Form 1042-S penalties.

• Author: Mahoney, Nicole L.

Beginning with the 2011 tax year, the IRS has doubled the per form penalties for late filings of Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, and for a Form 1042-S that was improperly completed. In some cases, the maximum penalty for businesses under Sec. 6721 has more than tripled for forms filed late; for forms filed more than approximately four and a half months late, penalties have increased sixfold. In May 2011, an IRS official stated that the IRS intends to more strictly enforce the rules and will begin to impose the harsher penalties to encourage more accurate reporting of U.S.-source income of foreign persons. The IRS will consider whether the filer had reasonable cause for lateness and errors, which can be a significant mitigating factor when notices of penalties are issued. It is important for practitioners to take note of the increased penalties and to comply in a timely and accurate manner with all filing requirements.

Form 1042-S

The function of Form 1042-S is to give the IRS information about the U.S.-source income of foreign persons that is not reported elsewhere, such as on a Form 1099 or a Form W-2, Wage and Tax Statement. A separate return must be filed by March 15 of the year following receipt for each foreign person receiving U.S.-source income and for each type of income received by the foreign payee. Withholding agents, excluding individuals not making the payment as part of their trade or business and also not required to withhold, must file the informational return. However, a withholding agent is not required to file in certain circumstances where another withholding agent is already reporting the same amount paid to the same recipient.

Foreign persons are defined broadly to include nonresident alien individuals, foreign corporations, foreign partnerships, foreign trusts, foreign estates, and any other non-U.S. person. Notably, the definition includes a foreign branch or office of a U.S. financial institution or clearing organization if the foreign branch is a qualified intermediary. A U.S. branch of a foreign person will be considered a foreign person.

A withholding agent is similarly defined with a broad scope. The term includes any withholding agent as defined in Sec. 1441(a). It also includes qualified and nonqualified intermediaries, withholding foreign partnerships and trusts, flowthrough entities, a U.S. branch of a foreign insurance company, or a foreign bank that is treated as...