X changes its tax treaty rate from 10% to 20%. A separate Form must be reported for each of the tax rates.
Again, you need to report Chapter 3 and Chapter 4 withholding separately. Account by account reporting by U.S. financial institution as discussed earlier in this presentation. Avoid any potential under-withholding by ensuring correct reporting. For example, if reporting to an unknown recipient, a Withholding Agent must withhold at 30% in report accordingly. Remember, you, the Withholding Agent are liable for the tax if you know, or should have known, that under-withholding on a payment has occurred. I see, Anika, that it is time for our last polling question.
Yes, Ed, it is time for our final polling question. So, audience, here is your final question. Some of the most common errors we find when processing Form 1042-S include: A, missing required fields; B, listing two or more recipients in box 13a Recipient’s Name Box; C, reporting that income is exempt from withholding under an income tax treaty, but recipient’s country code is not that of a treaty country; or D, all of the above. So, I’ll read that one more time. Some of the most common errors we find when processing Form 1042-S include: A, missing required fields; B, listing two or more recipients in box 13a Recipient’s Name Box; C, reporting that income is exempt from withholding under an income tax treaty, but recipient’s country code is not that of a treaty country; or D, all of the above. So, let’s take a moment and click the radio button that best answers the question. I’m going to give you all a few more seconds to make your selections.
Okay. So, we are going to stop polling now, and let’s share the correct answer on the next slide. And the correct response would be, D, all of the above. So, let’s see how well you all did with this question. Oh, that’s great. I see that 91% of you have responded correctly. That is a really great response rate. So, Ed, I’m going to turn it back over to you.
Great. That was a great response. Thank you very much. So, as we approach the end of this presentation, you now will be able to describe the general background of the Form 1042-S, explain recent developments impacting Form 1042-S, describe the general Form 1042-S reporting requirements, explain some of the basic rules to be followed when completing the Form 1042-S, explain each line item on the Form 1042-S, explain what is Form 1042-T and describe common errors and how to avoid them.
So, I think, at this point, I’d like to say thank you for attending this presentation, Sean and I hope you found it informative. And you’ll be able to now apply what you’ve learned when preparing your Forms 1042-S. So, back to you, Anika.
Thank you so much, Ed. Hello, again, it’s me, Anika Pompey, and I will be moderating the question-and-answer session. But before we start the Q and A session, I want to thank everyone for attending today’s presentation, Understanding Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Earlier I mentioned, we want to know what questions you have for our presenters, and here’s your opportunity. If you haven’t input your question, there’s still some time, go ahead and click-on the drop down arrow next to Ask Question field, type in your question and click Send. Sean and Ed are staying on with us to answer your questions.
One thing before we start, we may not have time to answer all the questions submitted. However, let me assure you, we will answer as many as time allows. If you are participating to earn a certificate and related continuing education credit, you may qualify for one credit by participating for at least 50 minutes from the official start time of the webinar. And you will qualify for two credits by participating for at least 100 minutes from the official start time of the webinar. And that means that the first few minutes of chatting before the top of the hour is not going to count towards the 50 or 100 minutes.
So, let’s get started so we can get to as many questions as possible. Okay, so I see, we have a question here. Sean, I’ll direct this question to you. So as a recipient of Form 1042-S, if I don’t believe the information contained on it is correct, can I recreate the Form 1042-S with the information that I believe is correct, and submit my version to the IRS and attach it to my return?
Anika, that’s a very good question. Thank you. The answer is no. Recipients should not create their own Forms 1042-S with the information that they believe is to be correct. Every recipient receives a Form 1042-S from the Withholding Agent. The recipient should contact the Withholding Agent if the Form 1042-S contains information that they don’t believe is correct. They definitely should contact the Withholding Agent and address that data issue that way. A Withholding Agent would then need to amend the Form 1042-S, assuming that information was originally wrong, so they would have to amend that 1042-S updating the records, and then they would need to submit those amended Forms 1042-S to the IRS and the recipients as soon as possible.
So, again, if a recipient receives a Form 1042-S, they would be the ones that are receiving those Copies B, C, and D, then it is expected that the IRS would receive that same information on the Copy A of the 1042-S that the Withholding Agent sent over to the IRS for filing. So, again, all the information that’s filed with the IRS must be the exact same information that’s provided to the recipients.
Okay, Sean, thank you for that very detailed explanation. So, we have another question in, and I’m going to direct this one to you Ed, and this is a two-part question. So first, Are the Forms 1042-S filed quarterly? And second, if there is no tax to be withheld, does a Form 1042-S still need to be filed?
