21.8.2  BMF International Adjustments (Cont. 1)

21.8.2.7 
Visa Holders - General

21.8.2.7.1 
Foreign Student/Nonresident Visitors - Exemption from FICA Tax

21.8.2.7.1.1  (10-01-2007)
Optional Practical Training

  1. Optional Practical Training (OPT) and Curricular Practical Training (CPT) are two different types of work permits that are available to students in F-1 or M-1 status.

  2. Optional Practical Training (OPT) is only available by application to USCIS and it is shown only on the student's F-1/ M-1 Employment Authorization Card (I-766/I-688B). The Employment Authorization card specifically states on the front that it is for "Student: Optional Practical Training" . The permit allows employment either on or off the campus of the university that issued the student’s Form I-20.

    1. F-1 or M-1 students often transfer to H-1 status before their OPT authorization ends. It is possible for someone who is currently in H-1 status to be eligible for a FICA refund provided the FICA was withheld from wages he or she earned while the OPT was in effect. He or she must meet the restrictions of IRC § 3121(b)(19).

      Note:

      Form I-797 is an approval notice used by USCIS to notify an applicant of the approval of any change in status. It is also used as a receipt notice when an application is received and is pending at USCIS.

    2. Students with H-1 status, who previously had been F-1, Q or M-1 visa holders, can obtain a refund of FICA withheld up to the date their status was changed to H-1, if their Employment Authorization Card (EAD) dates are current.

  3. Curricular Practical Training (CPT) is available to the F-1/ M-1 students only from the academic institution’s Designated School Official (DSO).

    1. The work permit is reflected only on the back of the student’s Form I-20 and is employer-specific.

    2. The student will not have an EAD for this kind of work authorization.

      Note:

      J-1 students are not required to apply to USCIS for an Employment Authorization Card (I-766/ I-688B). The work permit is issued by the Responsible Officer of the Exchange Visitor Program and it should be reflected on the student's Form IAP-66/ DS-2019.

21.8.2.7.2  (10-01-2013)
Validating Exemption/Qualification

  1. When an inquiry is received regarding a refund of erroneously withheld FICA tax, verify that the claim is valid, i.e.,:

    • Form 1040NR filed within the statutory period

    • Visa is exempt from FICA tax

    • Employee has provided a statement from the employer indicating the amount of the reimbursement the employer provided (if any) and the amount of the credit or refund the employer claimed, or was authorized by the employee to claim

  2. When a claim is filed, but research shows that there is no account on record and that no tax return was filed, do not process the claim. Correspond using Letter 916C, or Letter 513C to request the filing of Form 1040NR/NR-EZ. One of the following statements can be used:

    Use the statement that is applicable
    Because our records do not indicate a Form 1040NR being filed on your behalf, we are unable to process your claim. The Form 1040NR is an essential part of the erroneous withheld FICA process and therefore necessary to process your claim. If your Form 1040NR has been filed since submitting this claim, please resubmit this claim with the indication "1040NR " . If you have not filed, complete and submit a Form 1040NR with a copy of this claim we are returning to you, and this letter. Please indicate "1040NR filed" on your 843 claim.
    or
    Because we do not have a record of receiving an income tax return for this tax period, we are unable to process your claim at this time. Please resubmit your claim six weeks after the return is filed.

  3. When the employee filed a tax form other than the Form 1040NR, reject the claim as follows:

    1. Input TC 290 .00 with Blocking Series 18 or 15 for cases worked in CIS.

    2. Issue Letter 916C with the following statement:

    Letter Paragraphs
    Because our records indicate that you filed a Form 1040, U.S. Individual Income Tax return, we are unable to process your claim. The filing of the Form 1040 indicates that you are a resident of the United States for tax purposes. As a resident of the United States, you are not exempt from FICA Tax.
    or
    Because our records indicate that you filed a tax form other than the Form 1040NR, we are unable to process your claim. The Form 1040NR is an essential part of the erroneously withheld FICA tax process because it identifies you as a Nonresident Alien. Because you did not file the Form 1040NR declaring your Nonresident Alien status, you are not exempt from FICA Tax.

    Exception:

    Do not disallow claims from F-1 or J-1 Visa holders who elect under IRC § 6013(g) or IRC § 6013(h) to file a joint return with their spouse as a resident alien. These claimants continue to be exempt from FICA under IRC § 3121(b)(19) or IRC § 3121(b)(10).

  4. A teacher, researcher or trainee in the United States with a J or Q visa is not automatically exempt from FICA tax:

    1. If the teacher, researcher or trainee has visited the U.S. during any two of the six preceding calendar years as either a student, teacher, researcher or trainee, then he/she is no longer an "exempt individual" for the current year for purposes of the substantial presence test. Therefore, he or she must begin counting days from his/her very first day of arrival in the United States.

    2. After 2 years, a nonstudent under a J-1 visa status who was exempt from social security and Medicare taxes during his first two calendar years in the United States is considered a U.S. resident for tax purposes, and therefore is liable for FICA tax. The claim is not valid and must be disallowed.

      Note:

      Document I-94, Arrival/Departure Record, contains the entry and departure dates to determine if they have exceeded the qualification period.

    3. If it is determined that the claim is not valid, input TC 290 .00 with Blocking Series 98 or 99 to disallow the claim and issue Letter 105C with the following fill-in:

      Letter Paragraph
      We have disallowed your claim because in accordance with Internal Revenue Code §7701(b) you meet the substantial presence test and are considered a resident alien. Therefore, you do not qualify for exemption from FICA tax on wages.

    4. If the Visa status changes from an exempt F-1, J-1, M-1, or Q Visa type, the holder is then liable for social security and Medicare taxes (in accordance with IRC § 7701(b)) from the day the status is changed. For example, a change to H1 visa type.

      Note:

      T/P must provide documentation of exempt earnings up to the date the visa status changed. A copy of a pay statement with cumulative tax information is sufficient to support the claim for the exempt portion of the earnings.

    5. Dual Status filings may occur when residency status changes. Use care to properly adjust accounts when both a Form 1040 and a Form 1040NR are filed.

  5. A student in the United States with an F or M visa is not automatically exempt from FICA tax.

    1. Generally, a student is not exempt from FICA if he or she was exempt as a student, teacher, researcher or trainee for more than any part of five calendar years.

      Note:

      Check for Form 1040NR filing. Disallow if Form 1040NR was filed for more than 5 consecutive years.

    2. A student who has been exempt more than five years must be subject to the substantial presence test.

    3. If this individual meets the substantial presence test for the calendar year, he/she is considered a U.S. resident for tax purposes and therefore liable for FICA tax. The claim is not valid and must be disallowed. Input TC 290 .00 with Blocking Series 98 or 99 to disallow the claim and issue Letter 105C with the following fill-in:

      Letter Paragraph
      We have disallowed your claim because in accordance with Internal Revenue Code §7701(b) you meet the substantial presence test and are considered a resident alien. Therefore you do not qualify for exemption from FICA tax on wages.

  6. A student qualifies for exemption from FICA tax provided he or she can show evidence that he or she does not intend to reside permanently in the United States. Evidence may consist of, but is not limited to:

    1. Maintaining a tax home in a foreign country during the year

    2. Maintaining more significant contact (closer connection) with the foreign country, where the student has a tax home, than with the U.S.

    3. Being present in the U.S. for less than 183 days during the year (usually occurs in the final year of education or training)

    Note:

    These requirements are further explained in Publication 519, U.S. Tax Guide for Aliens.

  7. A claim received after the statute for refund has expired (i.e., a claim that was not timely filed) is not valid and must be disallowed. Check postmark date to determine timeliness. See IRM 21.8.2.1.5

    1. Send a 105C letter and state that the claim was not timely filed (include appeal rights).

    2. Input a TC 290 .00 with Blocking Series 98/99 on the requester's tax account to file the claim.

  8. A claim received with a J-2, F-2, H-1, or TN visa is not a valid claim and must be disallowed.

    1. Input a TC 290 .00 with Blocking Series 98/99 on the requester's tax account.

    2. Send 105C letter with the following fill-in:
      "We have disallowed your claim because, in accordance with Title 26, §3121(b), your entry visa does not qualify you for exemption from FICA tax on wages."

  9. A teacher, researcher, or trainee may qualify for exemption from FICA tax provided he or she is a resident of a country with which we have a Totalization Agreement - Bilateral Social Security Agreement, and provides a copy of the statement from the foreign country or the U.S. Social Security Administration exempting the individual's pay from U.S. social security tax but not foreign social security tax. See IRM 21.8.2.8, Totalization Agreement - Bilateral Social Security Agreements, for additional information.

21.8.2.7.3  (02-08-2012)
Processing Employee Claims

  1. All adjustments are done on the employer's Form 941 (Form 943 for H-2A claims) account and the resulting credit is transferred to the employee's account for refunding.

  2. A complete claim contains the following substantiation:

    • Completed and signed Form 843 claim for each employer. If the claim is for more than one employer, but otherwise complete with all required documentation, process the claim.

    • Form W-2 (If not provided, attempt to verify the withholding amount using Command Code (CC) IRPTR, attach a print and accept). If the visa status changed, a copy of the pay stub is needed to verify the FICA amount claimed.

    • A copy of your visa.

      Note:

      Canadian citizens are not required a visa to enter the United States directly from Canada for the purposes of visiting or studying.

    • Form I-94, Arrival/Departure Record, or other documentation showing the dates of arrival and departure.

      Note:

      Overseas filers no longer have the Form I-94 since the USCIS keeps this document when the student/visitor leaves the United States.

    • Form I-20 (for F-1/M-1 visa(s) only) or IAP-66/DS-2019 (for J-1 visa only).

    • Form 8316 or signed claim/statement verifying that unsuccessful attempts have been made to obtain a refund from the employer. Statements in lieu of the Form 8316 must include all the information requested on the Form 8316.

      Note:

      Form I-766 or I-688B (Employment Authorization Document) is issued by USCIS and is needed only if the student is engaged in optional practical training. See IRM 21.8.2.7.1.1.

  3. If the employee has filed the appropriate tax return (Form 1040NR) and submitted the proper documentation, do the following:

    1. Verify the employer has filed the final quarter Form 941 for the tax year corresponding to the claim.

    2. If the employer's return for the final quarter is not located or the account is in balance due status, adjust the preceding quarter, which must be within the same tax year;

      Example:

      If the final quarter for the tax year ending 200812 is not located, adjust 200809, then 200806 or 200803 in that order.

    3. If the employer's full paid Form 941 account can't be located, research CC ENMOD and/or Corporate Files on Line (CFOL) to check for the possible usage of another EIN due to a takeover, merger, etc.

    4. If, after all available research has been exhausted, you are still unable to determine the filing of a return, or a full paid module, or the employer is in a balance due status for all quarters of the tax year in which the claim was filed, disallow the claim on the requester's income tax account. Refer to IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures; include the following statement in the disallowance letter:

      Letter Paragraph
      Because our records do not indicate any payments being remitted to the Internal Revenue Service on your behalf for the particular tax period in question, we cannot allow the refund. You should contact your employer for the refund or to have him/her supply us with information substantiating that the payments corresponding to the taxes in question were paid.

      Note:

      If the balance due on the employer's account (Form 941) is because of a penalty, the FICA claim may still be processed. (Take steps to avoid creating an unpostable.)

