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.

Form 1042 – IRS makes some important changes

Last month IRS made changes to the instructions of Form 1042 – Annual Withholding Tax Return for US Source Income of Foreign Persons. As the readers may recall, IRS made some changes to Form 1042 earlier to coincide with the newly issued FATCA regulations under Chapter 3 and 4. The updated instructions were released to assist the withholding agents in preparing the Form. It is pertinent to note that although 2014 and 2015 versions of the Form are identical, IRS has made certain parts of the Form which were optional in 2014, as mandatory for 2015.

Following parts of Form 1042-S are accordingly mandatory for 2015:

  • Withholding agent’s Chapter 3 and 4 status code must be entered on page 1 under the withholding agent’s name.
  • Reconciliation of U.S. source fixed or determinable annual or periodical (FDAP) income in section 2 of Form 1042 must be completed. This schedule reconciles the total U.S. source FDAP income subject to withholding under Chapter 4 with the total amount of U.S. source FDAP income reported on Forms 1042-S.
  • It is required that withholding agents now summarize the reasons why the amounts were not subject to Chapter 4 withholding such as amounts paid with respect to grandfathered obligations, amounts paid that were characterized as excluded nonfinancial payments, etc.).

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.