The Large Business and International (“LB&I”) division of the IRS has several active campaigns to address taxpayer noncompliance related to unreported income, undisclosed assets or any other tax avoidance scheme. Specifically, the LB&I division is currently focusing on Forms 1042/1042-S compliance. This area of often overlooked by CPAs when payments are made to foreign persons.
In most cases, Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is used to report amounts paid to foreign persons (including those presumed to be foreign) by a United States entity or business. This applies to non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts that are subject to income tax withholding. The form reports amounts withheld under Chapter 3 or Chapter 4. Even if no amount has been deducted (i.e., withholding tax) from the payment due to a treaty or taxation exception, Form 1042-S is still required to be timely filed. Royalties, interest, dividends, and other types of income examples of payments that should be reported on Form 1042-S.
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is used to report tax withheld on the income of foreign persons. Therefore, Form 1042 is concerned with how much income will be withheld for tax purposes, and Form 1042-S is only concerned with payments made to foreign persons. A withholding entity only needs to file a Form 1042 with the IRS, not with the employee. In addition, Form 1042 can be filed by itself, while Form 1042-S must always be filed together with Form 1042-T.
McGuire Sponsel’s Global Business Services team is experienced in this area. If you have any questions about our team or any global business issue, do not hesitate to reach out.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.