  4. If an incomplete claim for FICA tax is received:

    1. Send Letter 513C to the claimant requesting that the employee seek reimbursement from the employer. Return the Form 843 claim to the requester. "X" out the IRS received date on the Form 843 prior to mailing.

    2. When sending a 513C to the employee, also send a Letter 512C to the employer advising the employer to reimburse the employee for any erroneously withheld FICA taxes and to take an adjustment to the currently filed Form 941/943 (or file Form 941-X). Beginning January 2009, the employer must file a Form 941-X or Form 943-X to correct the errors since the Form 941C is obsolete (except for 200812 tax periods). Employers will no longer file Form 941C for corrections to employment issues.

      Note:

      These two letters are issued at the same time and reference each other in their content.

      Exception:

      Do not send Letter 512C to the employer if the claimant submits a signed Form 8316 indicating they have unsuccessfully attempted to obtain reimbursement from their employer.

  5. Refer to IRM 21.5.3, General Claims Procedures, for information on claim processing.

21.8.2.7.3.1  (10-01-2013)
Adjusting Employee Visa Claims (Employer's Account - BMF)

  1. When the employee has filed the appropriate tax return (Form 1040NR), submitted the proper documentation, and you have located the employer's Form 941/943:

    • Input a TC 291 with appropriate Item Adjustment Codes to abate the student's portion of the FICA/Medicare wages and tax on the employer's account.

      Caution:

      Pay special attention if a TC 606 is present in the employer's account. This transaction reverses when the TC 291 posts, which will cause the credit transfer part of the process to unpost if TC 606 is not addressed. See IRM 21.5.8.4.1, IDRS Guidelines for Credit Transfers, for additional information.

    • Use Hold Code 4 and Blocking Series 15.

    • Use Priority Code 8, if applicable, to avoid Unpostable Code (UPC) 328 RC 2.

    • FLC 60.

    • Category "IETP."

    • Source Document (SD) employee portion of FICA (Attach Form 843 to the adjustment).

    • Acknowledge all transactions that may be restricting the account. Do not overlay the "CORR DATE" field.

    • Transfer credit from the employer's account to the employee's account. See (2) below.

    • Inform the employer of the adjustment action using Letter 288C.

    • It is imperative to send the employer a 288C Letter. Combined Annual Wage Reporting (CAWR) will assess additional tax on the employer's account if the employer does not file an amended Form 941, (Form 941-X beginning in 2009), W-2C, and W-3C to correct the wages.

      Note:

      The Letter 288C open paragraph fill-in must contain the following statement:

      Letter Paragraph
      Because you did not reimburse the social security tax withheld from your foreign employee, (name, SSN of employee), when we sent you a 512C Letter: _________, we have adjusted the wages in the amount of $x,xxx.xx and refunded the social security tax erroneously withheld to the employee. Please adjust your account accordingly on the attached Form 941-X or Form 943-X for your portion of the tax. Form W-2C also needs to be filed.

    • If the employer was not sent the 512C letter, use it in lieu of the 288C letter. See IRM 21.8.2.7.3 (4).

    • The letter 512C open paragraph fill-in must contain the following statement:

      Letter Paragraph
      Because you did not reimburse the social security tax withheld from your foreign employee (name and SSN of employee), we have adjusted the wages in the amount of $x,xxx.xx and refunded the social security tax erroneously withheld to the employee. Please adjust your account accordingly on the attached Form 941-X or Form 943-X for your portion of the tax. Form W-2C also needs to be filed.

  2. When transferring the erroneously withheld FICA credit from the employer's account to the employee's account, input the following on IDRS using CC ADD24:

    • Input TC 820 (for the amount of the TC 291) to the employer's account (Form 941). Use the normal (un-extended) due date of the Form 941 or Form 943, or the payment date (whichever is later) as the transaction date, and enter a two cycle Posting Delay Code. If there will be credit remaining on the account after the credit transfer posts, input TC 570 on this transfer and a TC 571 with a Posting Delay Code 4. If the employer account being adjusted has a balance due in the account being adjusted, do not use a TC 820. Instead, input a TC 652 or 672 to avoid an unpostable situation (Unpostable Code (UPC) 325). Apply credits (TC 650/670) beginning with most current paid date.

      Caution:

      When the module balance is less than the erroneously withheld FICA credit, follow standard adjustment procedures, which may require adjusting or moving a credit from a prior quarter.

    • Input TC 700 to the employee's account with a secondary TC 570 if a manual refund is being issued (when withholding is required on the interest). Use the normal due date or the payment date (whichever is later) of the Form 1040NR as the transaction date.

      Note:

      When changing a credit date, an override code "2" is needed on both the debit and credit parts of the transfer to bypass the debit/credit date consistency check.

21.8.2.7.3.2  (10-01-2013)
Adjusting Employee Visa Claims (Employee's Account - IMF)

  1. Determine if the employee is entitled to interest on the amount of FICA tax erroneously withheld, using either his or her return due date or any other applicable date. Interest is allowed on:

    • Prior and current year returns/claims worked after the 45-day interest-free period.

      Note:

      To determine interest "from" and "to" calculation dates, refer to IRM 20.2.4, Overpayment Interest.

    1. If entitled, the interest must be manually computed using Command Code COMPA or ACT/DMI, InterestNet. See IRM 20.2.6.4, Interest Computation Tools.

    2. If the employee is not entitled to interest, skip the interest withholding procedures. Follow local procedures to allow a computer-generated refund.

  2. When the employee is entitled to interest, determine the correct tax rate and amount of tax to be withheld from interest, if applicable, per IRC § 1441. A manual refund must be prepared if withholding tax from interest. Refer to related tax treaty amounts in Publication 901 and Publication 515.

    Caution:

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  3. Procedures for tax withheld from refund interest on the employee account (IMF):

    1. Prepare four-part Form 5205.

    2. Prepare five-part Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.

    3. Input a TC 290 .00 with a TC 770 for the total amount of tax withheld from refund interest (typically 30% of the amount determined in Paragraph (1) above, see IRC § 1441 for the 14% exception). Use Blocking Series 18 or 15 for cases worked in CIS, Source Code 1, Reason Code 099, file location code 98, Hold Code 4 and a 2 cycle posting delay (use 6 cycle posting delay if Form 1040NR was sent to be processed), SD (attach a copy of the Form 843 claim), part 4 of Form 5205, and Copy E of Form 1042-S. The "CR-INT-TO-DT" for the TC 770 will be the refund schedule date of Form 5792.

    4. Prepare Form 3809 with a TC 850 to debit the employee's account and a TC 730 to credit the 4610 Account (NMF) for the amount of tax being withheld from refund interest. The debit date of TC 850 is the 23C Date of the posted TC 770. The credit date of TC 730 is the "CR-INT-TO-DT" for the TC 770.

      Reminder:

      See IRM 21.4.4.5.1, Monitoring Manual Refunds, for monitoring requirements.

  4. Prepare the manual refund, Form 5792, for processing to the employee's account. Prior to preparation of the manual refund, check for any outstanding balances due under the employee's TIN or Individual Taxpayer Identification Number (ITIN). Offset to pay outstanding balances prior to determining the overpaid amount.

    • The overpayment amount is the amount of the employer's tax decrease, which has been transferred to the employee's account as a TC 700. See IRM 21.8.2.7.3.1(2), Adjusting Employee Visa Claims (Employer's Account - BMF).

    • The TC 770 amount, when applicable, is the net interest amount calculated in Paragraph (3) (c) above.

    • The TC 840 is the total of these two amounts.

  5. Submit the manual refund document (with the interest calculations), and all other forms and research along with the claim, to the manager for review.

  6. Once the manager has given approval, forward Form 5205, Form 843 Claim, Form 1042-S (copies A thru D), Form 5792 (manual refund document), entire Form 3809, and the interest computation sheet to Accounting.

  7. Examples of these completed forms can be found in related training materials.

21.8.2.7.4  (10-01-2013)
Claims from the Employer

  1. Employer claims must be filed on the appropriate Form 94XX when requesting a refund for erroneously withheld FICA. See IRM 21.7.2.5.11.2, Employer Claims Involving Foreign Students, for processing these claims.

21.8.2.7.5  (10-01-2013)
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21.8.2.8  (10-01-2007)
Totalization Agreements- Bilateral Social Security Agreements

  1. The United States has entered into Bilateral Social Security Agreements with many foreign countries in order to eliminate dual coverage and dual contributions to the social security system for the same work.

  2. The Bilateral Social Security Agreement generally ensures that social security taxes (including Self Employment (SE) tax) are paid to only one country. See IRM 21.8.2.8.3, Claims of Exemption from FICA Tax by Reason of Bilateral Social Security Agreement, for a list of countries.

21.8.2.8.1  (10-01-2012)
Substantiation of Exempt Status

  1. In order for an individual or for the individual's employer to substantiate the individual's exemption from FICA under the terms of a Bilateral Social Security Agreement, the individual or his or her employer must secure an Exemption Statement (a certificate of coverage) from either the country in which the individual is employed or the individual's country of residence.

  2. Some of the countries with which the U.S. has agreements do not issue certificates of coverage. In those cases, the employee or the employer must request a statement from the following address:

    Social Security Administration
    Office of International Operations
    P.O. Box 17741
    Baltimore, MD 21235-7742

  3. For the employee or the employer to establish that the employee's income is subject to only U.S. social security tax, the U.S. employer can obtain more information or get a determination by:

    • Writing to the address in paragraph (2) above

    • Calling 1-800-772-1213, or 410-965-1977

    • Faxing to 410-966-7025, or

    • Accessing the SSA Web site at http://www.ssa.gov/international

  4. Correspondence for exemption statements must include:

    • The employee's name

    • The employee's U.S. social security number

    • The employee's date and place of birth

    • The employee's citizenship

    • The employee's country of permanent residence

    • The employee's place and date of hiring

    • The employer's name and address in the United States and in the foreign country

    • The beginning date and the expected ending date of the employee's employment in the foreign country

    • The U.S. employer point of contact information (name and telephone number) to verify the employment information.

      Note:

      Some countries may require additional information. Access the SSA's website at http://www.ssa.gov/international/agreement_descriptions.html

      .

  5. The Exemption Statement must be maintained by the employer as it establishes that the employee's pay is exempt from taxation in the foreign country.

21.8.2.8.2  (10-01-2012)
Social Security Tax Obligation

  1. Use the following charts to determine the taxpayer's (U.S. citizen or resident alien) social security tax obligation when working in a foreign country:

    If... Then...
    Sent abroad by a U.S. employer for less than 5 years The taxpayer pays U.S. social security tax only.
    Sent abroad by a U.S. employer for more than 5 years The taxpayer pays foreign social security tax.
    Working for a foreign employer The taxpayer pays the foreign social security tax only, unless the foreign employer is an affiliate of a U.S. employer that has entered into the contract coverage under Title II of the Social Security Act with the U.S. Treasury Department, by filing a Form 2032, Contract Coverage under Title II of the Social Security Act, with IRS that has been approved.
    Working for the U.S. government Taxpayer pays U.S. social security tax only.
    Self-employed Taxpayer pays based on residency.

    Note:

    IRC § 3121(l) addresses a foreign employer affiliated with a U.S. company that has been accepted, in which case United States citizen and resident employees of that foreign employer are subject only to U.S. social security taxes if working for 5 years or less for the foreign employer.

