IRS Revises 2014 Form 1042 Instructions For Withholding On U.S. Source Payments

Form 1042, Revised Instructions

The IRS has updated the 2014 instructions for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, to provide additional guidance under Chapter 3, withholding on U.S. payments to foreign persons, and Chapter 4, the Foreign Account Tax Compliance Act (FATCA). The updates follow the IRS’s previous release of final Form 1042 for 2014 plus instructions.

ExactCPA COMMENT The 2014 version of Form 1042 reflects the requirements of FATCA and must be filed by taxpayers in 2015 to report withholding for 2014. The revised instructions incorporate changes and additions needed for reporting on the form.

Background

FATCA requires foreign financial institutions (FFIs) to identify their accounts that have U.S. owners and to provide information on the accounts. U.S. financial institutions that make payments to FFIs and to other entities maintaining foreign account must withhold 30 percent of the payments if the entity does not comply with FATCA.

Form 1042 is filed by withholding agents and other intermediaries who receive, control, dispose of or pay a withholdable payment.

Updates

The updates, dated November 13, 2014, supplement or replace specified sections of the instructions, as follows:

• Escrow procedure: a withholding agent that withheld tax during calendar year 2014 but was not required to deposit the tax with the IRS should not report the amount as a liability or an amount withheld. The amount should be reported in a future year when the withholding agent must deposit the tax with the IRS.
• Escrow procedures: these are used to reduce the amount withheld from income paid to a beneficial owner during the calendar year or a subsequent year.
• Reimbursement procedure: The withholding agent repays the beneficial owner an amount overwithheld, using its own funds for the repayment, and reimbursing itself by reducing the amount of a subsequent tax deposit.
• Reporting on lines 63a through 63e (withholdings, reimbursements, and taxes assumed by the withholding agent);
• Reporting on lines 64b and 64c (total net tax liability under Chapters 3 and 4, respectively); and
• A QSL (qualified securities lender) engaged in borrowing U.S. securities and lending them to unrelated customers, and claiming a credit forward.