Best Practices for Filing Form 1042: A Summary of IRS Guidelines

In the August 30 FATCA News & Information Newsletter, the IRS has offered guidance on recommended procedures for withholding agents submitting Form 1042, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. The extended deadline for this Form is September 15, 2023, and many taxpayers are seeking guidance as they complete their annual tax returns.

What is Form 1042?

Form 1042 is used for reporting withholding agents who “have custody of, disposes of, or makes a payment subject to withholding” for the preceding calendar year. There are additional requirements to file this Form for Publicly Traded Partnerships or nominees that are required to report distributions per Sections 1445 & 1446 of the IRC. Form 1042 can often cause confusion amongst taxpayers without in-depth knowledge of tax reporting, which is why the IRS has released a guide to help correct some of the most common errors taxpayers make when filing this Form every year.

What is a Withholding Agent?

A withholding agent is a U.S. or foreign person that has “control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.”

IRS Guidance:

• Use the current year (2022) version of the Form 1042, and avoid accidental use of outdated versions of the Form.
• Refer to the instructions for Form 1042 published by the IRS often; these instructions have been revised in recent years to make them easier for taxpayers to understand.
• Ensure completion of all required fields in a consistent manner.
• When applicable, ensure all required attachments are included in the package delivered to the IRS.
• Verify all math performed in the calculations necessary to complete the Form are correct, and that the tax liability is reported accurately.
• Verify all required payments have been made electronically using the Electronic Federal Tax Payments System (EFTPS).

Additional Notes: Filing Form 1042 electronically is an option for withholding agents to expedite filing for the current tax year 2022, but it is not a requirement. The IRS strongly advises taxpayers to do so if possible. Starting in 2024 (for Tax Year 2023), filing electronically will become a requirement for certain withholding agents; see Treasury Regulation Section 301.6011- 15 to confirm if this requirement will impact you.

For any questions on filing Form 1042 or guidance on any of our international tax services, please contact our Global Business Services team.