The IRS updated the Form 1042 instructions for 2014. The updates as described below by the IRS clearly show why an international tax consultant is needed for any taxpayer needing to file IRS Form 1042. IRS Form 1042 is the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. Form 1042 is used to report the tax withheld under chapter 3 on certain income of foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts. The International Tax Team at LSL CPAs has extensive experience helping foreign taxpayers fill out Form 1042 effectively and quickly.
The IRS changes to IRS Form 1042 include the following provisions:
“The instructions provided below in this update are intended to supplement and, if indicated, replace the specified sections of the 2014 Form 1042 instructions.
- Escrow Procedure
A withholding agent that withheld tax during calendar year 2014 and that was not required to deposit with the IRS the amount of tax withheld during calendar year 2014 pursuant to the escrow procedure under §1.1471-2(a)(5)(ii) or 1.1441-3(d) should not report such amount as a liability on lines 1 through 60 or lines 64a through 64d and should not report such amount as withheld on lines 63a through 63d. An amount held in escrow is required to be reported on the future calendar year return for the year in which the withholding agent is required to deposit the amount of tax with the IRS.
- Reimbursement Procedure
…The reimbursement amount may not be more than the amount you actually repaid. The amount of the reduced tax liability for amounts repaid to the beneficial owner or payee during the calendar year must be reflected on the line for the period you reduced your liability….
…For example, if you overwithhold tax in 2014, you must repay the beneficial owner by March 16, 2015 (or the date on which you filed the associated Form 1042-S with the IRS, if earlier). You must keep a receipt showing the date and amount of the repayment and provide a copy of the receipt to the beneficial owner. If you repaid the beneficial owner after year end 2014, you must report the repayment on line 63c. You must reduce your Federal tax liability on line 59 of your 2014 Form 1042 by the amount of the repayment and may claim a credit on line 71 for the amount of the difference between your tax liability and your deposits with the IRS. You may reimburse yourself by reducing any subsequent deposits you make before the end of calendar year 2015 (the year after the calendar year in which the amount was overwithheld).”
The Challenges of IRS Form 1042
Although this segment quotation is not comprehensive and does not include all of the changes, it gives you a sense how confusing the process of filling out Form 1042 can be for a non-tax professional. Please contact the international tax team at LSL CPAs for help.
Pursuant to U.S. Treasury Department Regulations, any federal tax advice in this article is not intended or written to be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
It is important to further note that this article presents only a partial view of the subject matter. It does not claim or attempt to be comprehensive or perfectly accurate. To learn more about how these issues might apply to your particular tax issues, please call LSL CPAs international tax accountant Yana Weaver at 714.569.1000.
