IRS offers online tool for U.S. withholding agents to report foreign income

The Internal Revenue Service introduced an online tool Monday to help U.S. withholding agents comply with their reporting and withholding responsibilities for IRS Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).

The tool does a quality review of data before it’s submitted to the IRS. The IRS noted, however, that use of the tool doesn’t change a withholding agent’s obligations to file Forms 1042-S with the IRS and furnish a copy of the Form 1042-S to the payee.

In general, withholding agents, such as banks, insurance companies, universities, entertainment venues and resorts, or other financial institutions are required to file an information return on Form 1042-S to report amounts paid from U.S. sources to foreign persons. The definition of a withholding agent includes any person, U.S. or foreign, that has control, receipt or custody of amounts that are subject to the rules under Internal Revenue Code Chapter 3 (Withholding of Tax on Nonresident Aliens and Foreign Corporations) or Chapter 4 (Taxes to Enforce Reporting on Certain Foreign Accounts, i.e. FATCA or the Foreign Account Tax Compliance Act).

“U.S. withholding agents play an important role in helping the IRS administer the tax code so we are delighted to be able to provide this tool free of charge to assist agents in meeting their filing requirement,” said IRS Large Business and International division commissioner Nikole Flax in a statement.

The new tool will accept Form 1042-S data in common file formats that can be generated by most withholding agents’ back office systems. After uploading the data, the user will receive a report indicating errors and potential errors. A tutorial on how to use the tool is available for viewing online or it can be downloaded.

Even though the tool identifies data errors, the IRS pointed out that a withholding agent is still responsible for making changes to the data on the agent’s system of record before submission to the IRS. The list of resources below will help agents understand and correct errors before submitting Forms 1042-S.

The tool can be used as often as necessary on new or revised data. The IRS said it has no access to the users’ data. Use of the tool is voluntary, but the IRS will take into account a withholding agent’s use of the tool when making enforcement and penalty determinations.

The IRS is asking information reporting and withholding industry experts and withholding agents to share information about the new tool with any withholding agents who can benefit from using it.

Resources

• Form 1042-S, Instructions in PDF or HTML and any recent updates;
• Form 1042, Instructions in PDF or HTML and any recent updates;
• Publication 1187 (.pdf),Specifications for Electronic Filing of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding; and
• Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.