Payments to foreign persons and 1042 – Don’t miss the March 15 deadline

IR 2017-43

The Internal Revenue Service today reminded non-U.S. citizens who may have taxable income, such as international students and scholars who may be working or receiving scholarship funds, that they may have special requirements to file a U.S. tax return.

The IRS also reminded withholding agents — such as payroll professionals or universities — that accurately filed Forms 1042-S help speed any refunds due to their non-U.S. citizen taxpayers. Errors on forms or returns could result in some refunds being delayed.

What Non-U.S. Citizen Taxpayers Must Do

The Internal Revenue Code generally requires non-U.S. citizens, whom the code defines as either resident or non-resident aliens, who are engaged in a trade or business within the U.S. to file tax returns. Non-resident aliens such as foreign students, teachers or trainees temporarily in the United States on F, J, M or Q visas are considered engaged in a trade or business.

Most individuals in F-1, J-1, M-1, Q-1 and Q-2 non-immigrant status are eligible to be employed in the U.S. and are eligible to apply for a Social Security number if they are actually employed in the United States. Those not eligible for an SSN but who have a tax filing requirement may request an Individual Taxpayer Identification Number from the IRS.

The non-U.S. citizen’s name must be reported exactly as it appears on the official documentation provided to the withholding agent (such as a Social Security Administration card or some other form of official governmental documentation).

Filing a Form 1040-NR or 1040NR-EZ is required by non-U.S. citizens who have a taxable event such as:

A taxable scholarship or fellowship, as described in Chapter 1 of Publication 970, Tax Benefits for Education;

  • Income partially or totally exempt from tax under the terms of a tax treaty; and/or
  • Any other income, which is taxable under the Internal Revenue Code.

Non-U.S. citizens also must attach one copy (generally Copy B) for each Form 1042-S received to their tax returns. Non-U.S. citizens should review the Form 1042-S to ensure it accurately reflects their name and income. If the form does not contain accurate information, they must contact the withholding agent for an amended Form 1042-S.

What Withholding Agents Must Do

Generally, non-U.S. citizens who have taxable income also may have withholding of taxes by the source of their income. Withholding agents are required to complete Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

Withholding agents must provide five copies of the Form 1042-S. Copy A should go to the IRS; Copies B, C and D to the recipient of the income; and copy E should be retained by the withholding agent. All information, including the name of the taxpayer, must match exactly on all copies of Form 1042-S.

If withholding agents create a substitute Form 1042-S, all five copies must be in the same physical format. The size, shape and format of any substitute form must adhere to the rules of Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. The official Form 1042-S is the standard for substitute forms.

A common error is to have a Form 1042-S listing two or more recipients in box 13a. The 2016 instructions to Form 1042-S have been updated to clarify that in the case of joint owners, Form 1042-S can only list one of the owners in box 13a.

Withholding agents should review Fact Sheet 2017-03, where they can find the latest changes to Form 1042-S instructions and common errors that delay processing of tax returns.

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Expatriates and new Trade Law

New trade laws were recently enacted after President Obama signed them into law recently.

One of the provisions is affecting child tax credit claimed by certain expatriates. Under the provisions of new law, expatriates claiming foreign earned income exclusion under IRC 911 will no longer be entitled to claim refundable child tax credit. The change is effective from the tax years beginning after December 31, 2014.

Pertinent to note here that IRC 911 exclusion limit for 2015 tax year is $100,800.

Flying over international waters and in U.S.? Flight attendant denied exclusion

Recently in Rogers case, the DC court affirmed the Tax Court’s decision that a flight attendant who performed some duties in and over the U.S. and international waters could not exclude all of her wages under IRC 911 as foreign earned income.

The taxpayer worked as an international flight attendant based in Hong Kong. She performed in-flight duties and some pre-departure and post-arrival work and was generally paid according to her flight time. She received vacation time and benefits, and could receive guarantee pay for work that she would have performed on flights that were canceled. When she received guarantee pay, she was required to remain in Hong Kong awaiting reassignment to another flight. The airline provided the taxpayer with an apportionment of her estimated duty time between minutes spent in or over foreign countries, in or over the U.S., and over international waters. The taxpayer and her husband filed a joint return and excluded all of the taxpayer’s earnings as foreign earned income under IRC 911.

IRS and later Tax Court disallowed the foreign earned income exclusion for the portion of income allocated to her time within U.S. and allowed exclusion only for the flight time that the taxpayer was outside the U.S.

Foreign earned income exclusion is claimed on Form 2555 and the taxpayer must meet either bona fide residence test or physical presence test. There are several exceptions and rules as well as planning opportunities. CPA Global Tax professionals can help you navigate this.

Important News from IRS

American Opportunity Tax Credit not available to students on F1 visas

The American Opportunity Tax Credit is available to help eligible students and their parents offset the cost of higher education by reducing the amount of the federal income tax they owe. If they don’t owe tax, the AOTC could result in a refund.

If a student is in the United States on an F1 Student Visa, the student would generally be considered a nonresident alien for federal tax purposes. A student who is a nonresident alien for any part of the tax year is not eligible and cannot claim the AOTC unless the student elects to be treated as a resident alien for federal tax purposes.

To learn more about resident and nonresident alien status and restrictions on claiming the education credits, read American Opportunity Tax Credit – Information for Foreign Students.

Now you can find your Social Security 1099 or 1042S online

If you receive Social Security benefits but did not receive or misplaced either form SSA-1099 or SSA-1042S, you may now view, print or replace the form online by creating a Social Security account.

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Form 3115 not mandatory for small taxpayers IRS says in IR-2015-29

The Internal Revenue Service today made it easier for small business owners to comply with the final tangible property regulations.

Requested by many small businesses and tax professionals, the simplified procedure is available beginning with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” said IRS Commissioner John Koskinen. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”

Thinking of abandoning green card without a formal surrender? Think again!

In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.

IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.

The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status

IRS posts revised FATCA regulations and finalizes new FATCA forms

IRS today announced that it posted the revised FATCA regulations in the Federal register for publication.

This contains the regulations coordinating chapters 3, 4, 61, and Section 3406 of the Internal Revenue Code as well as the revised final FATCA regulations.

Revised Forms:

IRS also posted on its website the revised certain FATCA Forms. These Forms were in draft form until now:

  • Form 1042
  • Form 8966
  • Form W-8BEN
  • Instructions to Form W-8BEN
  • Form W-8ECI
  • Instructions to Form W-8ECI

It  is important to note that the foreign entity receiving the US source FDAP income should file Form W-8BEN-E and is not eligible to file W-8BEN.