  2. Use the following charts to determine the taxpayer's (foreign persons, including resident aliens for income tax purposes) social security tax obligation when working in the United States:

    If... Then...
    Sent by a foreign employer for less than 5 years in the United States Taxpayer pays foreign social security tax only.
    Sent by a foreign employer for more than 5 years in the United States Taxpayer pays U.S. social security tax only.

21.8.2.8.3  (10-01-2013)
Claims of Exemption from FICA Tax by Reason of Bilateral Social Security Agreement

  1. Claims of erroneously withheld FICA tax must include:

    • Form 843, Claim for Refund and Request for Abatement

    • Copy of Form W-2 (to prove the amount of social security and Medicare taxes withheld)

    • Social Security Tax Exemption Statement

    • A signed statement from the employee, or from the employer, or Form 8316, Information Regarding Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type, whichever is applicable

    • A copy of Form I-94 (or other documentation showing the dates of arrival and departure)

    Note:

    Copy of Visa or Form I-94 is needed only if not a U.S. citizen.

    Note:

    Overseas filers no longer have the Form I-94 since the USCIS keeps this document when the student/visitor leaves the United States.

  2. The signed statement included in the claim must state that unsuccessful attempts have been made to secure refund of the erroneously withheld FICA tax from the employer. A Form 8316 may be used for this purpose.

  3. The claim is only valid when it involves one of the countries with which the U.S. has a Bilateral Social Security (Totalization) Agreement. The following is a list of those countries:

    • Australia

    • Austria

    • Belgium

    • Canada

    • Chile

    • Czech Republic

    • Denmark

    • Finland

    • France

    • Germany

    • Greece

    • Ireland

    • Italy

    • Japan

    • Luxembourg

    • Netherlands

    • Norway

    • Poland

    • Portugal

    • South Korea

    • Spain

    • Sweden

    • Switzerland

    • The United Kingdom

21.8.2.8.4  (10-01-2012)
Processing Bilateral Agreement Claims

  1. All bilateral agreement claim adjustments are input on the employer's Form 941 and the resulting credit is transferred to the employee's account for refunding. See IRM 21.5.3, General Claims Procedures.

  2. If the employee has filed the appropriate tax return and submitted the proper documentation, process as follows:

    1. Verify that the employer has filed the final quarter Form 941 for the tax year corresponding to the claim.

    2. If the employer's return for the final quarter is not located, or the account is in balance due status, adjust the preceding quarter, which must be within the same tax year.

      Example:

      If the final quarter for the tax year ending 201112 is not located, adjust 201109, then 201106, then 201103 in that order.

    3. If the employer's full paid Form 941 account cannot be located, research CC ENMOD and/or CFOL to check for the possible usage of another EIN due to a takeover, merger, etc.

    4. If, after all research available has been exhausted, and it cannot be determined that a return has been filed, that a full paid module exists, or the employer is in balance due status for all quarters of the tax year in which the claim was filed, reject the claim and include the following statement:

      Letter Paragraph
      Because our records do not indicate any payments being submitted to the Internal Revenue Service on your behalf for the tax period in question, we cannot allow the refund. You should contact your employer either for the refund, or to have him/her supply us with information substantiating that the payments corresponding to the taxes in question were paid.

    Exception:

    If the balance due on the employer's account (Form 941) is because of a penalty, the claim may still be processed. Take steps to avoid creating unpostable transactions.

21.8.2.9  (10-01-2007)
Foreign 1120 Series Returns

  1. Every foreign corporation must file a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, or Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation, if the corporation:

    • Is engaged in a trade or business in the United States any time during the taxable year.

    • Has income from United States sources that is not effectively connected with the conduct of a trade or business within the United States if tax liability is not fully satisfied by withholding of tax at source (See IRM 21.8.1.11.11, Non-Effectively Connected Income).

    • Has income that is, or is treated as if, effectively connected with the conduct of a trade or business within the U.S. (See IRM 21.8.1.11.10, Effectively Connected Income).

    • Has overpaid U.S. income tax and is requesting a refund.

  2. Refer to Form 1120-F instructions for others who must file.

  3. Refer to IRM 21.7.4, Income Taxes/Information Returns, for general adjustment procedures.

21.8.2.9.1  (10-01-2007)
Form 1120-F, Income Tax Return of a Foreign Corporation

  1. Form 1120-F is used to report a foreign corporation's U.S. income, gains, losses, deductions, and credits, to figure its income tax liability, and to claim any refunds due.

  2. A foreign corporation can be engaged in a trade or business in the United States, with or without having an office or other fixed place of business in the United States.

    1. If the foreign corporation does not have a U.S. office or other fixed place of business, then it is only taxed on its effectively connected income from U.S. sources.

    2. If it has an office or other fixed place of business in the United States, then it is taxed on effectively connected U.S. and foreign source income.

21.8.2.9.2  (10-01-2012)
Form 1120-F Filing Requirements

  1. A foreign corporation's due date to file depends on whether it has an office or place of business in the United States.

  2. For a foreign corporation that does not maintain an office or place of business in the United States, the Form 1120-F return is due the 15th day of the 6th month after the end of its tax year, unless an extension is filed. See IRM 21.8.2.1.5, Timeliness Determinations.

    1. To request an extension of time to file, a foreign corporation files Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, on or before the return due date.

    2. A foreign corporation is considered a taxpayer abroad within the meaning of IRC § 6081(a) and therefore may request an extension beyond six months. (See IRM 3.11.16, Corporate Income Tax Returns, for guidance.)

  3. A foreign corporation that maintains an office or place of business in the United States must either file Form 1120-F by the 15th day of the 3rd month after the end of its tax year, or get an extension of time to file. To get an extension, the corporation may either:

    1. File Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, by the return due date to request a 6-month extension.

    2. Get a 3-month extension by attaching the statement described in Treas. Reg. §1.6081-5 to Form 1120-F. If additional time is needed beyond the 3-month extension, then a Form 7004 must be filed before the end of the 3-month extension to obtain up to an additional 3 months to file.

  4. Extensions do not extend the time for payment of the tax. Tax must be paid by the due date of the return, without extensions.

21.8.2.9.3  (10-01-2013)
Payment of Tax Due - Form 1120-F

  1. A foreign corporation's requirement for payment of tax depends upon whether or not the corporation's estimated tax is $500 dollars or more.

    1. A foreign corporation that expects its tax liability to be $500 or more must make estimated tax payments. The payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year.

    2. A foreign corporation that expects its tax liability to be less than $500 does not have to make estimated tax payments. The payment of tax is due at the time the return is due.

  2. Regulation 153340-09 sets forth that corporations must make all Federal Tax Deposits electronically.

  3. Branch profits tax assessed under IRC § 884 is not includible in total tax when determining the required annual payment of estimated tax. See IRM 20.1.3.3.1.1.4, Foreign Corporations. If an estimated tax penalty was assessed, re-compute the penalty by using the sum of Section I, Line 11, Schedule J, line 9, to compute the required annual payment. Use the Statutory Exception - Penalty Reason Code 044.

    Exception:

    If the amount on line 4 of Schedule J in Section II is zero, abate the entire penalty. For additional information, see IRM 20.1.3.3.1.1.4, Foreign Corporations.

  4. All deposits posted to the Master File are used to verify the taxpayer's Form 2220 computations. Use the TC 660 amounts and dates when verifying the estimated tax liabilities. The taxpayer receives a notice if the amount of credits claimed on the return is more than the credits posted to Master File.

21.8.2.9.4  (01-05-2011)
Deposits Made by Foreign Corporations

  1. Regulation 153340-09 sets forth that corporations must make all Federal Tax Deposits electronically.

21.8.2.9.5  (10-01-2007)
Computing Tax on Form 1120-F

  1. Form 1120-F filers that have effectively connected income:

    1. Are engaged in a trade or business in the United States and are taxed at regular corporate rates

    2. Complete Section II of the Form to compute tax

      Note:

      1120-F Returns with effectively connected income are processed with Document Code 67 (60367-XXX-XXXXX-X or 78367-XXX-XXXXX-X).

  2. Form 1120-F filers that do not have effectively connected income:

    1. Are not allowed deductions against this income

    2. Are taxed at a flat 30%, or lower treaty rate, on this type of income

    3. Complete Section I of the form to compute tax

    Note:

    1120-F Returns without effectively connected income are processed with Document Code 66 (60366-XXX-XXXXX-X or 78366-XXX-XXXXX-X).

21.8.2.9.6  (10-01-2007)
Tax Adjustments - Form 1120-F and Form 1120-FSC

  1. When adjusting BMF international tax accounts using CC REQ54, or transferring credits using CC ADD24/ADD34/ADD48, input a filing location code (FLC) of 78 or 60 according to the primary location code shown on TXMOD or ENMOD. Input FLC 78 for primary location code 78 and FLC 60 for primary location code 60.

    Exception:

    An FLC 78 or 60 should be input on any BMF international tax adjustment or credit transfer for audit trail purposes, regardless of the location code shown on TXMOD or ENMOD.

  2. All tax decrease adjustments in excess of ≡ ≡ ≡ ≡ ≡ ≡ on Form 1120-F and Form 1120-FSC must be sent to Examination for classification.

  3. Refundable credits are not automatically audit criteria.

  4. Refer to IRM 21.7.4, Income Taxes/Information Returns, for general procedures for processing.

21.8.2.9.6.1  (05-20-2011)
180-Day interest-free Period for Chapter 3 Withholding

  1. P.L. 111-147, the Hiring Incentives to Restore Employment Act (HIRE) enacted on March 18, 2010, amended IRC 6611(e), Interest on Overpayments by adding new paragraph IRC 6611(e)(4).

  2. IRC 6611(e)(4), "Certain Withholding Taxes," provides that in the case of any overpayment resulting from tax deducted and withheld under chapter 3 or 4 of the Code, Code section 6611(e)(1), (2), and (3) shall be applied by substituting “180 days” for “45 days” each place it appears.

    Note:

    For further information regarding Chapter 4 withholding refer to IRM 20.2.4.7.6, 180-Day Rule

  3. One effect of this change means any refunds issued based on credits from Chapter 3 withholding, due to amended returns filed after the date of enactment now carry a 180-day interest-free period instead of a 45-day interest-free period.

  4. Chapter 3 refers to withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations.

  5. Other transactions related to IRC Chapter 3 withholding are dispositions of U.S. real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U.S. trade or business.

  6. Refunds of Chapter 3 withholding can be taken on Income Tax Returns, Partnership Returns where withholding is made under Section 1446, and forms used by withholding agents to report tax withheld at source under sections 1441 through 1443.

  7. Master File programming has been completed to account for the 180-day period on overpayments of Chapter 3 withholding on original returns, amended returns, and IRS-initiated adjustments. For amended returns, Master File will apply the 180-day processing routine of IRC section 6611(e)(2) to an overpayment originating from TC 766 with Credit Reference Number (CRN) 330 through 333. If priority code 3 is also included on the record, the 180-day processing routine of IRC section 6611(e)(3) will be employed. For additional information on the 180-day interest-free period, refer to IRM 20.2.4.7.6, 180-Day Rule.

21.8.2.9.6.2  (10-01-2013)
Refundable Credits - Form 1120-F and 1120-FSC

  1. Refundable credits are claimed on Form 1120-F, lines 5a through 5i. The following types of credits are claimed on line 5i:

    • Foreign Investment in Real Property Tax Act (FIRPTA) credit on Form 8288-A. Credit Reference Number (CRN) 332.

    • Partnership credits on Form 8805. CRN 331.

    • Withholding at source on Form 1042-S. CRN 330.

