Tax & Accounting Blog

IRS Issues Draft of Form 1042 for 2014, to Report Withholding on U.S. Source Income of Foreign Persons

1042-S, 1099, International Reporting & Compliance, Nonresident Alien Taxation Webcasts, ONESOURCE, ONESOURCE Nonresident Alien Taxation, Tax Information Reporting, Tax Information Reporting Webcasts, Trust Tax, Trust Webcasts, W-8 & W-9 Foreign Reporting, Year End May 8, 2013

The IRS has issued a draft of Form 1042 for calendar year 2014 reporting. The first use of the new version of this information reporting form will be the reconciliation of 2014 withholding, due date Match 15, 2015. A draft of the form can viewed on the IRS website. The IRS has not yet issued a draft of the new Instructions for this form.

This is a substantially revised and expanded form which requires you to report information not previously tracked or reported. The 2014 Form 1042 will be the first 1042 on which you must explain and reconcile both your withholding under Chapter 4 of the Internal Revenue Code (FATCA withholding rules) and Chapter 3 of the I.R.C. (the longer-established withholding-at-source rules). Just as is the case now, if you make payments to foreign individuals or entities required to be reported on Form 1042-S, you also have a requirement to file an annual Form 1042 – whether or not you withheld or were required to withhold tax on any of the 1042-S reportable payments.

The Form 1042 for 2014 has become a two-page form, instead of a single page form. Instead of the current 10 lines on which to report dollar amounts, the new Form 1042 provides 23 lines on which dollar amounts may be reported, because more types of information are required to be broken out for reporting. A careful review of those 23 lines now (lines 62 through 71 including subordinate lines which for some numbers run from (a) to (e)) will help you to identify the data you must track to prepare for filing the new Form 1042. The new lines include separate reporting of your organization’s net tax liability under chapters 3 and 4 of the Internal Revenue Code.

Also entirely new on the 2014 Form 1042 is “Section 2” which is a nine-line reconciliation of your payments of U.S.-source FDAP income. Section 2 requires you to break out totals of Chapter 4 FATCA income not withheld upon: based on payee exempt FATCA status, based on exempt non-financial payments, based on grandfathered FATCA income, and based on ECI (income effectively connected with the conduct of a business in the United States). If at the last line of this reconciliation section you show a variance – any amount other than zero – you are required to write in an explanation in lines provided at the end of Section 2.

Finally, the 2014 includes a new “Section 3” for separate reporting of whether any payments (including gross proceeds) were made under notional principal contracts or other derivatives contracts that reference a U.S. security.

You can send comments to the IRS about this draft Form 1042 for 2014 by emailing with “2014 Form 1042” in the subject line, or using the comment form on the IRS website.

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