Information Reporting for Forms 1042-S and 1042-T
Missing and Incorrect Information
IRS data indicate that at least 31 percent of the 2003 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, Foreign Person's U.S. Source Income Subject to Withholding.
TIN Requirement
Generally, if a Taxpayer Identification Number (TIN) is not provided on Form 1042-S, the withholding agent must apply tax at a rate of 30% (30.00). The TIN, name, and address of the recipient are required to be entered on the annual information forms for identification of the payee. The TIN is the social security number (SSN) issued by the Social Security Administration (SSA), IRS Individual Taxpayer Identification Number (ITIN), or an Employer Identification Number (EIN) issued by the IRS. Failure to report a TIN or a correct TIN may result in penalties assessed by the IRS. Refer to IRS Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs and/or Filing Forms 1042-S Without Payee Taxpayer Identification Numbers.
Completion of Withholding Certification
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 or W-8 BEN 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.
Incorrect Reporting of Gross Income
It has come to our attention that a number of withholding agents are reporting substantial excess gross income paid and tax withheld. In many cases, the software programs are simply deleting the decimal point, resulting in an amount reported that is actually 100 times more than the actual amount paid or withheld (e.g., $152.13=$15213). We strongly recommend that all withholding agents review their programming documentation to assure they are not transmitting this error to the IRS, since this information forms the basis of exchange of information with U.S. tax treaty partners.
Contact Information
Withholding agents are requested to include the name, address and a telephone number of a contact on Form 1042-S. This contact name and number should provide direct access to an individual who can answer questions about the statement(s). The telephone number, including any extension, should be a direct number and not a general business number.
Refer to Publication 1187, Specifications for Filing Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically or Magnetically for further information.
Filing Forms W-2 and 1042-S Without Payee TIN's
Withholding agents sometimes find it necessary to file information returns such as Forms W-2, 1042-S, 1099, etc. without having secured the Taxpayer Identification Number (TIN) of the payee. In such situations the withholding agent may follow the procedures below.
Treasury Regulation 301.6109-1(C)
(c) Requirement to furnish another's number. Every person required under this title to make a return, statement, or other document must furnish such taxpayer identifying numbers of other U.S. persons and foreign persons that are described in paragraph (b)(2) (i), (ii), or (iii) of this section as required by the forms and the accompanying instructions. If the person making the return, statement, or other document does not know the taxpayer identifying number of the other person, such person must request the other person's number. A request should state that the identifying number is required to be furnished under authority of law. When the person making the return, statement, or other document does not know the number of the other person, and has complied with the request provision of this paragraph, such person must sign an affidavit on the transmittal document forwarding such returns, statements, or other documents to the Internal Revenue Service, so stating. A person required to file a taxpayer identifying number shall correct any errors in such filing when such person's attention has been drawn to them.
The above regulation allows a withholding agent who has solicited the Taxpayer Identification Number (TIN) of an alien, and such alien has neglected or refused to provide such TIN, to avoid the penalty for failing to provide a payee TIN on an information return or on a payee statement (e.g., Forms W-2, 1042-S, 1099, etc.) by attaching an affidavit to the Forms W-2, 1042-S, 1099, etc. when filed (on paper or disk) which lists the names of all aliens from whom the withholding agent solicited TIN's and was not able to secure such TIN's. A TIN must be on a Withholding Certificate if the beneficial owner is claiming any of the following: tax treaty benefits (other than for income from marketable securities), exemption for effectively connected income, exemption for certain annuities, or an exemption based on exempt organization or private foundation. In addition, a TIN must be on a Withholding Certificate from a person claiming to be any of the following: a qualified intermediary, withholding foreign partnership, grantor trust with 5 or fewer grantors, exempt organization, or a U.S. branch of a foreign person treated as a U.S. Person.
Currently, the IRS has not provided a procedure for a withholding agent who files his Forms W-2, 1042-S, 1099, etc. magnetically or electronically to file the affidavit mentioned above. As an alternative, the withholding agent should prepare the affidavit mentioned above, keep the affidavit in its files, and submit it to the IRS only in response to a proposed penalty on the withholding agent for failure to report payee TIN’s on any Forms W-2, 1042-S, 1099, etc. As an additional precaution, he may attach a copy of the affidavit to his Form 941, Form 943, Form 945, Form 1042, etc. if he files those returns by paper.
There is no federal law which prevents a withholding agent from legally making a payment to a payee for the sole reason that the payee does not have a TIN. However, sections 6721, 6722, and 6723 of the Internal Revenue Code allow the IRS to impose penalties on withholding agents who fail to report payee TIN's on information returns and payee statements (Forms W-2, 1099, 1042-S, etc.) which report payments made to payees. However, Treasury Regulations found at 301.6724-1 contain "reasonable cause" criteria which a withholding agent can use to establish acceptable reasons for not providing a payee TIN on an information return or a payee statement, and thus avoid the penalties which the IRS might otherwise impose on the withholding agent for not providing payee TIN's on information returns and payee statements.
Treas. Reg. 301.6724-1 provides relief so that the IRS should not be allowed to assess penalties against a withholding agent who has taken every reasonable step to secure a payee TIN from an alien payee who has neglected, refused or otherwise been unable to acquire a TIN. It is the policy of the IRS that a withholding agent should take every reasonable step to secure a payee TIN from an alien payee, but that the IRS does not intend to penalize a withholding agent who has taken such reasonable steps and been ignored by an alien payee who has neglected or refused to apply for a TIN, or otherwise been unable to acquire a TIN. If the IRS has assessed, or has proposed to assess, a penalty against a withholding agent for failure to provide a payee TIN on a Form 1042-S or other information return, the withholding agent should make every effort to study the "reasonable cause" criteria provided at Treas. Reg. 301.6724-1 in order to avoid, or have abated, the penalty for failure to provide a payee TIN on Form 1042-S or other information return. For more information on IRS penalties relating to information returns and payee statements please refer to Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs.
Note: This page contains one or more references to Internal Revenue Code (IRC) sections. A link to the Internal Revenue Code is included for the convenience of those who would like to read the technical reference material. To access the applicable Internal Revenue Code sections visit the Tax Code, Regulations, and Official Guidance page.
