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Ten most common errors for completing the Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding

The Internal Revenue Service (IRS) continually develops strategies to build a tax administration to effectively deal with globalization and the international community.

In an effort to enhance the processing of Chapter Three Withholding (CTW) Program information returns, the IRS is providing withholding agents with the following 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. This communication alert is part of ongoing efforts to develop enhanced computer data consistency and validity controls to ensure the integrity, accuracy and completeness of Forms 1042-S submitted by Withholding Agents.

Top Ten Form 1042-S Processing Errors:

  1. Invalid income code entered in Box 1 (Income Code field). An entry is required in this box. The income code must accurately reflect the type of income paid. DO NOT leave blank or enter “00.”
  2. Invalid tax rate entered in Box 5 (Tax Rate field). An entry is required in this box. Enter the correct rate of withholding that applies to the income reported in Box 2 (Gross Income field) or Box 4 (Net Income field), as appropriate. Enter the tax rate using the following format: two digits, a decimal, and two digits (e.g., 04.95 for 4.95% or 30.00 for 30%).
  3. U.S. federal tax withheld reported in Box 7 (U.S. Federal Tax Withheld field) is inconsistent with a “valid tax rate.” This “math error” may result in the issuance of an error notice.
  4. Recipient code “20” (Unknown recipient) is entered in Box 12 (Recipient Code field) when a recipient’s name appears in Box 13 (Recipient’s Name and Address field). 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. 
  5. The recipients name entered in Box 13 (Recipient’s Name and Address field) is inconsistent with the recipient code entered in Box 12 (Recipient Code field).  For example, the “XYZ Pension Fund” is reported as an “Individual” (Recipient code “01”). 
  6. Box 14 (Recipient’s U.S. Taxpayer Identification Number (TIN)) does not report a TIN when exemption code “01” is entered in Box 6 (Exemption Code field).  If an account holder (recipient) does not provide a TIN on Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States, the form is invalid.  DO NOT enter exemption code “01” in Box 6.  Withhold tax at a rate of 30%.
  7. A Qualified Intermediary Employer Identification Number (QI-EIN) is entered in Box 14 (Withholding Agent’s EIN field) and Box 12 (Recipient Code field) reports a recipient code other than “12” (Qualified Intermediary).  In addition, the QI EIN checkbox in Box 14 is checked and the Withholding Agent EIN is not a QI-EIN.  Note:  A QI-EIN is for QI reporting purposes only and should not be used on any tax return other than Forms 1042, 1042-T, 1042-S or 945. 
  8. Country of residence entered in Box 15 (Recipient’s Country of Residence for Tax Purposes field) is inconsistent with the country code entered in Box 16 (Recipient’s Country Code field). The country code used must be a valid code taken from the Country Code Table. The use of “OC” or “UC” will generate an error condition.  If a recipient is claiming treaty benefits, the country code can never be “OC” or “UC.”
  9. Boxes requiring an entry are left blank.
  10. For all amount fields report in dollars only and right-justify.  You may round off cents to whole dollars.  To round, 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).    

Income Codes, Exemption Codes, and Recipient Codes are on pages 5 and 7 of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

References/Related Topics

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

Page Last Reviewed or Updated: 15-Dec-2014