Reminder to US Withholding Agents and Non-US Citizens of Potential Filing Obligations

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The IRS has issued a news release reminding non-U.S. citizens who have taxable income, such as international students who receive scholarship funds, of their potential filing obligations. The IRS also reminded withholding agents that accurately filing Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, will help speed any refunds to non-U.S. citizen taxpayers.

An accompanying fact sheet further explained the Form 1042-S requirements, outlined common errors and previewed changes to the 2017 version of the form.

Filing Obligations of Non-US Citizens

Filing obligations of non-U.S. citizens. Non-U.S. citizens, defined by the Code as either resident or nonresident aliens, who are engaged in a trade or business within the U.S. are generally required to file tax returns. Nonresident aliens such as foreign students, teachers or trainees temporarily in the U.S. on F, J, M or Q visas are considered engaged in a trade or business.

Most individuals in F-1, J-1, M-1, Q-1 and Q-2 non-immigrant status are eligible to be employed in the U.S. and are eligible to apply for a Social Security number if they are actually employed in the U.S. Those not eligible for an SSN but who have a tax filing requirement may request an Individual Taxpayer Identification Number (ITIN) from IRS.

Filing a Form 1040-NR, U.S. Nonresident Alien Income Tax Return, or 1040NR-EZ, is required by non-U.S. citizens who have a taxable event such as a taxable scholarship or fellowship, income partially or totally exempt from tax under the terms of a tax treaty or any other income which is taxable under the Code.

Non-U.S. citizens also must attach one copy – generally Copy B – for each Form 1042-S received to their tax returns. Non-U.S. citizens should review the Form 1042-S to ensure it accurately reflects their name and income, and if it doesn’t, contact the withholding agent for an amended Form 1042-S.

Obligations of withholding agents

Generally, non-U.S. citizens who have taxable income also may have withholding of taxes by the source of their income. Withholding agents are required to complete five copies of Form 1042-S: Copy A goes to IRS; Copies B, C, and D go to the income recipient; and Copy E is retained by the agent. All information must match exactly on all copies.

If withholding agents create a substitute Form 1042-S, all five copies must be in the same physical format. The size, shape and format of any substitute form must adhere to the rules of Pub 1179.

Form 1042-S common errors. The fact sheet provided the following tips to avoid common errors associated with Form 1042-S filing:

  • Report the recipient’s name exactly as it appears on the official documentation provided to the withholding agent, such as a Social Security Administration card or some other form of official governmental documentation. Otherwise, the recipient’s claim for credit or refund will be denied.
  • Don’t report two or more recipients in box 13a. For payments made to joint accounts, the withholding agent must either (i) issue a single Form 1042-S made out to the owner whose status the withholding agent relied upon to determine the withholding tax rate – the owner subject to the highest rate of withholding; or (ii) if one of the owners requests a separate Form 1042-S, allocate the payment and tax withheld among the joint owners and issue a separate Form 1042-S to each.
  • To request an automatic 30-day extension, file Form 8809, Application for Extension of Time to File Information Returns, before the March 15 due date of the Form 1042-S. If more time is needed, a second Form 8809 must be filed before the end of the initial extension period. Further extensions are granted only at IRS’s discretion upon the showing of extenuating circumstances. Don’t use Form 7004 for an extension to file Form 1042-S.
  • If an amended Form 1042-S is required, it must be filed with IRS and copies must be furnished to the recipient. The information on each copy of the amended Form 1042-S must match exactly. If a Form 1042-S has never been filed for a recipient, the withholding agent should issue an original Form 1042-S.

Looking ahead—2017 Form 1042-S. IRS also previewed the following changes to the 2017 Form 1042-S:

  • The IRS has created a new field on the 2017 Form 1042-S that will require withholding agents to assign a unique identifying number to each original Form 1042-S that is filed. The Unique Form Identifier (UFI) must be numeric and exactly 10 digits, and one must be assigned to each original Form 1042-S that is filed.
  • A new box has been added for withholding agents to indicate the number of amendments that have been made to the same Form 1042-S, as determined by the Form’s UFI. This will assist the IRS in identifying which information return is being amended when multiple information returns are filed by a withholding agent with respect to the same recipient.
  • New fields have been added for payer chapter 3 and 4 status codes in order to allow the IRS to determine the status of a withholding agent in cases in which it uses an agent to fulfill its withholding obligations.

Additional Resources

IRS Clarifies Form 1042-S Requirements for Withholding Agents; Outlines Common Errors

Ask the Experts

Kimberlee S. Phelan - CPA, MBA, Partner Kimberlee S. Phelan, CPA, MBA
Partner, Practice Leader, International Service
T (609) 520 1188
kphelan@withum.com
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kphelan@withum.com

To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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