Enacted on 29 June 2015, the Trade Preferences Extension Act of 2015, contains offsets to expenditures in the form of penalty increases under section 6721 for failure to file timely correct information returns and section 6722 for failure to furnish timely correct payee statements. Details are as follows.
Penalty for failure to file correct information returns and provide correct payee statements
Reduced rates based on timing of corrections
If the failure is corrected after 30 days but on or before 1 August, the penalty will increase from $60 to $100 for each reporting failure and the annual maximum will increase from $500,000 to $1,500,000.
Internal Revenue Code Section 6722 is amended as follows:
Reduced rates based on timing of corrections
Penalty in case of intentional disregard of the reporting requirements
The minimum $250 penalty for each reporting failure will increase to $500 (and the annual maximum will not apply, as has been the case).
The penalty increases described above will apply to returns and statements required to be filed and furnished after 31 December 2015 (i.e., effective beginning with calendar year 2015 information returns and payee statements).
For your reference
The Trade Preferences Extension Act of 2015 can be accessed by clicking here:
https://www.congress.gov/114/bills/hr1295/BILLS-114hr1295enr.pdf (PDF, 218 KB)
By now, most filers should have completed and submitted calendar year 2014 information reporting to the IRS. Unfortunately, the IRS released changes that filers need to be aware of as they move onto improving systems and procedures for 2015 reporting. Significant changes have been made to Form 1042-S, as well as certain optional reporting becomes required in 2015 on Form 1042 (not yet released).
Forms in the 1042 series
Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is used to report certain income paid to and tax withheld from foreign persons.
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is an annual tax return to report tax withheld on certain income of foreign persons.
Form 1042-T, Annual Summary and Transmittal of Forms 1042-S, is used to transmit paper Forms 1042-S to the IRS (not used when filing electronically). With mandatory electronic filing requirements, this form has limited usage.
When and How to File
File Forms 1042, 1042-T (if required), and 1042-S with the IRS on or before 15 March 2016. As most filers found out for 2014 reporting, the only way financial institutions are permitted to report payments made under chapters 3 or 4 to the IRS on Form 1042-S is electronically.
Electronic filing requirements for Form 1042-S are provided in Publication 1187. This publication has not been released yet for calendar year 2015 filing.
Recipient copies of Form 1042-S must be furnished on or before March 15, 2016.
Significant Changes for 2015 Reporting
Box renumbering: For 2015, all boxes from 12d through 23 have been renumbered and some moved.
Primary withholding agent: For withholding agents that have arrangements with other withholding agents to perform withholding on their behalf, the withholding agent who actually performed the withholding must be identified by name (box 14a) and employer identification number (box 14b).
KPMG Observations: This change alone will require non-withholding QIs and PFFIs to consider how they will capture this information. For each custodian who withholds on their behalf, a separate 1042-S will need to be filed.
The reason for this change was to assist the IRS in validating refund claims. Interestingly, the instructions state that when multiple withholding agents withheld amounts reported on the same Form 1042-S, the filer is to report the name of any of the withholding agents that withhold amounts. Given this, it is unclear how choosing any withholding agent in a chain could assist the IRS in substantiating a refund claim.
KPMG Observation: Codes 51, 52 and 53 should only be used where the withholding agent has reduced the rate of withholding under an income tax treaty and the beneficial owner has not provided a TIN (because it is not required for this type of income)
For Your Reference The publications and forms referenced above can be accessed by clicking here:
Publication 1187: http://www.irs.gov/pub/irs-pdf/p1187.pdf (PDF, 697 KB)
Publication 1179: http://www.irs.gov/pub/irs-pdf/p1179.pdf (PDF, 1 MB)
Form 1042: http://www.irs.gov/pub/irs-pdf/f1042.pdf (PDF, 172 KB)
Form 1042-T: http://www.irs.gov/pub/irs-pdf/f1042t.pdf (PDF, 62 KB)
Form 1042-S: http://www.irs.gov/pub/irs-pdf/f1042s.pdf (PDF, 199 KB)
For further information, please do not hesitate to contact us.
Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.