The expansion of the use of Form 1042-S has created a very broad definition of those who may be required to file the form. This stems from the inclusion of Chapter 4 payments on the form as required under the Foreign Account Tax Compliance Act (FATCA). As discussed, the purpose of FATCA is to locate and track foreign accounts held by US residents and taxpayers, to ensure that they are not evading taxes by holding assets offshore.
The Form 1042-S instructions provided by the IRS offer some guidance on how a withholding agent will be defined for Chapter 4 purposes, since that is the party that must file the form and make the withholding. The definition is worth examining since it is so broad, many payers may unknowingly fall under the new classification. The only clear exclusion to the 1042-S requirements are payments strictly confined to US borders or territories, in which case Form 1099 would be used.
Definition of Withholding Agent For Chapter 4
The definition begins with: “…any person, US or foreign…who can disburse or make payments of an amount subject to withholding…under Chapter 4.”
The next part states: “The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity.”
This definition includes virtually anyone who can make a payment to a foreign account, even if no payment has yet been made. This clearly includes typical financial institutions but also could be an individual or business making foreign payments.
Further, the definition continues to broaden: “A person may be a withholding agent even if there is no requirement to withhold from a payment or if another person has already withheld the required amount from a payment.” (emphasis added)
Under this definition, Form 1042-S has to be filed even if another agent withheld already, or if no withholding is required. This is designed to capture payments made through intermediaries en route to the recipient, or if the payment falls under some exception to the withholding requirement.
Required Information and Data for All Agents and Intermediaries
Obviously, the definition is geared to tracking payments rather than simply reporting withholding amounts, and a review of the form shows that the changes for 2014 reflect this intention. Box 8 requires reporting of total tax withheld by other agents, which seems nearly impossible to obtain unless all agents and payers are in close communication and sharing all withholding data with one another.
The form also requires all the identification numbers and location information for the primary withholding agent, as well as intermediary or flow through entities that may have been involved in payment or withholding (Boxes 12a to 13f and 14 through 16f).
Given the range of information required to complete the form accurately, anyone who has made any kind of payment from a US source to a foreign account should keep detailed records of payments, intermediaries and amounts withheld. Due to the fact these are new requirements, the IRS will be lenient through 2016 with reporting as long as ‘good faith efforts’ are being made to comply.