Thank you for that question. Filed quarterly, that’s interesting. But no, no. Forms 1042-S are not filed quarterly. They’re filed annually, just one time a year. As to the second part, yes. Certain FDAP payments, yeah, they could be exempt from tax because the Statutes in the Internal Revenue Code or the income could be exempt because of a tax treaty that’s executed between the United States and a foreign country. The typical, I guess, example to point out, portfolio interest is exempt from tax by statute that I think it is Section 871(h). Nevertheless, the gross income paid must be reported on Form 1042-S. The income code for portfolio interest is 01 and the exemption code 05 Portfolio Interest Exempt under code. So annual for part one, and yes, even though there’s no tax withheld Form 1042-S still needs to be filed in certain situations.
Okay. Thank you so much for that answer. Okay. So, we have another question here, Sean, I’m going to direct this one towards you. So, the question is, as the Withholding Agent, if I issued a Form 1042-S to a recipient for dividends, but later discovered that the payment was a mixture of both Return of Capital and Dividends, how am I to correct this?
Anika, I like this question. It’s a really good one. So, overall, how does the Withholding Agent correct a 1042-S that was filed to both the IRS and to the recipient. The first thing I want everybody to pay attention to would be the Unique Form Identifier. Again, that’s a 10-digit code at the top of the form, it’s very special. To give an example, if a Withholding Agent issued an original Form 1042-S with $100 listed as dividends and later discovered that this $100 is really made up of $70 of dividends and $30 of return to capital. So, we have like a 70-30 split.
So, the Withholding Agent needs to correct this information. The Withholding Agent would file an amended Form 1042-S, right, with that correct dividend amount, so it’d be $70. So, it’d be the new dividend amount using that same Unique Form Identifier number, that’s the one on the top of the form that was used on the original Form 1042-S, it should be the same. And they would mark that as amendment number one, because this is the first time that they’re amending that erroneous original 1042-S. So that takes care of the $70 that was a dividend, now what about the remaining $30.
But at the same time, Withholding Agent would also file and furnish a new original Form 1042-S not amended but a new original Form 1042-S for that Return of Capital amount. So, this is the $30. And this one would be using a brand new Unique Form Identifier that was not used in any of the other filings by the Withholding Agent for that year. So, it is going to be completely new. So, we’re going to have that one amended 1042-S for that $70 in dividends, and a brand new original 1042-S with a new Unique Form Identifier for that remaining $30.
Now, just a reminder that that new original Form 1042-S should not be marked amended. Why? Because it’s not amending some other 1042-S that was filed previously for Return of Capital, right, so this is a brand new original 1042-S with its own brand new Unique Form Identifier. The amended one that should overwrite the original dividend amount of the $100 and replace it with the $70 and then the brand new one is the $30 for the return to capital. And that should take care of how to correct that particular issue.
Sean, thank you for that very detailed explanation. I’m sure our audience members really appreciate that. And I have one more question here. And I’m going to direct this question towards you, Ed. So, the question is, Form 1042-S can be extended for one month and then for second month. How can you obtain an extension for 6 months to match the Form 1042 extension?
Okay. Thank you. Yeah, that’s a very good question. And this is important, it’s especially important for all the partnership filers out there. So, the answer, generally, you cannot extend the 1042-S beyond the second month. I’m showing went over that earlier in the presentation. But and I went over this in the second part of the presentation, and I’m going to go over it again. However, certain partnerships can get up to 6 months to report certain payments. And, again, as I said earlier, specifically, the proposed regs that were issued on December 18, back in 2018, now allow partnerships or trust to withhold in a subsequent year with respect to a foreign partner’s or beneficiary’s share of income for the prior year and designate the deposit of the withholding as attributable to the preceding year.
So, if a partnership withholds, as I said early on a foreign partner’s share of income after March 15 of the subsequent year, the due date for filing and furnishing the forms now becomes September 15 of the subsequent year. So, for example, the partnership withholds on April 1, 2022 with respect to a foreign partner’s share of undistributed income for the 2021 calendar year, the partnership may designate the deposit as made for 2021 and report the liability and tax withheld under 2021 Form 1042-S for the partner.
But, and also this is very important, to get this September 15 extension, it’s very important that the partnership must also ensure that its Chapter 3 status code on such forms properly reflects its status as a partnership, including as a withholding partnership, because the partnership and withholding partnership, they get this special benefit. So, they got to check that box.
And also note, as I said earlier, the extended deadline of December 15, 2022, it’s also applicable when a partnership is reporting on 1042-S an allocation of income made after March 15 of the subsequent year to a foreign partner, even if no withholding is required. Even if no withholding is required, they still would be able to get that extension to September 15, if they follow the rules. So that was good question. and again, obviously, it’s important for all the partnerships out in the audience. So, you have to know this.
Oh, wow. Thank you for that explanation. We’re learning so much great information here today. I do have another question that came in. So, Sean, I’m going to ask that you take this one for us. So, the question is, do I have to file a Form 1042, if I already filed a Form 1042-S?
