Information Reporting for Forms 1042-S and 1042-T
Missing and Incorrect Information
IRS data indicates that a significant percentage of the Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, and 1042-T, Annual Summary and Transmittal of Forms filed with the Internal Revenue Service had incorrect or erroneous information, including invalid income codes, invalid tax rates, boxes requiring an entry left blank, and recipient identified as “Unknown.” In general, an “unknown recipient” is a recipient from whom no documentation, or incomplete documentation, has been received by a withholding agent. An unknown recipient is always subject to withholding at the maximum applicable rate. See the list of the ten most common errors found during the processing of Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.
Generally, if a Taxpayer Identification Number (TIN) is not provided on Form 1042-S, the withholding agent must apply tax at a rate of 30%. The TIN, name, and address of the recipient are required to be entered on the annual information forms for identification of the payee. The TIN is the social security number (SSN) issued by the Social Security Administration (SSA), IRS Individual Taxpayer Identification Number (ITIN), or an Employer Identification Number (EIN) issued by the IRS. Failure to report a TIN or a correct TIN may result in penalties assessed by the IRS. Refer to IRS Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs and/or Filing Forms 1042-S Without Payee Taxpayer Identification Numbers.
Completion of Withholding Certificate
Unless there is an exception, any withholding agent who receives a Form 8233 or, generally, a W-8BEN without a payee TIN for the purpose of claiming a tax treaty benefit is not allowed to grant that benefit until a proper Form 8233 or W-8 BEN that does report the payee's TIN is received. In short, this means that, in the case of payments to nonresident aliens, if an NRA does not report his/her TIN to the withholding agent or does not meet an exception, the withholding agent is required to withhold 30% federal income tax on the payment(s) and the NRA is not entitled to any tax treaty benefit until a TIN is provided.
Incorrect Reporting of Gross Income
It has come to our attention that a number of withholding agents are reporting substantial excess gross income paid and tax withheld. In many cases, the software programs are simply deleting the decimal point, resulting in an amount reported that is actually 100 times more than the actual amount paid or withheld (e.g., $152.13=$15213). We strongly recommend that all withholding agents review their programming documentation to assure they are not transmitting this error to the IRS, since this information forms the basis of exchange of information with U.S. tax treaty partners.
Withholding agents are requested to include the name, address and a telephone number of a contact with their submission of Forms 1042-S. This contact name and number should provide direct access to an individual who can answer questions about the statement(s). The telephone number, including any extension, should be a direct number and not a general business number.
Refer to Publication 1187, Specifications for Filing Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically or Magnetically for further information.