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IRS releases new Form 1042 instructions for FATCA withholding

Posted by William Byrnes on May 12, 2014

The IRS has released the Instructions for 2014 Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons to correspond to FATCA (Chapter 4 of the Internal Revenue Code).

A withholding agent must use Form 1042 to report the tax withheld on certain income of foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts, or 2% excise tax due on specified foreign procurement payments.

The IRS has provided the final 2014 version of the Form 1042 at this time for informational purposes in order to provide time for withholding agents and intermediaries to implement the new requirements of FATCA. The 2014 version of the Form 1042 reflects the new FATCA requirements and will be filed by taxpayers in 2015 to report with respect to 2014.  See link for the 2013 Form.

What changed?

The Form 1042 for 2014 has been modified from the previous Form 1042 primarily for withholding agents to report payments and amounts withheld under FATCA chapter 4 of the Code (chapter 4) in addition to those payments and amounts required to be reported under chapter 3 of the Code (chapter 3).

The 2014 Form 1042:

  1. adds lines for reporting of the tax liability under chapters 3 and 4,
  2. includes separate chapter 3 and 4 status codes for withholding agents, and
  3. provides for a reconciliation of U.S. source fixed or determinable annual or periodical (FDAP) income payments that are withholdable payments for chapter 4 purposes.

Withholding agents that make nonfinancial payments generally will not be affected by the new requirements under chapter 4.

When is Form 1042 Due?

Form 1042 is a calendar year tax return.  The Forms 1042 and 1042-S must be filed by March 15 of the year following the calendar year in which the income subject to reporting was paid. Thus, for the 2014 year, the filing date in Monday, March 16, 2015 (because March 15th is a Sunday).

Who Must File?

Every withholding agent or intermediary who has control, receipt, custody, disposal or payment of any fixed or determinable, annual or periodic U.S. source income must file an annual return for the preceding calendar year on Form 1042.

A withholding agent or intermediary must file Form 1042 if:

  • required to file Form(s) 1042-S (whether or not any tax was withheld or was required to be withheld),
  • Is a qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), participating foreign financial institution (FFI), or reporting Model 1 FFI making a claim for a collective refund under the respective agreement with the IRS,
  • pays gross investment income to foreign private foundations that are subject to tax under section 4948(a), or
  • pays any foreign person specified federal procurement payments that are subject to withholding under section 5000C.

(Chapter updates since November 2013 are available at https://profwilliambyrnes.com/category/fatca/)book cover

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters of the analysis of 50 FATCA experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance requirements (Chapters 17–34), including  information exchange protocols and systems.  The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, and insights as to the application of FATCA and the IGAs for BRIC and European country chapters.  complimentary chapter download: http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me: profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour” 

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