The international tax experts at LSL CPAs understand that filling out Form 1042-S can be difficult if you do not have the experience and expertise of a tax professional. This is part of an ongoing blog series examining some of these challenges. The process is so challenging that the IRS has a website page focused on the challenges involved: The ten most common errors for completing Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.
The IRS is doing its best to effectively deal with globalization and the international community’s presence in the American economic spectrum. As a result, they assure the site visitor that the page is designed to help you. Although this is probably true, the information delivered is quite difficult for the nonprofessional to understand and properly use to their benefit.
As the fourth part of this ongoing series, let us provide you with Problem 7 and Problem 8 of the ten common errors the IRS wants you to avoid when completing IRS Form 1042-S:
7. A Qualified Intermediary Employer Identification Number (QI-EIN) is entered in Box 14 (Withholding Agent’s EIN field), and Box 12 (Recipient Code field) reports a recipient code other than “12” (Qualified Intermediary). In addition, the QI EIN checkbox in Box 14 is checked, and the Withholding Agent EIN is not a QI-EIN. Please remember that A QI-EIN is for QI reporting purposes only and should not be used on any tax return other than Forms 1042, 1042-T, 1042-S, or 945.
8. Country of residence entered in Box 15 (Recipient’s Country of Residence for Tax Purposes field) is inconsistent with the country code entered in Box 16 (Recipient’s Country Code field). The country code used must be a valid code taken from the Country Code Table. Using “OC” or “UC” will generate an error condition. If a recipient claims treaty benefits, the country code can never be “OC” or “UC.”
What exactly is a QI-EIN, and do you already have one? What is a Withholding Agent, and why do they have their field? What treaty benefits can be taken, and should you be taking them? If you cannot designate your country of residence, how can you fill out the form? If a piece of the puzzle is missing, should you withhold it at the highest rate?
The problem is that one mistake can spell disaster. Yes, the IRS is doing its best to enhance the processing of Chapter Three Withholding (CTW) Program information returns. The Internal Revenue Service wants to help, but these instructions confuse the nonprofessional. Luckily, such challenges are never a problem, and the answers are second nature to our international tax experts.
Regarding such key distinctions, working with an inexperienced accountant is a mistake. You need to work with tax experts with a proven track record regarding IRS foreign reporting and withholding requirements. Your tax representative should know how to fill out Form 1042-S because they have done it countless times.
LSL CPAs have the expertise to guide you through filling out Form 1042-S without making any errors and knowing how to optimize your withholdings. In addition, although this content contains accurate information, it is inherently limited because of the length of the article and the complexity of the issues at hand. As a result, it presents only a partial view of the subject matter. To learn more about how these issues might apply to your particular filing case or tax situation from a more three-dimensional perspective, please call LSL CPAs international tax consultant Yana Weaver at 714.569.1000.
