Missing and Incorrect Information
IRS data indicates that a significant percentage of the Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, and 1042-T, Annual Summary and Transmittal of Forms, filed with the Internal Revenue Service had incorrect or erroneous information, including invalid income codes, invalid tax rates, boxes requiring an entry left blank, and recipient identified as “Unknown.” In general, an “unknown recipient” is a recipient from whom no documentation, or incomplete documentation, has been received by a withholding agent. An unknown recipient is always subject to withholding at the maximum applicable rate. See the list of the ten most common errors found during the processing of Form 1042-S.
Generally, a Taxpayer Identification Number (TIN) is required on Form 1042-S, to reduce the tax rate of withholding that a withholding agent must apply tax to less than 30%. Exceptions include certain code-based reductions (such as portfolio interest) and treaty rates on marketable securities (such as on most stocks and bonds paid through a brokerage). The TIN is the social security number (SSN) issued by the Social Security Administration (SSA), the Individual Taxpayer Identification Number (ITIN) issued by the IRS, or the Employer Identification Number (EIN) issued by the IRS. If the sole purpose of supplying a TIN is to request treaty benefits, the recipient’s Foreign TIN (FTIN) can now be used to identify the recipient that is a resident of a treaty country. In any case, if the withholding agent has the TIN, FTIN or GIIN (Global Intermediary Identification Number) of the recipient, these are required to be entered on the Form 1042-S.
TINs on Withholding Certificates
Unless there is an exception, any withholding agent who receives a Form 8233 or, generally, a W-8BEN without a payee TIN for the purpose of claiming a tax treaty benefit is not allowed to grant that benefit until a proper Form 8233, W-8BEN or W-8BEN-E that does report the payee's TIN is received. In short, this means that, in the case of payments to nonresident aliens, if an NRA does not report his/her TIN to the withholding agent or does not meet an exception, the withholding agent is required to withhold 30% federal income tax on the payment(s) and the NRA is not entitled to any tax treaty benefit until a TIN is provided. There is an exception for payments of FDAP income that are paid on marketable securities if the withholding agent has the facts necessary to make this determination. There is also an exception to the TIN requirement for “portfolio interest” payments. See Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Incorrect Reporting of Gross Income
Some withholding agents are reporting gross income paid where the dollars and cents intended are being transmitted as dollars only, 100 times too high. Per Publication 1187, Specifications for Electronic Filing of Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding (PDF), all income, withholding, and repayment fields must be reported in whole dollars only. Do not enter cents in amount fields. Please confirm your submissions do not contain this error. With the exchange of this information with treaty partners of the U.S., checking this might also prevent your recipients from being accused of underreporting their income.
Withholding agents submitting electronic Forms 1042-S are required to include the name, address and a telephone number of an additional contact person with their submission of Forms 1042-S. This contact name and phone number should provide direct access to an individual who can answer questions about the submissions. The telephone number, including any extension, should be a direct number and not a general business number.
Refer to Publication 1187 (PDF) for further information.