When the employer files a Form 941 or a Form 843 claim with a Form 941-X, requesting a refund for the entire (employee and employer) amount of erroneously withheld FICA, the employer must provide all the required substantiation documentation. See IRM 21.8.2.7.1, Validating Exemption/Qualification.

When requesting receipt of the employee's portion of erroneously withheld FICA, the employer must provide a signed statement from the employee authorizing the employer to receive his/her portion, or Form 941-X with the appropriate Part II certification box checked and signed.

When the required documentation is not attached or when the employee has not been reimbursed, and there is no indication that the employee intends for the employer to receive his/her portion of the erroneously withheld FICA tax:

When there is a signed statement from the employee that the employer has given reimbursement, input the following:

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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.

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:

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:

Correspondence for exemption statements must include:

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.

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:

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:

Claims of erroneously withheld FICA tax must include:

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.

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:

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.

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

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.

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.

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

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.

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:

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

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

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

Branch profits tax assessed under IRC § 884 is not includible in total tax when determining the required annual payment of estimated tax. If an estimated 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.

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.

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

Form 1120-F filers that have effectively connected income:

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

When adjusting BMF international tax accounts using CC REQ54, or transferring credits using CC ADD24/ADD34/ADD48, input a filing location code (FLC) of 66 or 98 according to the primary location code shown on TXMOD or ENMOD. Input FLC 66 for primary location code 78 and FLC 98 for primary location code 60.

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

Refundable credits are not automatically audit criteria.

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

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.

Follow normal procedures to adjust penalties and interest (see IRM 20.1, Penalty Handbook and IRM 20.2, Interest).

If failure to pay and failure to file penalties were assessed on overseas taxpayers, See IRM 21.8.2.1.5, Timeliness Determinations.

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.

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.

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

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

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.

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

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:

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:

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.

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.

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.

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

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.

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.

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:

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.

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:

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."

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

When allowing a claim:

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 are available for refund and were not used as an offset against any outstanding balances before you include them as part of the Manual Refund.

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:

When processing an adjustment that results in a refund including interest, the interest must be manually computed. Use command code COMPAC when computing interest with computation dates up to and including 12-31-1994. For additional interest computation tools, see IRM 20.2.6.4, Interest Computation Tools.

Effective January 1, 1995, the General Agreement on Tariffs and Trade (GATT) established a lower credit interest rate for large corporate overpayments (CC COMPAG). The GATT rate is one and one half points below the normal corporate credit interest rate for overpayments exceeding $10,000 for all business taxpayers with a corporate filing requirement (Form 990-C; Form 990-T with a significant Form 990-T Corp. indicator; and any Form 1120 series).

Interest on overpayments for non-corporate BMF taxpayers is not subject to the GATT rate (See IRM 20.2.4.9.1, GATT Credit Interest Computations on Overpayments).

Effective January 1, 1999, debit and credit interest rates were equalized for all returns except for "corporations " (Restructuring and Reform Act of 1998 (RRA '98), Section 3302). A corporate overpayment interest rate is established for returns deemed to be from corporations. (See IRM 20.2.4.9, Special Credit Interest Rules for Corporations.)

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.

Prepare four-part Form 5205.

Prepare Form 1042-S.

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

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.

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

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

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.

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

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.

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.

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.

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:

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

Taxpayers excluding income from the territories 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 territory tax credit cannot claim a foreign tax credit for certain taxes paid to Puerto Rico or the Virgin Islands. Such corporations can show the territory gross income and definitely allocable deductions for foreign branches on Form 1118, Schedule F.

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

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.

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.

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:

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.

The same limitation period applies to:

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

The Tax Reform Act of 1986 and the American Jobs Creation Act of 2004 revised IRC § 904(a) on the limitation of the foreign tax credit. After 1986 and before 2007, the foreign tax credit is calculated separately for the following categories of income, then added together:

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

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.

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.

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.

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.

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).

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.

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:

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:

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.

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

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.

