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QI Alert 2017-04

Final Version of Form 1042 (Rev. 2016)

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Final Version of Form 1042 (Rev. 2016)

The IRS has issued the final version of the 2016 Form 1042 and corresponding instructions. The form remains unchanged from the draft version that was released in August 2016 and the instructions include several changes which are summarized below.


Overview: Form 1042

Form 1042 is the annual withholding tax return for U.S. source income of foreign persons. A Form 1042 should be used to report the following:

  • The tax withheld under chapter 3 on certain income paid to foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts.
  • The tax withheld under chapter 4 on withholdable payments.
  • The tax withheld pursuant to section 5000C on specified federal procurement payments.
  • Payments that are reported on Form 1042-S under chapters 3 or 4.


Key Changes

  1. Line 63c has been renamed Adjustments to Withholding and now provides separate fields for (line 63c(1)) adjustments to overwithholding and (line 63c(2)) adjustments to underwithholding.

    Withholding agents that reduce their withholding by repaying a beneficial owner in the year following the calendar year of overwithholding pursuant to the reimbursement or set-off procedures should report such repayments on line 63c(1). Withholding agents that increase their withholding in the year following the calendar year of underwithholding by withholding on future payments made to a beneficial owner or from other property or additional contributions of a beneficial owner that are held in custody or otherwise controlled by the withholding agent should report the additional withholding on line 63c(2). Withholding agents should also report on line 63c(2) any other amounts withheld in the year following the calendar year in which the related payment was made (to the extent permitted under an applicable regulation section in chapter 3 or 4).

  2. Line 65 now provides separate fields for tax paid during the calendar year (line 65a) and tax paid during the subsequent year (line 65b).

    Withholding agents should use new line 65b to report deposits of tax withheld in the year following the calendar year in which the related payment was made.


Final Version of Instructions for Form 1042 (2016)

Key Changes

Section 2

Lines 2a through 2g

The final instructions now contain detailed descriptions for U.S. source FDAP income not required to be withheld upon on lines 2a-2f. Line 2g is the sum of line 2a-2f.

The key changes on the 2016 version of the Instructions for Form
1042 are below.


Purpose of the Form

The IRS now requires the use of Form 1042 to report the following:

  • The tax withheld under section 877A on payments of eligible deferred compensation items or distributions from nongrantor trusts to a covered expatriate.
  • Certain distributions subject to section 1445 made by publicly traded trusts, real estate investment trusts, and regulated investment companies that are qualified investment entities (as defined under section 897(h)(4)).


Income Tax Withholding on Wages, Pensions, Annuities and Certain Other Deferred Income

Payments of pensions, annuities and certain other deferred income paid to a foreign person are subject to withholding under section 1441 (as opposed to 3405), and should be reported on Forms 1042 and 1042-S instead of Form 945.


Deposit Requirements

A new section detailing how to report deposits made during a subsequent year has been added to the instructions. If you are making a deposit of tax withheld in the year following the calendar year in which the related payment was made (to the extent permitted under an applicable regulation section in chapter 3 or 4), you must designate the deposit at the time that it is made as attributable to the calendar year in which the payment was made. In such a case, you should report the tax paid on line 65b.


Section 1

Lines 1 through 60

This section was updated to allow negative amounts to be included on these lines when you are repaying a beneficial owner in the subsequent year pursuant to the reimbursement or set-off procedure and are reporting the reduced liability on line 59.


Foreign partners of U.S. partnerships and foreign beneficiaries of U.S. trusts

This section was previously titled “Foreign partners of U.S. partnerships.” Under this revised heading, instructions as to how a domestic trust should report on lines 1 through 60 were added.


Withholding after the time of payment

This section was added to the instructions to provide detail on how to report withholding that takes place after the time that a payment has been made.


Total Tax Reported as Withheld or Paid

The instructions under this heading have been amended with respect to line 63c. See “Updates to the 2016 Version of the Form 1042,” above for more information as to the new requirements.


Total Net Tax Liability

Line 64a should now include any adjustment to total net tax liability, as opposed to certain tax liabilities that result from adjustments of underwithheld tax on corporate distributions made in the current calendar year, which were required to be reported on the prior version.


Reporting of Taxes Paid and Overpayment or Balance Due

New instructions are provided with respect to line 65 because the draft 2016 Form 1042 splits line 65 into lines 65a and 65b. Deposits of tax withheld during the calendar year in which the related payment was made should be entered on line 65a. Deposits of tax withheld during the year following the calendar year in which the related payment was made should be entered on line 65b.


Adjustment for Overwithholding

The instructions under the set-off procedure sub-category have been amended. The requirement that the amounts reported on lines 63a and 63b should reflect a reduction of any amount withheld from income paid to a beneficial owner because you applied the set-off procedure during the calendar year or the subsequent calendar year, has been removed. The draft instructions now state that amounts reported on line 63c(1) should be limited to amounts repaid to the beneficial owner or payee (by reducing the withholding on a later payment) in the subsequent calendar year (before the earlier of the filing of the associated Form 1042-S or the due date for such form).


Adjustment for Underwithholding

This is a new section of the instructions, which provides details on how to report the liability related to withholding on lines 1 through 60 for the period in which you adjusted underwithholding by withholding additional tax.


KPMG Observation:

The new instruction for adjustments for underwithholding comports with Treasury and the IRS’s interpretation (stated in Notice 2016-76) that a withholding agent should not be subjected to late deposit penalties when it corrects an amount underwithheld by March 15th of the year following the calendar year in which the underwithholding occurred.


For Your Reference

The Form 1042 (Rev. 2016) can be accessed using the following link: Form 1042 (Rev. 2016) (PDF | 130KB)

The Instructions for Form 1042 (2016) can be accessed using the following link: Instructions for Form 1042 (PDF | 221KB)

 

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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