    • U.S. income tax withheld. Transaction Code (TC) 766.

  2. To claim line 5i credits, the withholding statement must be attached (Form 8288-A, Form 8805, and/or Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, or a statement from the withholding agent in support of the amount actually withheld).

    Caution:

    Withholding agents may make payments to disregarded entities but they should not include them as a recipient on Form 1042-S. The withholding agent must file a corrected Form 1042-S if they do. See Payments Made to Persons Who Are Not Recipients on Page (8) of the Form 1042-S Instructions at: http://core.publish.no.irs.gov/instrs/pdf/64278y13.pdf, for additional information. If you cannot match the name and TIN on the Form 1042-S to the recipient's account, do not allow the credit(s). Follow no consideration procedures in IRM 21.5.3.4.6.3, No Consideration Procedures. Advise the withholding agent the claim cannot be considered until a corrected Form 1042-S is filed.

  3. The statement or document from a withholding agent which is submitted in lieu of a Form 1042-S, must include:

    • Name and address of the withholding agent

    • The agent's U.S. TIN

    • Name in which the tax withheld was reported

    • Country code and income code tax rate

    • Gross income and tax withheld

    Note:

    These refundable credits are considered Chapter 3 Withholding credits and are subject to the 180-day interest-free period. For more information on the 180-day interest-free period refer to IRM 20.2.4.7.6, 180-Day Rule

  4. Before allowing the credit, verify the following:

    • Form 8288-A for all dollar amounts (the credit must be on the Form 13698, International Credit Verification Slip.)

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

      Exception:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Form 1042-S for all dollar amounts, research EIN of the withholding agent to ensure Form 1042 has been filed to report at least the amount of the credit claimed. Allow credits that can be verified using CC IRPTR. See IRM 21.8.1.11.14.1, Claims for Tax Withheld at Source, for additional procedures.

    • Form 1099, verify amount shown in withholding box. Allow credits that can be verified using CC IRPTR.

      Note:

      These refundable credits can be allowed without prior Examination Classification.

  5. To allow the credit use TC 290.00 and the appropriate CRN (330 through 333) for the amount of the credit. The CRN will generate TC 766.

    Note:

    To reverse the credit use TC 290.00 and the appropriate CRN with a (-).

  6. Refundable Credits are claimed on Form 1120-FSC lines 2a through 2g. The types of credits claimed on line 2g are:

    • Withholding at source on Form 1042-S

    • U.S. income tax paid

  7. To claim line 2g credits, the withholding statement must be attached. Before allowing the credit, verify the following:

    • Form 1042-S: Research EIN of withholding agent to ensure Form 1042 has been filed to report at least the amount of the credit claimed. See IRM 21.8.1.11.14.1, Claims for Tax Withheld at Source, for additional procedures.

    • Form 1099: Verify amount shown in the withholding box

      Note:

      These refundable credits can be allowed without prior Examination Classification and follow the same CRN regime as noted in paragraph 4.

21.8.2.9.7  (10-01-2013)
Adjusting Penalty and Interest

  1. Penalties and interest are often assessed because a foreign corporation with no U.S. office filed timely, i.e., June 15th if a calendar year taxpayer, and was erroneously classified as a foreign corporation with a U.S. office with a due date of the 15th day of the 3rd month after its year end, i.e., March 15th if a calendar year taxpayer. Verify whether the foreign corporation has a U.S. office by its answer to question D(3) on Form 1120-F.

  2. Follow normal procedures to adjust penalties and interest. See IRM 20.1, Penalty Handbook, and IRM 20.2, Interest.

21.8.2.9.8  (10-01-2007)
Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation

  1. A corporation must have elected to be treated as a Foreign Sales Corporation (FSC), or small FSC, by filing Form 8279 prior to October 1, 2000, and the election must still be in effect.

  2. Form 1120-FSC is used to report income, gains, losses, deductions, and credits of an FSC. It is also used to figure the FSC's income tax liability.

  3. The FSC may be organized under the laws of certain qualifying foreign countries or territories of the United States, excluding Puerto Rico.

  4. Foreign corporations that elected FSC status may not claim the benefits of any U.S. tax treaty.

  5. An FSC that is a member of a controlled group must check the box on line 1 of Schedule J of the 1120-FSC and attach Schedule O of Form 1120. If Schedule J is not complete, or if the controlled group box is not checked, a math error results and the tax is increased to the 35% tax rate. The taxpayer must provide a corrected apportionment plan in order to allow the reduced tax rate.

21.8.2.9.9  (10-01-2009)
FSC Repeal and Extraterritorial Income Exclusion

  1. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 effected the following changes:

    • Generally repealed the FSC rules

    • Provided taxpayers with an exclusion, which is figured on Form 8873, Extraterritorial Income Exclusion

    • Provided transition rules for existing FSC's

  2. In general, the extraterritorial income exclusion applies to taxpayers with respect to transactions entered into after September 30, 2000. However, the exclusion does not apply, but the FSC provision does apply to any transaction in the ordinary course of trade or business involving a FSC that occurs:

    • Before January 1, 2002, or

    • After December 31, 2001, pursuant to a binding contract that is in effect on September 30, 2000 and thereafter, and is between the FSC (or a person related to the FSC) and a person other than a related person in a taxable year that begins before May 10, 2007

    Note:

    More information on binding contracts is contained in the instruction booklets for Form 1120-FSC and Form 8873.

  3. Taxpayers may elect to apply the extraterritorial income (ETI) exclusion rules instead of the FSC rules for transactions entered into during the transition period stated in (2) above. The election is:

    • Made by checking the box on line 2 of Form 8873

    • Made on a transaction by transaction basis

    • Effective for the tax year for which it is made, and for all subsequent tax years

    • Not applicable for transactions entered into before October 1, 2000

    • Revocable only with the consent of the IRS

      Note:

      The American Jobs Creation Act of 2004 repealed the ETI Exclusion Provision generally for transactions after 2004 subject to the transition rule.

  4. If an FSC has no foreign trade income for any 5 consecutive tax years beginning after December 31, 2001, the FSC is no longer treated as an FSC for any tax year beginning after that 5 year period.

  5. Form 1120-FSC is processed at the Ogden IRS Campus. However, a corporation that makes an election to be treated as a domestic corporation under IRC § 943(e)(1) must file Form 1120 or 1120-A at the campus address listed in the Form 1120 instruction booklet under the "Where to File" section.

    Note:

    IRC § 943(e)(1) was repealed for tax years beginning after 5/17/2006.

21.8.2.9.10  (10-01-2010)
Payment of Tax Due - Form 1120-FSC

  1. An FSC must pay the tax due in full no later than the 15th day of the 3rd month after the end of its tax year.

  2. Regulation 153340-09 sets forth that corporations must make all Federal Tax Deposits electronically.

21.8.2.9.11  (10-01-2007)
Underpayment of Estimated Tax - Form 1120-FSC

  1. An FSC with a tax liability of at least $500 that fails to make estimated tax payments when due may be subject to an estimated tax penalty for the period of underpayment. To avoid the estimated tax penalty, the FSC must make estimated tax payments totaling the smaller of its current tax liability or its prior year tax.

  2. Form 2220, Underpayment of Estimated Tax by Corporations, is used to determine whether the FSC owes the penalty and to compute the amount of the penalty.

  3. Generally, an FSC does not have to file the Form 2220 since the IRS can figure the amount of any penalty and bill the FSC for it. However, the FSC must complete and attach Form 2220 even if the FSC does not owe the penalty, if:

    1. The annualized income or adjusted seasonal installment method is used, or

    2. The FSC is a "Large Corp." computing its first required installment based on the prior year's tax.

  4. When the Form 2220 is attached to the Form 1120-FSC, the taxpayer must check the box on line 3 in the Tax and Payments section on page 1 of Form 1120-FSC and enter the amount of any penalty on that line.

21.8.2.9.12  (10-01-2007)
Claims for Refund of Backup Withholding on Form 1120-F or Form 1120-FSC

  1. If a corporation had income tax withheld from any payments (i.e., interest, dividends) it received because it failed to give the payer its correct EIN:

    1. The corporation may claim a credit on Form 1120-F/1120-FSC for the total amount withheld.

    2. This type of withholding is called "backup withholding."

  2. The amount withheld is shown in the right-hand column on Form 1120-F between lines 4 and 5i, and included in the total for line 5i, and on Form 1120-FSC between lines 1 and 2h, and included in the total for line 2h. The amount should be labeled "backup withholding."

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Follow the instructions for Processing Claims with Missing Schedules in IRM 21.5.3, General Claims Procedures, when the form cannot be verified.

  5. When allowing a claim:

    1. Input TC 290.00 with Credit Reference Number 766 and the amount of backup withholding requested.

    2. Use Credit Reference Number 767 to decrease backup withholding.

21.8.2.9.12.1  (10-01-2013)
General Agreement on Tariffs and Trade (GATT)

  1. The General Agreement on Tariffs and Trade (GATT), is effective on refunds issued on or after January 1, 1995. The refunds affected by GATT are issued from Form 1120, Form(s) 990-C, and 990-T with a significant Form 990-T indicator. In addition, the 941 series, 940, and 720 refunds fall under GATT when the entity has corporate filing requirements. See IRM 20.2.4.9, Special Credit Interest Rules for Corporations.

    Note:

    Beginning in tax year 2006, Form 990-C was replaced with Form 1120-C.

  2. Any overpayment amount greater than $10,000 will have credit interest paid on it at a rate lower than the normal corporate credit interest rate. (See IRM 20.2.4.9.1, GATT Credit Interest Computations on Overpayments.)

  3. If the total overpayment plus the amount currently being processed for refund is less than or equal to the $10,000 threshold amount, process the refund using normal corporate credit interest rates.

    Note:

    Add all refunds (TC 84X), credit elects (TC 83X), and offsets (TC 82X) posted on that module, excluding any interest given on prior refunds and offsets to determine if the threshold has been met.

  4. If there is no prior overpayment, or an overpayment of less than $10,000 on the module, use Command Code (CC) COMPAC to compute credit interest on the amount of the overpayment up to $10,000.

    Note:

    The amount in excess of $10,000 is subject to the lower GATT rate. Use CC COMPAG to calculate.

  5. If the total previous overpayment on the module was over $10,000, use only CC COMPAG when calculating interest on the additional overpayment.

  6. When both CC COMPAC and CC COMPAG is used, add the COMPAC (first $10,000) with the GATT interest (over $10,000) to obtain the total interest allowed.

  7. The "45-day interest-free period" must be considered when issuing a manual refund. However, this does not mean that the refund is issued without interest. If the refund is issued within the 45-day period, interest is allowed TO the received date of the claim, less the 9-day back-off period. See IRM 20.2.4.7.5, 45-Day Rule.

    Note:

    This differs from the 45-day interest-free period applicable to overpayments originating from the processing of original returns and carryback claims/applications. See IRM 20.2.4.7.5.2, 45-Day Rule and All Original Tax Returns

    , and IRM 20.2.9.2, Determining the Overpayment Interest Period, for more information.

  8. If the "45-day interest-free period" has expired, interest is computed from the credit availability date to one day after IDRS input when using Form 5792, Request for IDRS Generated Refund (IGR).

    Note:

    If using Form 3753, Manual Refund Posting Voucher, and the "45-day interest-free" period has expired, compute interest to 3 work days from IDRS case closure and route to Accounting. Additional information for preparing manual refunds can be found in IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated Refund.

