On November 6, the IRS has released a draft of the new Instructions for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for 2014. As the draft of the form itself, issued earlier this year without any instructions, showed, the IRS is making substantial changes in Form 1042 and expanding it to two pages. New sections and many new lines have been created, and the form calls for the reporting of information not previously tracked by payers’ systems or reported to the IRS. Beginning with this form which will report 2014 payments and withholding, the Form 1042 provides for identification and reconciliation of your withholding both 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).
Transition relief is provided for the new data elements that will be reported in Section 2 of the new Form 1042. The newly released Instructions specify that for 2014, the new Section 2 of Form 1042 is optional. In future years, completion of Section 2 will be required. Section 2 reconciles income reportable under FATCA rules (“chapter 4”) with the total of all U.S.-source FDAP income (“fixed or determinable annual or periodic”) income reported on all of the withholding agent’s Forms 1042-S for the year. Section 2 breaks this information out as follows:
1. Total U.S. source FDAP income required to be withheld upon under chapter 4
2. Total U.S. source FDAP income not required to be withheld upon under chapter 4 because:
-2a Amount of income paid to recipients whose chapter 4 status established no withholding is required .
-2b Amount of excluded nonfinancial payments (see instructions)
-2c Amount of income paid with respect to grandfathered obligations
-2d Amount of income effectively connected with the conduct of a trade or business in the U.S.
-2e Total U.S. source FDAP income not required to be withheld upon under chapter 4
3. Total U.S. source FDAP income reportable under chapter 4
4. Total U.S. source FDAP income reported on all Forms 1042-S
5. Total variance, subtract line 3 from line 4, if amount other than 0 provide explanation on line 6
Even without the requirement to complete Section 2, the 2014 Form 1042 is a huge change from the current form. The draft Instructions for Form 1042 for 2014 are available at http://www.irs.gov/pub/irs-dft/i1042–dft.pdf and the draft Form 1042 for 2014 is available at http://www.irs.gov/pub/irs-dft/f1042–dft.pdf