On its website, IRS has updated its general frequently asked questions (FAQs) about the obligations of FATCA withholding agents to provide relief for late filing of Forms 1042 and 1042-S and late withholding with respect to these forms for 2020 and 2021.
Background.
FATCA (Chapter 4 of the Code, i.e., Code Sec. 1471 through Code Sec. 1474) requires that foreign financial institutions (FFIs) and certain other non-financial foreign entities report on the foreign assets they hold on behalf of their U.S. account holders or be subject to 30% withholding on withholdable payments to the FFIs and non-financial foreign entities unless they meet an exemption.
Withholdable payments include payments of dividends (Code Sec. 1473(1)(A)), including dividend equivalents. (Reg §1.1441-3(h)(1))
A FATCA withholding agent must report withholdable payments on either Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) or Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).
A FATCA withholding agent that fails to file Form 1042 or 1042-S is subject to various interest, penalties, and additions to tax. (Reg § 1.1474-1(h))
The IRS has previously said that, for 2017 through 2019, a FATCA withholding agent would not be subject to interest, penalties, or additions to tax for failing to withhold and report by March 15 of the next year, on a payment of a dividend equivalent made with respect to a derivative referencing a partnership, provided that the FATCA withholding agent withholds and reports on Form 1042 and Form 1042-S with respect to the payment by September 15 of the subsequent year. In a case in which a FATCA withholding agent withholds after March 15, the FATCA withholding agent should file a Form 1042 (if the dividend equivalent payments are the only payments reportable for the year) or an amended Form 1042 by September 15, and write “Dividend Equivalent-Partnership” in the top center portion of Form 1042. The FATCA withholding agent should also file Form(s) 1042-S or amended Form(s) 1042-S by September 15 for the dividend equivalent payment. Finally, when depositing the tax withheld for a dividend equivalent payment, the FATCA withholding agent must designate the payment as being made for the appropriate calendar year in accordance with the instructions to Form 1042. (FATCA – FAQs General, Q&A-23, before updated)
General Compliance FAQs updated.
The IRS has updated Q&A-23 in the set of General Compliance FAQs to provide rules for 2020 and 2021 that are similar to the rules in Q&A-23 for 2017 through 2019. In the updated FAQ, for calendar years 2020 and 2021, a FATCA withholding agent will not be subject to interest, penalties, or additions to tax with respect to a dividend equivalent payment made with respect to a derivative referencing a partnership provided that the FATCA withholding agent withholds and reports on Form 1042 and Form 1042-S with respect to the payment by September 15, 2021 (for the 2020 calendar year), or September 15, 2022 (for the 2021 calendar year).
In a case in which a FATCA withholding agent withholds after March 15 of the subsequent year, the FATCA withholding agent should file a Form 1042 (if the dividend equivalent payments are the only payments reportable for the year) or an amended Form 1042 by September 15, 2021, or September 15, 2022 (as applicable), and write “Dividend Equivalent—Partnership” in the top center portion of the 2020 or 2021 Form 1042. The FATCA withholding agent should also file Form(s) 1042-S or amended Form(s) 1042-S by the applicable date noted above with respect to the dividend equivalent payment.
Finally, when depositing the tax withheld for a dividend equivalent payment made in 2020 or 2021, the FATCA withholding agent must designate the payment as being made for the applicable calendar year in accordance with the instructions to Form 1042.
To continue your research on obligations of FATCA withholding agents, see FTC 2d/FIN ¶O-13077.
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