    Note:

    See IRM 20.2.4, Overpayment Interest, if trying to match a prior interest or the overpayment is being offset.

  9. If there is a "Large Corp" or "CEP" indicator on the tax module, contact the designated large corporation unit before issuing the refund. See IRM 21.7.1.4.11.4, Campus Contacts for Large Corp Cases.

21.8.2.9.13  (10-01-2013)
Refunds on Form 1120-F/FSC That Include Interest

  1. Initiators must carefully review the account. You must ensure that there are no prior, duplicate, manual, or generated refunds issued at any other campuses or call sites. Review the taxpayer accounts to make sure that the prepaid credits the taxpayer is claiming for refund are available and were not used as an offset against any outstanding balances before you include them as part of the Manual Refund.

  2. When the Service issues a refund to a nonresident alien taxpayer that includes interest, the Service is required to withhold tax on the interest with the following exceptions:

    1. The Service is not required to withhold tax on the interest if the amount of withholding on interest is less than ≡ ≡ ≡ .

    2. If the tax rate for that country is ("0" ) per the Internal Revenue Code and the income tax treaties. See Publication 515 for more information.

  3. When processing an adjustment that results in a refund including interest, the interest must be manually computed. Use the following table when computing credit interest:

    "If" Computing Credit Interest... "Then" Use...
    Before 01/01/1999 for a Non-Corporate taxpayer. COMPAC
    On or after 01/01/1999 for a Non- Corporate taxpayer. COMPA
    Before 01/01/1995 for a Corporate taxpayer, regardless of the overpayment amount. See IRM 20.2.4.9, Special Credit Interest Rules for Corporations, for the definition of a "Corporate" taxpayer. COMPAC
    On or after 01/01/1995 for a Corporate taxpayer and the overpayment amount is less than or equal to $10,000.

    Caution:

    If the GATT threshold has been met, the overpayment will be computed at the GATT interest rate (COMPAG), regardless of the overpayment amount. See IRM 20.2.4.9.2, Determining the GATT Threshold.

    COMPAC
    Credit interest after 12/31/1994 for a Corporate taxpayer and the overpayment amount is greater than $10,000, or the GATT threshold has previously been met. See IRM 20.2.4.9.2, Determining the GATT Threshold. COMPAG (GATT)

    Note:

    Add the COMPAC (first $10,000) with the GATT interest (over $10,000) for the total interest allowed.

    For additional interest computation tools, see IRM 20.2.6.4, Interest Computation Tools.

    Caution:

    Some credits may be Chapter 3 Withholding and subject to the 180-day interest-free period. For information on the 180-day interest-free period refer to IRM 20.2.4.7.6, 180-Day Rule

  4. Determine the correct tax rate and amount of tax to be withheld from the interest per IRC § 1441 and IRC § 1442 . If the tax treaty withholding rate is 0%, no withholding is required on interest. Treaty rates are found in Publication 515.

  5. Prepare four-part Form 5205.

  6. Prepare Form 1042-S.

  7. Prepare Form 3809 when transferring tax withheld on interest to 4610 account.

    Note:

    Do not prepare a Form 3809 for transferring interest to the 4610 account when withholding tax on interest is less than ≡ ≡ ≡ ≡ ≡ .

  8. Prepare the manual refund document, Form 5792 (for refunds over 10 million dollars use Form 3753). Additional information on preparing manual refunds can be found in IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated Refund.

    1. The overpayment amount is the amount of the tax decrease and/or the credit available for refund.

    2. The TC 770 amount is the net interest (after the withholding is computed). Use the appropriate credit interest date on the adjustment.

      Note:

      Do not withhold if the withholding on the interest is less than ≡ ≡ ≡ ≡ ≡ .

    3. The TC 840 is the total of the overpayment and the TC 770 amounts.

      Note:

      Line numbers for manual refunds are listed in Exhibit 2.4.20-12, Description of Line Item Numbers.

  9. Input the adjustment to IDRS and use CC RFUNDR to issue the manual refund.

    1. On the same ADJ54 document, input TC 29X for the amount of the tax decrease and/or refundable credit.

    2. Input TC 770 for the amount of tax withheld from the interest.

    3. Use Blocking Series 18 or 15 for cases worked in CIS and FLC 60.

    4. Input a two cycle Posting Delay Code and a Hold Code 4.

    5. Attach Part 4 of Form 5205 and Copy E of Form 1042-S with the TC 29X adjustment.

  10. Submit the refund document and related forms, along with the case itself, to the manager for review.

  11. Forward Form 5205, Form 1042-S, the refund document, Form 3809, and a print of COMPAC or COMPAD (interest computation) to Accounting. Attach screen prints of TXMODA and RFUNDR.

    Note:

    The initiator must monitor the account until the TC 840 posts on Master File. The managers and employees must take responsibility for erroneous refunds when caused by the failure to monitor IDRS. More information is available in IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated Refund.

21.8.2.10  (10-01-2007)
Foreign Tax Credit (Form 1116 and Form 1118)

  1. This section contains information and instructions for handling the foreign tax credit under IRC §901 and 903 and IRC §902 and 960.

  2. Foreign Tax Credit (FTC) is a non-refundable credit for income, war profits, and excess profits taxes (referred to as income taxes) accrued or paid, or deemed paid to a foreign country; the term "foreign country " , for purposes of claiming a foreign tax credit, includes U.S. possessions.

  3. Publication 514, Foreign Tax Credit for Individuals, as well as Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), and Form 1118, Foreign Tax Credit - Corporations and instructions contain detailed information on this credit and may be helpful when resolving FTC issues.

21.8.2.10.1  (10-01-2013)
Who May Claim the Foreign Tax Credit

  1. An individual, estate, or trust can claim the foreign tax credit by filing Form 1116.

  2. A corporation that elects the benefits of the foreign tax credit must complete and attach Form 1118 to its income tax return. Additional information can be found in the Form 1118 Instructions.

  3. A foreign corporation engaged in a U.S. trade or business during the tax year can take a credit for foreign income taxes paid, accrued, or deemed paid to any foreign country or U.S. territory with respect to income effectively connected with the conduct of a trade or business in the United States.

  4. An individual, estate, or trust that elects the benefits of the foreign tax credit generally must complete and attach Form 1116 to the income tax return. However, Form 1116 is not required if there is a minimal amount of foreign tax credit claimed.

21.8.2.10.2  (10-01-2007)
Claiming the Credit for Foreign Taxes

  1. Eligible taxpayers may claim a foreign tax credit for foreign income taxes paid or accrued (or taxes paid or accrued in lieu of those taxes) or deemed paid or accrued during the tax year to any:

    • Foreign country

    • U.S. possession, or

    • Political subdivision (e.g., city, state, or province) of the foreign country or U.S. territory

      Note:

      For purposes of this credit, U.S. possessions include the U.S. Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa with respect to individuals with income from U.S. possessions. See Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

  2. Important: When foreign income tax is taken as a credit:

    1. It is a nonrefundable credit, and

    2. It cannot be claimed as a deduction.

  3. Taxpayers excluding income from the possessions cannot take the foreign tax credit for taxes paid on excluded income. Credit for taxes paid to the Virgin Islands are figured on Form 8689, not Form 1116. Corporations electing the possession tax credit cannot claim a foreign tax credit for certain taxes paid to Puerto Rico or the Virgin Islands. Such corporations can show the possession gross income and definitely allocable deductions for foreign branches on Form 1118, Schedule F.

    Note:

    See IRM 21.8.2.10.6 for additional limitations.

  4. The credit for foreign income taxes is allowed using TC 291.

21.8.2.10.3  (10-01-2013)
Election - Foreign Tax Credit

  1. The annual election to take the amount of any qualified foreign income taxes paid or accrued as a foreign tax credit against U.S. income tax is evidenced by filing Form 1116 or Form 1118.

  2. IRC § 901(a) and § 1.901-1(d) cross reference sections IRC § 6511(d)(3) and IRC § 6511(c), allows an individual, corporation, estate, or trust to change their election to claim a deduction or credit at any time during the period within 10 years from the due date for filing the return for the tax year for which the change is requested.

    Note:

    If the amount deducted as foreign tax credit is later refunded from the foreign country, then the U.S. income tax return must be amended to include the amount received. Debit interest is computed from the date the refund is received from the foreign country to the payment date, plus all interest received from the foreign country. See IRM 20.2.10.2.2, Interest on Adjustments to FTC.

21.8.2.10.4  (10-01-2012)
Foreign Taxes for Which a Credit May Not Be Claimed

  1. A credit may not be claimed in the taxable year for the following foreign taxes. For details, see the instructions for Form 1116/1118 and Pub 514, Foreign Tax Credit for Individuals:

    • Taxes paid to a foreign country that are not legally owed, including amounts eligible for refund by the foreign country

    • Taxes imposed by and paid to certain foreign countries. See IRM 21.8.2.10.6, Computation - Foreign Tax Credit, for a listing of these countries. They have repeatedly provided support for acts of international terrorism, or are countries with which the United States does not have diplomatic relations, or are countries whose governments the United States does not recognize

    • Payment of foreign tax that is returned to the taxpayer, a related person, or a party to the transaction generating the tax, in the form of a subsidy

    • Tax withheld from dividends and (after November 21, 2004) other income from property, if certain minimum holding periods are not met, or if the taxpayer is obligated to make related payments with respect to substantially similar or related property; tax related to foreign income not subject to U.S. tax by reason of a covered asset acquisition (see section 901G foreign taxes that are subject to section 909 because they have been split from related income.)

21.8.2.10.5  (10-01-2007)
Statute of Limitation - Foreign Tax Credit

  1. There is a ten-year period of limitation allowed for filing a claim for refund of U.S. tax when a taxpayer was required to pay, or had accrued, a larger foreign tax than originally claimed as a credit.

  2. The same limitation period applies to:

    • A claim for refund based on the correction of math errors in figuring the foreign tax credit

    • The discovery of qualified foreign taxes not originally reported on the return

    • Any other change to the size of the credit, including one caused by a correction to the foreign tax credit limitation, or a decision by the taxpayer to claim a credit for the taxes rather than a deduction.

  3. The 10 years are counted from the due date of the return for the year in which the foreign taxes were paid or accrued.

    Note:

    Do not confuse this limitation period for claiming a refund with the five year or ten year carryover and two year or one year carryback periods (see IRM 21.8.2.10.7, Carryback and Carryover-Foreign tax credit). Refer cases involving foreign tax credit carryovers to Examination Classification. Only refer Foreign Tax Credit carryback claims to Examination when over ≡ ≡ ≡ ≡ . See IRM 21.5.9, Carrybacks, for additional carryback information.