There are special restrictions which apply to carrybacks and carryovers.

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.

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

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:

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:

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).

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.

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.

Beginning in 2006, when a Form 8804 or 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 entitled 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 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.

Once credit availability is verified, allow withholding credit on Form 8804 with a CRN 331.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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.

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:

Effective 12/31/2005, 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.

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

All withholding agents are required to deposit the tax withheld. The amount of taxes withheld determines the frequency of deposits.

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

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.

Use the following chart to determine the frequency of deposits:

90% Rule/Safe Haven: T.D. 9507 removed the 90 percent 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:

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

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

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.

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

All taxpayers must enroll to use EFTPS by completing Form 9779, EFTPS Business Enrollment. Taxpayers can request 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).

Taxpayers can enroll in EFTPS by mailing the completed Form 9779,EFTPS Business Enrollment, or by completing the enrollment form online on the EFTPS website at http://www.eftps.gov.

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.

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

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

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The penalty calculation rate is:

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.

Refer inquiries concerning Form 1042 penalty adjustments to the International Department at the Philadelphia Accounts Management Center (PAMC). Prepare a Form 4442, Inquiry Referral, and fax to ≡ ≡ ≡ ≡ ≡ ≡ ≡ (number is for internal use only). Route penalty correspondence to PAMC at DP.1-D08.113.

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

A withholding agent must withhold income tax at the statutory rate or lower treaty rate, unless one of the following conditions are met:

All exempt or reduced withholding must be based on the applicable alien withholding certificate (1078, W-8BEN, W-8ECI, W-8EXP, W-8IMY, or W-8CE) or a statement signed under the penalties of perjury attesting to the recipient's country of residence for income tax purposes. See IRM 21.8.2.18, Withholding Certificates.

Effective January 1, 2001, Form W-8 series documents (listed below) replaced the following forms:

Form 1042 reports money withheld from nonresident alien individuals and businesses.

Most requests for adjustments occur when payers mistakenly withhold tax at the wrong rate, or from recipients exempt from taxation, either under treaty provisions or for reasons described in IRC § 1441 and IRC §1442.

The same criteria is used to decide the validity of issues raised by the taxpayer whether submitted as amended Form 1042 (the "Amended Return" box at the top of the Form 1042 is checked), Form 843, or a correspondence request for adjustment or abatement.

When claims are received without enough information to determine if the special procedural criteria listed below have been met, correspond with the taxpayer. See IRM 21.8.2.12.9, Processing Claim Adjustments for Form 1042.

Refunds by the IRS to the withholding agent or payer can only be done if the conditions set forth in IRC § 1461, IRC § 1464, and IRC § 6414 are met. The following is a list of situations where refunds of amounts claimed are acceptable:

The Form 1042-S must reflect the correct lower withholding and the deposits for the year should be reduced accordingly. Only the correct amount of withholding should be reported on the Form 1042. The excess deposits will be refunded under normal settlement procedures.

If a complete package is received, but the error was discovered after the close of the calendar year, refer to Examination. They usually recommend disallowance of the claim and/or amended Form 1042 when the:

Overpayments discovered after the return has been filed (March 15) can be claimed only by the recipient on an Income Tax Return (Form 1040NR or 1120-F) with the credit substantiated by attaching a Form 1042-S.

Follow the procedures in the following table for processing amended 1042-S forms (submitted with or without Form 1042):

Amended/corrected 1042-S forms are sometimes submitted with the amended Form 1042. In this case, the corrected 1042-S form is regarded as a supporting schedule for adjustments. If the corrected 1042-S form is with the amended Form 1042, attach copies of the 1042-S forms to the adjustment document. Send the original corrected/amended 1042-S forms to:

CP 193 notices are generated for all duplicate (multiple) return conditions processed through pipeline.

