QI News - Issue 2015-04

QI News - Issue 2015-04

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Reporting Update

Information Reporting Penalties Rise Again

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

  • Internal Revenue Code Section 6721 is amended as follows: The $100 penalty for each information reporting failure will increase to $250
  • The annual maximum for reporting failures will increase from $1,500,000 to $3,000,000

Reduced rates based on timing of corrections

  • If the failure is corrected within 30 days, the penalty will increase from $30 to $50 for each reporting failure and the annual maximum will increase from $250,000 to $500,000.

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:

  • The $100 penalty for each reporting failure will increase to $250
  • The annual maximum for reporting failures will increase from $1,500,000 to $3,000,000

Reduced rates based on timing of corrections

  • If the failure is corrected within 30 days, the penalty will be increase from $30 to $50 for each reporting failure and the annual maximum will increase from $250,000 to $500,000.
  • 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.

 

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).

 

Effective date

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)

Recap of 2015 Reporting Changes for Non-U.S. Persons

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.

  • Separate recipient copies required by income type. In the past, withholding agents were permitted to create substitute forms that met the guidelines provided in Publication 1179. This included a spread sheet style of presentation on a form. This practice is no longer permissible. Withholding agents must provide a Form 1042-S for each type of income of payment, as well as by withholding rate and exemption code.
  • Recipient’s Foreign TIN. The recipient’s TIN must be obtained and reported when: 
    • A foreign person claims a reduced rate of withholding, or exemption, under a tax treaty with the U.S. if the person did not provide a U.S. TIN and the income is not the type for which an exemption from the TIN requirement applies.
    • A recipient of a payment made with respect to an obligation maintained at a U.S. office of the withholding agent if the withholding agent is an FI and the foreign TIN is available in an electronically searchable system or is required to be collected on Form W-8.
  • Foreign country codes. The instructions no longer provide the country codes to use in address lines on the form. Filers need to refer to an IRS web page for this information. It is accessible at: http://www.irs.gov/Tax-Professionals/e-File-Providers-&-Partners/Foreign-Country-Code-Listing-for-Modernized-e-File 
  • Income Codes. New and Revised Codes:
    • Code 51: Interest Paid on certain actively traded or publicly offered securities
    • Code 52: Dividends paid on certain actively traded or publicly offered securities
    • Code 53: Substitute payments – dividends from certain actively traded or publicly offered securities
    • Code 23: Gross income – other
    • Code 54: Other income is now code 54 (formerly 51)

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)

  • Exemption Codes. New and Revised Codes:
    • Code 20: Chapter 4: Dormant Account: The footnote was expanded to describe reporting requirements when tax was withheld and deposited under chapter 3.
    • Code 21: Chapter 4: Excluded payment on offshore obligation – wording change
    • Code 22: Chapter 4: Excluded Payments on Collateral – as provided in the footnote, this code is only used when the income paid is not subject to chapter 4 withholding under the transitional regulations for collateral arrangements made prior to 1 January 2017.
  • Chapter 3 Status Codes. New and Revised Codes:
    • Code 13: Qualified Securities Lender – Qualified Intermediary
    • Code 14: Qualified Securities Lender – Other
    • Code 15: Corporation
    • Code 16: Individual
    • Code 17: Estate
    • Code 18: Private Corporation
    • Code 19: Government or International Organization
    • Code 20: Tax Exempt Organization (Section 501(c) entities)
    • Code 21: Unknown Recipient
    • Code 22: Artist or Athlete
    • Code 23: Pension
    • Code 24: Foreign Central Bank of Issue
    • Code 25: Nonqualified Intermediary
    • Code 26: Hybrid Entity Making Treaty Claim For QI, QSL, WP and WTs, these codes should be used (renumbered from last year):
    • Code 27: Withholding Rate Pool – General
    • Code 28: Withholding Rate Pool – Exempt Organization
    • Code 29: PAI Withholding Rate Pool – General
    • Code 30: PAI Withholding Rate Pool – Exempt Organization
    • Code 31: Agency Withholding Rate Pool – General 
    • Code 32: Agency Withholding Rate Pool Exempt Organization
    • Code 33: Joint Account Withholding Rate Pool

  • Status Codes – Chapter 4.
    • All codes from 05 through 41 have been renamed.
    • New code: 49 – QI-Recalcitrant Pool-General

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.
 

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