21.8.2.10.6  (10-01-2013)
Computation - Foreign Tax Credit

  1. After 1986 and before 2007 under IRC § 904(a) the foreign tax credit is calculated separately on separate Forms 1116/1118 for the following categories of income, then added together:

    • Passive income (e.g., dividends, interest, royalties, rents, annuities, gain from the sale of property that produces investment income or non-income producing investment property, and gains from foreign currency or commodities transactions)

    • High withholding tax interest (withholding of 5% or more)

    • Financial services income

    • Shipping income

    • Dividends from a Domestic International Sales Corporation (DISC) or former DISC

    • Distributions from an FSC, or former FSC, from earnings and profits attributable to foreign trade income

    • In the case of a corporation, dividends from a non-controlled IRC § 902 corporation paid in tax years beginning before January 1, 2003, that are derived from earnings and profits accumulated in taxable years beginning before January 1, 2003

    • Lump-sum distributions from pension plans

    • IRC § 901(j) income

    • Income re-sourced by treaty, and

    • General limitation income (all other income)

      Note:

      For 2007 and later years, the foreign tax credit limitation is no longer calculated separately for high withholding tax interest, financial services income, shipping income, dividends from a DISC or former DISC, or distributions from a FSC or former FSC. These types of income may be classified as passive category income or general category income depending on the facts. Refer to the Form 1116/1118 instructions and Pub 514, Foreign Tax Credit for Individuals, for more information on the limitation of foreign tax credit. The American Jobs Creation Act of 2004, H.R. 4520, retroactively repealed the separate limitation for dividends from noncontrolled §902 corporations for taxable years beginning in 2003. The Gulf Opportunity Zone Act of 2005 allows taxpayers to elect to defer the effective date of this repeal from 2003 to 2005.

  2. A separate Form 1118, for corporate filers, and Form 1116, for estates, trusts, and individuals, is used for each category of income.

  3. If the individual, estate or trust paid taxes to more than 3 countries or territories with the same type of income, then additional Forms 1116 must be used. For corporate filers, if taxes are paid to more than six countries or territories with the same type of income, then additional Forms 1118 must be used.

    Caution:

    The taxpayer cannot combine the same type of income for different countries and/or territories by writing "various" where the name of the country is to be listed.

  4. The credit on each type of income cannot exceed the proportionate amount of U.S. tax paid on that type of income. This is called the foreign tax credit limitation. Therefore, the foreign tax credit is limited to the lower of the foreign tax credit limitation or the foreign tax paid or accrued.

  5. For each type of income, the taxpayer totals all the taxes paid on that category of foreign source taxable income and compares it to the total U.S. tax liability multiplied by the fraction equal to the amount of that type of foreign source taxable income over worldwide taxable income. See Instructions for Form 1118, Schedule B, Part II.

  6. Also there is the "reduction" or "scale down" of foreign tax due to excluded or exempt income. When income is excludable or exempt from tax (e.g., IRC § 911(a), IRC § 931(a) for income from sources within Guam, American Samoa, and Northern Mariana Islands derived by a bona fide resident of American Samoa, and IRC § 933(a) for income from sources in Puerto Rico), the amount of foreign income taxes that may be claimed as a credit (or deduction) must also be reduced or "scaled down" to account for the income on which no U.S. tax is going to be paid. See Form 1116, Part III, line 12, "Reduction of Taxes" , and Form 1118, Schedule G.

  7. The amount of foreign income taxes allocable to excludable income is determined by multiplying the foreign tax paid or accrued by a fraction of the excluded foreign earned income (minus apportioned deductible expenses) divided by the total foreign earned income (minus allocatable deductible expenses).

    Allocable Excludable Income Determination  


    (Foreign tax paid or accrued) X
    Excluded foreign earned income (minus apportioned deductible expenses)
    Total foreign earned income (minus allocatable deductible expenses).

  8. When income other than earned income is taxed by the foreign government, and it is not separately taxed, the denominator is the foreign source income less allocable deductible expenses.

    Note:

    Applies to Form 1116 for individuals, estates, and trusts.

  9. U.S. Citizens may be able to claim an additional credit for part of the tax imposed by treaty partners on U.S. source income when that citizen resides in the treaty country. This credit is calculated using the worksheet contained in Publication 514. It is separate from, and in addition to, the foreign tax credit, for foreign taxes paid and accrued on foreign source income. This special credit is provided by the treaties of the following countries:

    • Australia

    • Austria

    • Bangladesh

    • Belgium

    • Bulgaria

    • Canada

    • Chech Republic

    • Denmark

    • Finland

    • France

    • Germany

    • Iceland

    • Ireland

    • Israel

    • Italy

    • Japan

    • Luxembourg

    • Malta

    • Mexico

    • The Netherlands

    • New Zealand

    • Portugal

    • Slovak Republic

    • Slovenia

    • South Africa

    • Spain

    • Sweden

    • Switzerland

    • The United Kingdom

  10. The additional foreign tax credit cannot be calculated on Form 1116 for U.S. Citizens residing in the following countries and a special worksheet is provided, see Pub 514, Foreign Tax Credit for Individuals:

    • Australia

    • New Zealand

    If... Then...
    A statement is attached to the return claiming a foreign tax credit from the countries above Process the claim as if it had been calculated on Form 1116.

  11. IRC § 901(j) denies the foreign tax credit for taxes paid to certain countries due to non-recognition of the foreign government (in most instances), the severance or lack of diplomatic relations, or the classification of the foreign country as one supporting terrorism.

  12. The foreign tax credit is not currently available for taxes paid to the following countries:

    • Cuba

    • Iran

    • Iraq (before June 27, 2004)

    • Libya (before December 9, 2004)

    • North Korea

    • Sudan

    • Syria

21.8.2.10.7  (10-01-2007)
Carryback and Carryover - Foreign Tax Credit

  1. If, due to a limitation, a taxpayer could not claim the credit for the full amount of qualified foreign income taxes paid or accrued, or deemed paid or accrued, in the tax year in a separate category, IRC § 904(c) was amended to allow a one-year (rather than two-year) foreign tax credit carryback for excess foreign income taxes paid or accrued in tax years beginning after October 22, 2004 and then a ten-year (rather than five-year) carryover of the remaining excess foreign income taxes carried to tax years ending after October 22, 2004.

    1. The excess foreign income taxes for that separate category is treated as paid or accrued in the applicable years to the extent of any excess limitation (the amount by which the limitation exceeds the amount of qualified taxes originally claimed) in those years.

    2. The excess foreign income taxes must be applied to the first eligible preceding year and then subsequent years. This is regardless of the relative benefits in various years.

  2. There are special restrictions which apply to carrybacks and carryovers.

    1. The carryback or carryover of excess foreign income taxes can be claimed only as a credit, not as a foreign tax deduction.

    2. In a carryback or carryover year in which foreign income taxes were used as a deduction, no credits are allowed for the foreign income taxes carried to that year, but the available excess foreign income taxes must be reduced by the amount that would have been allowed if the taxpayer had elected the credit.

  3. Excess foreign taxes that are being carried back to the preceding tax year may be claimed by filing an amended tax return, either Form 1040X or Form 1120X, with a revised Form 1116 or Form 1118, respectively. See IRM 21.5.9, Carrybacks which further explains processing carryback/carryover claims and IRM 21.5.9.5.44, Carryback of Foreign Tax Credit (FTC), for specific instructions and restrictions.

  4. Form 1139 and Form 1045 CAN NOT be used to carryback foreign tax credits.

    If... Then...
    An unused foreign tax is carried back The statute of limitation on IRS assessment and collection of any tax resulting from the carryback for that year does not close until one year after the statute closes on the year in which the carryback originated.

21.8.2.11  (10-01-2013)
Form 8288, U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests, and 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

  1. The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 was amended by the Deficit Reduction Act of 1984. This amendment added IRC § 1445 to Chapter 3, Subchapter A, of the Internal Revenue Code of 1954.

  2. §1445 requires the deduction and withholding of tax by the transferee on amounts realized on dispositions of certain U.S. real property interests by a foreign seller.

  3. Form 8288 is filed by the withholding agent (transferee) to report the tax withheld at source.

  4. This form was processed on a separate system like Non-Master File (NMF) prior to processing year 2006.

  5. Beginning in 2006, Form 8288 was processed to the Business Master File under MFT 17 at the Philadelphia Submission Processing Campus. The DLN of the returns posted as DO 98, Tax Class 1, Doc Code 40 (98140–ddd-xxxxx-x). In 2007 and subsequent years, the Form 8288 is processed at the Ogden Submission Processing Campus and assigned the DLN (60140-ddd-xxxxx-x or 78140-ddd-xxxxx-x).

    Note:

    NMF processed Form 8288 returns are worked in CSPC under DLN 17641-ddd-xxxxx-x when the Date of Transfer is 12/12/05 and prior.

  6. Refer inquiries concerning Form 8288 (MFT 17 Accounts) to the International Department at the Ogden Accounts Management Center (OAMC). For telephone calls prepare a Form 4442, Inquiry Referral, and fax to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ (number is for internal use only). Route correspondence to OAMC at Mail Stop 6552. These inquires will be assigned to the International Departments in Cincinnati Accounts Management Center (CAMC) and OAMC to work.

  7. The earliest tax period in which these returns post to Master File is 200512 with the earliest received date being 01/01/2006. The tax period is derived from the month and year of the date of transfer. Beginning in 2006, subsequent Form 8288 returns that attempt to post to a module that contain a TC 150 create TRNS 193 duplicate filing conditions. This is likely a supplemental return for an additional property from the same withholding agent.

  8. In cases of multiple purchases of partnership interests being acquired in the same month with the same date of transfer and property description (line 2 Form 8288), a company may file a consolidated Form 8288 with a consolidated payment. They must also complete and submit sets (Copy A and Copy B) of Form 8288-A for each foreign person or entity, and lines 2 and 3 must match amounts listed on Form 8288, lines 5 and 7.

    Exception:

    If there is a withholding certificate for any of the foreign persons or entities, that information must be reported on its own Form 8288 and submitted with the FIRPTA tax payment and the Form 8288-A (copy A and B).

  9. TRNS 193 notices generated on Form 8288 accounts are processed at the Ogden Accounts Management Campus. Use the following instructions in conjunction with IRM 21.7.9, BMF Duplicate Filing Conditions, to resolve TRNS 193 notices on Form 8288 (MFT 17) accounts:

    1. Always input a Hold Code 4 on the CC ADJ54 adjustment.

    2. Input the real property description from Line 2 of the Form 8288 in the remarks field of the CC ADJ54 adjustment.

    3. Input the Date of Transfer (DOT) on the CC ADJ54 adjustment.

      Note:

      The year and month of the DOT input on ADJ54 MUST match the year and month of the tax period or the adjustment will unpost. Refer to IRM 3.12.279.131, UPC 331 RC 4 – 5.

    4. For a return filed for a subsequent sale within the same month, the Return Due Date (RDD) is 20 days from the date of transfer and is not related to the first date of transfer posted on the module.

    5. A late-filed Form 8288 is subject to interest, Failure to File and Failure to Pay penalties which must be manually assessed since the computer is unable to calculate these values. The RDD is 20 days from the date of transfer or withholding certificate letter date, whichever is later. When a penalty is warranted, calculate the penalty from the RDD to the payment date.

      Note:

      The DOT is the actual date of transfer, or the date of the withholding certificate letter, whichever is later.

      Note:

      When manually computing interest, the running module balance method must be used so that all transactions within the module are considered. See IRM 20.2.6.6, Steps to Compute Interest, and IRM 20.2.5.3 , Interest on Penalties and Additions to Tax, regarding how to compute interest on penalties.

    6. When processing an adjustment to a Form 8288-A account, update the National Standard Application (NSA) database as necessary to reflect the correct information.