Follow general guidelines in IRM 21 and specific adjustment procedures in IRM 21.7.9.4,Duplicate Filing Conditions Procedures, to resolve the "-A" freeze unless the entity is a Qualified Intermediary (QI), in which case apply those specific procedures contained in Qualified Intermediary Agreements (QI). See IRM 21.8.2.12.10.

An adjustment to the Form 1042 account is made using:

An adjustment to the gross income paid (item reference number 011) can be done at any time.

However, no tax decrease adjustment can be made to the withholding tax after the due date of the Form 1042, unless special criteria exists. See IRM 21.8.2.12.8, Amended Returns - Form 1042.

When a claim for tax decrease is received, verify that the taxpayer has submitted substantiation.

When a taxpayer replies to the Letter 916C by submitting substantiation for the Form 1042 tax decrease:

P.L. 111-347, The 911 Healthcare Bill, signed on January 2, 2011 introduced a 2% excise tax payable by federal agencies on government foreign procurement payments. The requirement to report and pay this tax began in 2011.

This excise tax is reportable on line 71 of Form 1042 and is included in the ROFTL.

Masterfile has been programmed to identify line 71 entries as reference item 298.

If an amended return is received correcting line 71 of Form 1042, follow all general adjustment guidelines. Use REQ 54 to input TC 290 with reference code 298 to make the correction. If the correction results in a decrease, follow all Cat-A guidelines, use TC 291 and reference code 298 with a (-) minus to input the decrease.

Under Treas. Reg. § 1.1441-1(e)(5), the IRS signed an agreement which became effective on January 1, 2001 in which Qualified Intermediaries can be:

A foreign partnership or trust cannot become a QI. However, a foreign partnership, or a foreign simple or grantor trust, can enter into a Withholding Foreign Partnership (WP) or Withholding Foreign Trust (WT) agreement with the IRS under Treas. Reg. § 1.1441-5(c)(2) and (e)(5)(V). See Rev. Proc. 2003-64 and Rev. Proc. 2005-77 for agreement and application procedures. A partnership or trust that has entered into a WP or WT agreement assumes Non-Resident Alien (NRA) withholding responsibilities.

The benefits of becoming a Qualified Intermediary include:

Refer taxpayers, who question how or where to apply for QI status, to Rev. Proc. 2000-12 and Rev. Proc. 2005-77, which give guidance for entering into a QI Agreement. Applications are sent to:

There is a web site established for Qualified Intermediaries on http://www.irs.gov. Additional information can also be found in Publication 515.

If taxpayers question the time frame for approval of QI status, advise them that a QI in the range mentioned above will be issued upon receipt of the SS-4 application. Acceptance of a QI application currently takes approximately 85 days for approval and will be issued from the New York office. If there is a question on the QI status, ENMOD can be researched to see if the application was rejected. Entity will be notified to update ENMOD if the number is being revoked. See IRM 21.7.13, Assigning Employer Identification Numbers.

Ann. 2000-48 and IRB 2006-35 Notice 2006-35 provide additional guidance for financial institutions that are considering the QI regime.

Withholding Foreign Trusts and Foreign Partnerships can find procedures in Notice 2002-41.

A QI agreement generally has a duration of 6 years and is based in part on a Treasury Department Certification that the country has effective rules and/or procedures for providing tax information to the U.S. Treasury and the IRS regarding know-your-customer (KYC) rules as a vital component of adequate self-regulation. The IRS generally does not extend the QI system to any country that does not have acceptable KYC rules.

The following is a list of countries that have submitted approved KYC rules:

If the EIN is in the range noted in paragraph (5) above and the INTERMEDIARY IND on the BRTVU is 1, the entity is a Qualified Intermediary. If the indicator is "2" , the entity is a NON-QI. This indicator comes from the top portion of Form 1042 below the address stating "Check if you are a QI/Withholding foreign partnership or trust" . If these conditions are present, the taxpayer is a Qualified Intermediary and there may be a Line 66 entry.

If an unnumbered Form 1042 is received without a QI EIN, but the QI box is checked, send it back to the taxpayer with an explanation of the requirements.