Tax & Accounting Blog

IRS Implementing New Systems to Find and Assess Penalties on Form 1042-S Filing Failures

ONESOURCE, Tax Information Reporting, Trust Tax May 23, 2011

A report from the federal Treasury Inspector General for Tax Administration (TIGTA) pointed out problems of underpayment of U.S. tax by foreign persons.  This included payers not withholding correct amounts of federal income tax, and foreign persons claiming tax refunds they weren’t actually entitled to receive.  To give the IRS a stronger cross-matching program to find these errors, TIGTA recommended that the IRS fix certain “control weaknesses” so there can be better verification of refunds claimed by nonresident aliens, prior to such refunds being sent to the NRAs who claimed them.  The IRS has agreed with the recommendations and is taking appropriate corrective actions.
The IRS has created a screen on the internal IRS individual master file (IMF) which will provide a total of all Forms 1042-S filed electronically and on paper for each withholding agent.  (In tax parlance, the withholding agent is simply the payer which has the responsibility of filing Forms 1042-S and 1042, and withholding U.S. tax from payments whenever withholding is required.)  IRS implementation of this new screen in their IMF will facilitate the penalty process and improve compliance with the regulations.  This includes penalties for failures to file Forms 1042-S, and it also includes failures to file electronically when the payer has 250 or more 1042-S forms due.
The IRS is working with the Office of Servicewide Penalty and Interest to begin assessing penalties for late filing, inaccurate filing, or erroneous paper filing (filing 250 or more Forms 1042-S on paper instead of electronically) of Forms 1042-S.  The IRS plans to automate the penalties for filing Forms 1042-S late and for filing more than 250 Forms 1042-S on paper.  We expect to see this in the August 2011 round of proposed penalty notices.