    If... Then...
    The Form 8288 is received after the 20th day from the DOT or after the 20th day from the date of the withholding certificate letter (if applicable), whichever is later Input TC 290 for the additional tax amount. Manually compute and assess TC 160, TC 270 and TC 340 using the return due date as the "from" date. TC 340 must be computed using the running module balance method. See IRM 20.2.6.6, Steps to Compute Interest.
    The Form 8288 was timely filed and paid Input TC 290 for the additional tax and also enter a TC 160 .00, TC 270 .00, and TC 340 .00 to prevent penalty and interest assessments.
    The taxpayer was issued a withholding certificate, and the withholding certificate letter date falls within a subsequent month (the return is due within 20 days of the DOT, or the date of the withholding certificate, whichever is later) Input TC 290 .00 to release the "-A" freeze. Edit the correct date of transfer and reinput the return to the correct tax period using Form 13596, Reprocessing Returns. Transfer any related payments using CC ADD/ADC24.
    The taxpayer was issued a withholding certificate and the return due date remains in the same tax period to which the subsequent return posted Input TC 290 for the additional tax amount. If the return was filed timely and paid, input TC 160 .00, TC 270 .00 and TC 340 .00 to prevent penalty and interest assessments. If the return was filed and/or paid late, manually compute and assess TC 160, TC 270 and TC 340 amounts using the return due date as the "from" date. Do not reinput the return.

    Note:

    If Form 8288-A is attached to Form 8288 and the 8288-A does not have a FIRPTA Unit stamp on it saying "Copy B mailed," route the return to the FIRPTA Unit for processing of Form 8288-A.

    Caution:

    Do not establish Mail Filing Requirements for Form 8288.

  10. Foreign buyers/sellers of U.S. real property are required to obtain ITIN's in order to request reduced tax withholding and to pay withholding tax. Research for correct buyer/transferee TIN before re-inputting a tax return to the TIN of a Title, Escrow, Realty Company, etc. or third party TIN.

    Note:

    Ogden will research IDRS to see if the payment posted to the title company EIN account. If it did, the BMF international unit will locate the FIRPTA payment from the title company account and transfer it to the actual transferee account as necessary.

  11. CP 105/125 balance due notices will generate on Form 8288 accounts because of incorrect posting of payments or higher assessments due to missing withholding certificates. Research and transfer misapplied payments or correspond for missing withholding certificates as necessary.

  12. Review penalty and interest claims received in correspondence to determine if the penalties and interest were correctly assessed by determining the date of transfer. If the return and/or the payment is received more than 20 days after the date of transfer, or 20 days after the withholding certificate date, the taxpayer is liable for the penalties and interest on penalties. See IRM 20.2.5.3, Interest on Penalties and Additions to Tax, regarding how to compute interest on penalties.

  13. If a taxpayer was issued a withholding certificate, interest and penalties may be erroneously assessed if the date of transfer from the withholding certificate is not edited as the date of transfer. Failure to correct the date of transfer causes the return to post to an incorrect tax period, and interest and penalties to be assessed erroneously. Edit and re-input of the Form 8288, with a copy of the withholding certificate, to the correct tax period and transfer any related payments using CC ADD/ADC 24 per duplicate filing conditions found in IRM 21.7.9, BMF Duplicate Filing Conditions.

  14. If the return posts to the correct month, but the date of transfer is incorrect, penalties and interest may be assessed erroneously. If the return and payment are timely filed and posted to the correct month, input a TC 271, TC 161, and TC 341 to abate the erroneously assessed penalties and interest. A penalty reason code (PRC) will be required with the penalty abatement. If not full paid as of the transfer date, then interest will need to be computed from due date to payment date. A TC 341 will be the difference between the original TC 340 and the correct amount.

    Caution:

    Only abate the penalties and interest if the return does not have to be reinput to another tax period.

    Note:

    When manually computing interest, the running module balance method must be used so that all transactions within the module are considered. See IRM 20.2.6.6, Steps to Compute Interest.

21.8.2.11.1  (10-01-2013)
FIRPTA Payments Received Without a Form 8288

  1. Some title companies, transferees, escrow companies, Certified Public Accountants (CPAs), attorneys, and realtors may send FIRPTA payments to deposit activity areas without a Form 8288. The payments are received in the following ways and any associated correspondence is sent to Accounts Management:

    • A check with a check stub statement identifying it as a FIRPTA payment

    • A check with a statement or cover letter identifying the remittance as FIRPTA tax

    • A check, with or without a check stub attachment, attached to a Form 8288-A and/or Form 8288-B

    • A check, with or without a check stub statement or cover letter, attached to a copy of a deed and/or a copy of a HUD-1 settlement statement

    • A check, with or without a check stub statement or cover letter, attached to a copy of a withholding certificate

    • A check, with or without a check stub statement or cover letter, and/or a copy of a FIRPTA withholding tax return or withholding certificate from the states of Hawaii, California or Colorado

  2. Return the correspondence to the taxpayer requesting that they file a Form 8288 and 8288-A using a Letter 3104C. Advise the taxpayer that these forms must be completed by the transferee and returned to the Ogden Submission Processing Campus for processing. Include the following open paragraph with the 3104C Letter:

    Letter Paragraph
    We are returning your correspondence received with your FIRPTA payment of $xxxx.xx on mm/dd/yyyy. To ensure proper application of your payment, please complete and return the enclosed Form 8288 and Form 8288-A to the Internal Revenue Service, Ogden, UT 84201.

21.8.2.11.2  (02-19-2013)
Claims for FIRPTA Credits

  1. When taxpayers claim FIRPTA credits on their income tax return, they must submit Form 8288-A, Copy B (similar to domestic withholding claims being accompanied by a Form 1099).

  2. In addition, credits claimed on Form 8288-A, Copy B, must be verified with the FIRPTA data base prior to allowance. FIRPTA Credit verification is requested using Form 13698, International Credit(s) Verification Slip.

    Note:

    For further information on FIRPTA Credit verification, see IRM 3.21.25.15, Form 8805 Credit Verification of Pre-IRMF Section 1446 Credits Claimed on Form 1040-NR, Form 8804, Form 990-T, Form 1120-F, and Form 1040-NR Estate or Trust.

  3. The presence of a TC 971 with Action Code 650 on a tax module indicates that a refund of the FIRPTA credit was issued from the BMF MFT 17 account for the amount indicated. A TC 972 indicates a reversal of a TC 971.

  4. When a Form 8804 or Form 1120-F posts to Master File and a TC 971 Action Code 650 is present, the account is frozen from refunding and a Master File transcript titled PRIOR-REFD generates. Research to determine if the FIRPTA credit claimed on the return was previously refunded as indicated by the TC 971 Action Code 650.

    If... Then...
    The Action Code 650 amount is the same as the Credit Reference Number (CRN) 332 amount Input an adjustment to reduce the CRN 332 amount to zero since the credit has already been refunded.
    The Action Code 650 amount is included in the CRN 332 amount (for example, $9,200 is part of the $10,500 claimed) Reduce the CRN 332 amount by the Action Code 650 amount since this has already been refunded. See Caution below.
    The Action Code 650 amount is not included in the CRN 332 amount No action is necessary. Input TC 571 to release the freeze on the account.

    Caution:

    Research the FIRPTA database or request the original return from Files, if necessary, to determine if the FIRPTA credit being claimed on the return is the same credit previously refunded according to the TC 971 CRN 332 transaction. For more information on Early FIRPTA Refunds, See IRM 21.8.5.3.11, Request for an Early FIRPTA Refund.

  5. If correspondence or an amended return is received requesting credit for withheld FIRPTA tax, it must be accompanied by a Form 8288-A, Copy B, so the credit can be verified.

    Reminder:

    Attach the FIRPTA Credit Verification Slip, Form 13698, to the case as proof of verification.

  6. Once credit availability is verified, allow withholding credit using CRN 332.

    • Reminder:

      These credits are considered Chapter 3 Withholding Credits and are subject to the 180-day interest-free period. See IRM 21.8.2.9.6.1, 180-day interest-free Period for Chapter 3 Withholding.

      Note:

      When issuing a manual refund from a Form 8288 account, use Line Number 65.

21.8.2.12  (10-01-2007)
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

  1. Income that is effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or foreign corporation is subject to the same income tax rates that apply to U.S. Citizens, residents, and domestic corporations, per IRC § 871(b). (See IRM 21.8.1.11.10, Effectively Connected Income.)

  2. Income not effectively connected with the conduct of a trade or business in the United States is subject to a 30% tax rate (or lower treaty rate) whether or not the taxpayer engages in a trade or business in the United States, per IRC § 871(a). (See IRM 21.8.1.11.11, Non-Effectively Connected Income.)

  3. The Deficit Reduction Act of 1984 provides for repeal of the 30% tax on interest received by foreign persons on certain portfolio investments.

  4. IRC § 1441(a) and IRC § 1442(a) require the withholding of income tax at the source on certain amounts paid to nonresident alien individuals, partnerships, and foreign corporations.

  5. See Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for a more detailed explanation of withholding requirements.

21.8.2.12.1  (10-01-2007)
Withholding Agent/Withholding Tax

  1. A withholding agent is any entity that has custody or control of an item of income of a foreign person subject to withholding. A withholding agent may be an individual, a trust, an estate, partnership, corporation, government agency, association, or tax-exempt foundation, whether domestic or foreign.

  2. Withholding agents must withhold income tax at a rate of 30% on all types of income paid to "nonresident alien recipients" from sources within the United States, unless the nonresident is a resident of a treaty country. See Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

    1. A "nonresident alien" includes any foreign individual, fiduciary, partnership, corporation, private foundation, organization, association or charitable institution.

    2. Income qualifying as a scholarship, per IRC § 117(a), requires withholding of taxes at a rate of 14% if the nonresident alien is temporarily present in the United States on an F, J, M, or Q Visa (a non-degree candidate).

    3. Income for compensation from personal services that is effectively connected with U.S. trade or business is exempt from withholding if the recipient is a foreign partnership or foreign corporation. However, the income is still taxable, subject to estimated tax, and a tax return must be filed to report the income and pay any tax due at graduated rates.

  3. The withholding agent may withhold at a lower treaty rate if the nonresident alien recipient is a resident of a country that has a tax treaty in effect with the United States. In order to be eligible for the reduced withholding, the nonresident alien must prove he/she is a resident of the treaty country, for income tax purposes.

  4. The above rules do not apply to a nonresident alien spouse of a U.S. citizen or resident who makes an election to be treated as a resident for income tax purposes and files a joint return and reports income from all U.S. and foreign sources.

    Note:

    Scholarships, grants, fellowship grants, prizes, and awards received by a nonresident alien (person other than a U.S. person) from a foreign government, agency, political subdivision, person or international organization (any foreign entity) for the purpose of study within the United States, is treated as foreign source income. This income, being foreign source income, does need to be claimed or reported.

21.8.2.12.2  (10-01-2009)
Form 1042

  1. Form 1042 is the annual taxable return used by withholding agents to report tax withheld on U.S. source income paid to certain nonresident alien individuals, and corporations, etc.

  2. The Form 1042-T serves as a transmittal for Form 1042-S returns, which are information returns used to report income paid to the foreign person. The Form 1042–T is Tax Class 5 and Document Code 01.

  3. A withholding agent must file a Form 1042 by March 15th in order to pay and report taxes withheld. Form 1042 is a Master File annual tax return (NMF for 1984 and prior), filed only for the calendar year and cannot be filed as a fiscal year return.

  4. Form 1042 is equivalent to the Form 945, Annual Return of Withheld Federal Income Tax, which is a withholding tax return only.