Oh, this is a good one. Yes. So, I’d like to give a long detailed explanation, but really good one. Absolutely, yes. The Withholding Agents, if they filed a 1042-S with the IRS and furnish the 1042-S to the recipients. They are required to file the Form 1042 with the IRS. It’s mandatory. So, if they’re filing a Form 1042-S or 1042-T that does not, those are information returns, right, the 1042-S and the 1042-T are information returns. The 1042 is the actual tax return. So, you can’t just file an information return without filing the tax return.
Filing 1042-S does not exempt the Withholding Agent from their requirements to file the tax return. Again, the 1042 is the tax return. So, the Form 1042 that consolidates and reports all the amounts on all the Forms1042-S that were filed by the Withholding Agent. So, it takes all that information, all the gross income all the withholdings and consolidates that onto the 1042, and that is what needs to be filed, so yeah. So, again, if you’re filing, if Withholding Agent is filing a 1042-S, they absolutely need to file Form 1042.
All right. Thank you, Sean, for that a great explanation. It looks like we have time for just one more question. So, Ed, I’m going to direct this question towards you. Why would you file Form 1042 and 1042-S, if the income recipient is not subject to withholding?
That’s a good question. Yeah, there are Withholding Agents, there are filers out there that somehow think that if you’re not subject to withholding then there’s no file required. But not being subject to withholding does not preclude the Withholding Agent from having to issue a 1042-S to the recipient of the gross income paid. It’s important every Withholding Agent must file an information return on Form 1042-S to report the amounts paid, yeah, the amounts subject to reporting on Form 1042-S are amounts from U.S. sources paid to foreign persons, including persons presumed to be foreign, or included in the U.S. payee pool that are reportable under Chapters 3 and 4, even if no amount is deducted and withheld from the payment because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee.
Remember, reporting on 1042-S and on Form 1042 may be required even if there is no withholding. So please remember that.
Ed, thank you so much for that response. These are some really great questions, and you all answered them very well. But audience, that is all the time that we have for questions. I want to thank Sean and Ed for sharing their knowledge and expertise and for answering your question. Before we close the Q and A session, Sean and Ed, what key points do you want the attendees to remember from today’s webinar? Sean let’s start with you.
Sure, Anika, no problem. So, the Form 1042-S is to be completed and filed by the Withholding Agent, not the recipient. Recipient information that’s used to complete the Form 1042-S by the Withholding Agent that should be validated against the account opening documents supplied by the recipients. Remember to the W-8 series or documentary evidence. The recipient should verify that this information is correct on the Forms 1042-S that they receive.
Withholding Agent can request extensions to file the Form 1042-S with the IRS and to furnish the Forms 1042-S to the recipients. The process for requesting both extensions is different so make sure you refer to the instructions. Significant penalties can apply for various failures. So definitely please make sure you’re submitting accurate information timely.
The 1042-S Data Integrity Tool, this is a great way for Withholding Agents to verify their 1042-S data before it’s submitted to the IRS, very easy to use and it’s free. Ensure the Unique Form Identifier field is completed on every Form 1042-S. This original number is unique to every original Form 1042-S. And if you’re amending an erroneous original Form 1042-S, ensure that the amended Form 1042-S has that same Unique Form Identifier as the erroneous original Form 1042-S. That’s it for me.
Thank you so much, Sean. So, Ed, do you have some takeaways to share?
I do have a few. The Form 1042-S, it’s less than one page, but the instructions are almost 40 pages. Please refer to the instructions early and often when preparing Forms 1042-S for your payees. I guess, as I said, when I answered one of the questions, you must file a Form 1042-S, even if you did not withhold tax under Chapter 3 because the income was exempt from tax under a U.S. tax treaty or the Code.
And, again, if you withheld at more than one tax rate for a specific type of income that you paid to the same recipient, you must file a separate Form 1042-S for each amount to which a separate rate was applied. There is no blending of tax rates when preparing Forms 1042-S. Again, under certain circumstances, it may be necessary to submit more than one form for the same recipient. And please try and complete all the required fields. And lastly, use only income, status, and exemption codes specifically listed in the instructions. That’s all I have.
All right. Thank you, Ed. So, thank you both, Sean and Ed. Audience, we are planning additional webinars throughout the year. To register for all upcoming webinars, please visit IRS.gov, keyword search, Webinars, and select the Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering certificates and continuing education credits for upcoming webinars. So, we invite you to visit our video portal at www.irsvideos.gov [not available]. There you’ll be able to find and view archived versions of our webinars. Please note, continuing education credits or certificates of completion are not offered if you view any version of our webinars after the live broadcast.
Another big thanks to our speakers, Sean Crowley and Ed Kromberg, for such a great webinar, for sharing their expertise and for answering your questions. I also want to thank you our attendees for attending today’s webinar Understanding Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Now, if you attended today’s webinar for at least 100 minutes after the official start times, you qualify for 2 possible CE credits. If you stayed on for at least 50 minutes from the official start time of the webinar, you qualify for one possible continuing education credit.
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