Tax & Accounting Blog

Form 1042-S: IRS Alerts Payers to the Correct Use of Codes for Unknown Recipient and Unknown Country

1042-S, 1099, International Reporting & Compliance, ONESOURCE, Tax Information Reporting, Trust Tax, W-8 & W-9 Foreign Reporting, Withholding Management January 10, 2012

A perennial problem in Form 1042-S reporting, noted by the IRS in the current edition of Publication 1187, is misreporting which results from the payer not making correct use of Unknown Recipient (recipient code 20) and Unknown Country (country code UC). UC is used as a country code only when you conclude you have paid an unknown recipient and will code box 13b of the 1042-S with 20. 

Publication 1187 defines an unknown recipient as a “recipient for whom no documentation has been received by a withholding agent or intermediary or for which documentation received cannot be reliably associated. This includes incomplete documentation. An unknown recipient is always subject to withholding at the maximum applicable rate of 30%. No reduction of or exemption from tax may be applied under any circumstances.” 

You should consider using recipient code 20 any time you know the payee is acting for the benefit of someone else and you fail to receive documentation from the true beneficial owner of the income you are paying. Here is an example: You receive a W-8IMY from a nonqualified intermediary or a flow-through entity (such as a partnership, or grantor or simple trust), without details on the actual beneficial owners. A W-8IMY alone gives you information about the intermediary for the owners, but that is not enough. The W8-IMY should have Forms W-8BEN attached as documentation of the actual owners to whom the income will be passed. When you have the W-8IMY but not the W-8BENs, you do not know who the beneficial owners really are or in what country they reside. This is a situation in which it is proper to use recipient code 20, Unknown Recipient, in box 13b of the Form 1042-S. You complete boxes 17 through 20 of the Form 1042-S with the information you have obtained on the Form W-8IMY from the agent (or nonqualified intermediary or flow-through entity) to which you made the payment. 

Another example: You have a payee name and a care-of address to which payment is supposed to be sent, but no permanent address for the payee has been furnished to you. This is a situation in which it is proper to use recipient code 20, Unknown Recipient, in box 13b of the Form 1042-S. The payment will have been subject to 30 percent withholding. Remember that a care-of address on a W-8BEN gives reason to doubt the form and triggers the requirement to obtain additional information from the payee to support a foreign status claim. See IRS Publication 515 for more information.