  5. None of the money belongs to the withholding agent, except in cases of math errors.

  6. The Form 1042 cannot be used for U.S. Citizens, resident aliens, U.S. trusts, or U.S. corporations.

    Note:

    Special rules for Qualified Intermediaries and a withholding foreign partnership or trust now exist. See IRM 21.8.2.12.10, Qualified Intermediary Agreements (QI).

  7. Form 1042 is processed using a Tax Class of 1, a Doc Code of 25, and one of the following File Locations Codes:

    • FLC 29 - If the withholding agent is located within the U.S.

    • FLC 60 - If the withholding agent is located outside of the U.S.

    • FLC 78 - If the withholding agent is located in one of the U.S. territories, territories, or the Commonwealth of Puerto Rico

21.8.2.12.2.1  (10-01-2013)
Form 1042-S

  1. The withholding agent issues a Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, which is an information return similar to a Form 1099.

  2. Form 1042-S provides the pertinent data in verifying that the withholding is correct.

    • Income Code (identifies type of income paid)

    • Gross Income Paid

    • Withholding Allowances (for income Codes 15 and 16)

    • Net Income

    • Tax Rate

    • Exemption Code (identifies which type of exemption the recipient claimed)

    • Federal Tax Withheld

    • Amount repaid to recipient

    • Country Code (identifies the country of which the recipient is a resident for tax purposes)

  3. Form 1042-S returns can be filed on paper if there are less than 250 income recipients for which data must be reported. If 250 or more Form 1042-S returns are submitted, withholding agents are required to file them electronically.

  4. Electronic submissions of 1042-S forms are filed using the Filing Information Returns Electronically (FIRE) System. FIRE, which is located at http://fire.irs.gov, is a Web based system so it is available 24 hours a day - 7 days a week.

  5. Forms 1042-S, whether filed on paper or electronically, must be filed with the Internal Revenue Service by March 15. Taxpayers may request an extension of time to file Form 1042-S by filing a completed Form 8809, Application for Automatic Extension of Time To File Information Returns. An additional 30 day extension may be requested by submitting a second Form 8809. Generally, requests for additional time are only granted in cases of extreme hardship or catastrophic event.

    Note:

    The Form 8809 does not extend the time for filing Form 1042.

  6. Paper Form 1042-S returns are filed at the Ogden Submission Processing Campus with the Form 1042-T being used as the paper transmittal form for paper Form 1042-S returns.

  7. For assistance with electronic filings or extensions of time to file, taxpayers can contact the IRS by e-mail at mccirp@irs.gov or by phone at the following numbers:

    • 866-455-7438 (toll free)

    • 304-263-8700 (toll call)

    • 877-477-0572 (fax)

    • 304-579-4105 (international fax)

  8. The Form 1042 is the taxable return. It should reflect the total of all taxes withheld and paid over to the IRS, as reflected on the Form 1042-S.

  9. The Form 1042-S is processed with FLC 60, Tax Class 5, and Document Code 02 for paper documents.

  10. Form 1042 and Form 1042-S are sorted, batched, numbered and follow basic pipeline processing.

    1. During the Code and Edit function, the Form 1042-S returns are detached from the Form 1042 and processed separately.

    2. Form 1042-S returns follow basic campus processing but the records do not post to Master File.

  11. The tax data extracted from Form 1042-S processing is exchanged with foreign countries with which the United States has a tax treaty or exchange of information agreement. Form OECD (Organization for Economic Cooperation and Development) is used to exchange this information. See IRM 21.8.2.13.

  12. To claim any over-withheld amount, the income recipient must file Form 1040NR, 1120-F, 1120-FSC, 1041, 990-T, 990-PF, or 8804, along with a copy of the Form 1042-S, even if a return is not otherwise required to be filed. This applies to all but a Qualified Intermediary (QI) which can claim a refund using a credit entry that is placed on Form 1042 Line 66 and they have the proper EIN number. See IRM 21.8.2.12.10, Qualified Intermediary Agreements (QI), for QI regulations.

  13. For claims involving Form 1042-S tax withheld at source, refer to IRM 21.8.1.11.14.1, Claims for Tax Withheld at Source.

21.8.2.12.3  (10-01-2007)
Form 1042 Filing Requirements

  1. The Form 1042 is filed by all individuals and corporations having the control, receipt, custody, disposal, or payment of interest, dividends, rent, salaries, etc., to the extent that any such items constitute gross income from sources within the United States, of nonresident alien individuals, or foreign corporations. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations, can be used as a reference.

  2. Form 1042 is due on or before March 15 of each year. Form 1042 and Form 1042-S must be filed whether or not any tax was withheld or was required to be withheld (i.e., income was exempt from withholding). The Exemption Codes, which are also located on the back of Form 1042-S, are:

    Code Authority for Exemption
    01 Income effectively connected with a U.S. trade or business
    02 Exempt under an IRC § (income other than portfolio interest)
    03 Income is not from U.S. sources *
    04 Exempt under tax treaty
    05 Portfolio interest exempt under an IRC §
    06 Qualified intermediary that assumes primary withholding responsibility
    07 Withhold foreign partnership or withholding foreign trust
    08 U.S. branch treated as a U.S. person
    09 Qualified Intermediary represents income is exempt
    * Non-U.S. source income received by a nonresident alien is not subject to U.S. tax. Exemption Code 03 is used when entering an amount for information reporting purposes only.

  3. Taxpayers may apply for an extension to file by submitting a Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

    1. Approval of the extension allows additional time to file the tax return, NOT additional time to pay the taxes.

    2. Any undeposited taxes of $200 or more, due by the Return Due Date (RDD), must still be deposited by that time. Undeposited amounts less than $200 may be paid with the extension, but they still must be paid by the RDD.

  4. Form 1042 returns are processed as BMF. Returns filed for Tax Year 1984 and prior were processed as NMF.

21.8.2.12.4  (10-01-2012)
Form 1042 Federal Tax Deposits

  1. All withholding agents are required to deposit the tax withheld. The amount of taxes withheld determines the frequency of deposits. See IRM 20.1.4.11, Form 1042, for additional information on deposit requirements and due dates for Form 1042.

  2. Foreign withholding agents are required to deposit funds electronically. See Treas. Reg. §§ 1.6302-2(c), 31.6302-1(h)(3).

  3. For deposit purposes, each month is divided into four periods ending on the 7th, 15th, 22nd and last day of the month. These are referred to as the "quarter-monthly" periods and are labeled 1 through 60 on the tax return.

  4. When the total tax for the year is at least $200, the taxpayer is required to list his/her tax liability in the Record of Federal Tax Liability (ROFTL) Section.

  5. Use the following chart to determine the frequency of deposits:

    If... Then...
    At the end of any quarter-monthly period, the total amount of undeposited taxes is $2,000 or more The taxes must be deposited within three banking days after the end of the quarter-monthly period.
    At the end of any month, the total amount of undeposited taxes is $200 or more but less than $2,000 Taxes must be deposited by the 15th day of the following month.
    At the end of the year, the total amount of undeposited taxes is less than $200 The entire amount may be deposited electronically, or remitted with the Form 1042 on its due date.

    Exception:

    When the end of the month is December, any balances normally carried over to the following month are due with the filing of the Form 1042, or they must be deposited by the return due date.

  6. 90% Rule/Safe Haven: T.D. 9507 removed the 90% safe harbor rule from Treas. Reg. § 1.6302-2 beginning for tax periods 2011 and subsequent. For tax periods 2010 and prior, taxpayers are considered to have met the $2,000 deposit requirement listed in (4) above if all the following statements are true:

    1. At least 90% of the tax liability is deposited timely; and

    2. Any underpayment is deposited with the first deposit that must be made after the 15th day of the following month, if the quarter-monthly period is in a month other than December. Any underpayment of $200 or more that occurs during December must be deposited by January 31.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    .

21.8.2.12.5  (10-01-2012)
Electronic Deposit Requirements

  1. Beginning January 1, 2011, all deposits must be made by Electronic Funds Transfer (EFT).

  2. Refer to IRM 21.7.1.4.8.1.3, EFTPS Deposit Requirements, for criteria that determines which taxpayers are required to use EFTPS.

  3. Taxpayers that are required to make electronic deposits, but fail to do so, may be subject to a penalty. See IRM 21.8.2.12.6, Failure To Deposit Penalties - Form 1042.

  4. For additional information, see Treas. Reg. § 31.6302-1(h).

  5. All taxpayers must enroll to use EFTPS by completing Form 9779, EFTPS Business Enrollment.

  6. Taxpayers can enroll in EFTPS by completing the enrollment Form 9779 online on the EFTPS website at http://www.eftps.gov, or by requesting an enrollment form by calling the IRS Tax Forms toll free number (1-800-829-3676), or by calling the EFTPS Customer Service toll free number (1-800-555-4477) and then mailing the completed form.

  7. For any additional information, taxpayers can call the EFTPS Customer Service Center (1-800-555-4477). For all EFTPS Customer Service Center Numbers see IRM 21.7.1.4.8.1.1, EFTPS Enrollment.

21.8.2.12.6  (10-01-2013)
Failure To Deposit Penalties - Form 1042

  1. Penalty processing on Form 1042 (Chapter Three Withholding (CTW)) began in processing year 2003.

  2. Taxpayers are now liable for this penalty and should have been making timely deposits beginning in 2002.

    Note:

    If a consent dividend has been issued, and notification is provided after the end of the tax year and before the 15th day of the third month following the close of the taxable year (March 15), the dividend is considered paid on the last day of the tax year. The applicable deposit is considered timely per IRC § 561(a), IRC § 561(b), IRC § 563(b), or IRC § 565(c). These dividends are sometimes entered in the Record of Federal Tax Liability (ROFTL) in error. They should be reported on Line 63b of Form 1042. If you encounter this situation, advise the taxpayer to report only the consent dividend on line 63b and provide you with a corrected ROFTL. When the corrected ROFTL is received manually remove the FTD penalty attributable to the consent dividend using Penalty Reason Code 010. Additional information on consent dividends can be found in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities

    .

  3. The penalty calculation rate is:

    • 2% of the underpayment if 1 to 5 days late

    • 5% of the underpayment if 6 to 15 days late

    • 10% of the underpayment if 16 or more days late

    • 10% for deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with the tax return

    • 10% for amounts subject to electronic deposit requirements but not deposited using EFTPS

      Note:

      The penalty is increased to 15% if the balance of tax is not paid within 10 days after the IRS issues the first delinquency notice demanding payment. See IRM 20.1.4.14.4, 15 Percent Rate Penalty Indicator Codes (PIC).

    Reminder:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Taxpayers can self compute the penalty (except the 15% penalty) and enter the amount on Form 1042, Line 70. The Form instructions provide the percentages to be used to calculate this penalty as listed above. Do not abate, unless a request is subsequently made by the taxpayer. See the Caution below.

    Caution:

    Verify that the penalty amount was not self assessed for an incorrect lower amount. Command Code FTDPN can be used to verify the correct penalty. If the penalty per FTDPN is higher and not within tolerance, assess the difference.

    Note:

    This option is no longer available beginning with tax year 2011

  5. Refer telephone inquiries concerning Form 1042 penalty adjustments to the International Department at the Ogden Accounts Management Center (OAMC). Prepare a Form 4442, Inquiry Referral, and fax to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ (number is for internal use only). Route penalty correspondence to OAMC at Mail Stop 6552. These inquires will be assigned to the International Departments in Cincinnati Accounts Management Center (CAMC) and OAMC to work.

  6. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, contains information that the taxpayer can use for additional reference.


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