IRS officials recently reminded taxpayers that its compliance campaign announced earlier this year is focused on Forms 1042 and 1042-S reporting of U.S. source income paid to non-U.S. persons and is slated to begin early in 2019. (See link and refer to our prior alerts dated May 22, 2018 and July 5, 2018). According to the IRS, the campaign will focus on common reporting errors made by institutions that have withholding obligations on payments to foreign nationals.
John Cardone, Director of the IRS Large Business and International Division (withholding and international compliance), provided the following examples of the errors that the IRS intends to focus on, in an attempt to reduce their occurrence and encourage more compliant behavior.
IRS Form |
Type of Error |
Description of Error |
1042-S |
Name mismatch |
Different names are often provided on copies A, B, C, D, or E of Form 1042-S, which is generally due to manual input errors and other causes.
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Use of prior year forms |
Taxpayers often use prior year versions of forms 1042-S which do not reflect changes made to revised versions of the form published by the IRS resulting in missing information and errors.
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Amendment mismatch |
Taxpayers often fail to provide copies of amended forms to both the IRS and recipient resulting in mismatched information.
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Truncated identification numbers |
Taxpayer identification numbers (TINs) are often truncated on Copy A of Form 1042-S, which is prohibited. The TINs may be truncated for the recipient and withholding agent copies, which include copies B,C, D and E, but should not be truncated on copy A.
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Inconsistent dollar amounts |
Amounts reported on Forms 1042-S should generally be rounded to the nearest dollar. If this method is not used, the amounts reported should be consistent on all lines.
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Inconsistent tax rates |
Tax rates applied are often not identical on all copies of the forms. Rates should be consistent.
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Form 1042 |
Failure to provide liabilities on the form |
Withholding agents often enter the amounts actually deposited with the IRS in Section 1 of Form 1042 as opposed to recording their actual withholding tax obligation or tax liability for the period in Section 1 of Form 1042.
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Failure to complete page two of the form |
No information is provided on page two of the form therefore preventing the IRS from matching the amount of the liability reported on page one to the appropriate chapter for the liability (i.e., Chapter 3 or Chapter 4). |
According to the IRS, many of the errors tend to occur as a result of manual entries on paper filings and could be reduced with the use of automated controls and smart forms, since the information entered on those forms is consistent across all copies.
In order to prepare for the IRS’ increased enforcement efforts associated with the 1042 and 1042-S compliance campaign, withholding agents should enhance their systems, processes and controls now to avoid these errors and to manage potential risk going forward. It would be a good idea to perform a review of the 1042 and 1042-S reporting and withholding processes relied on by your organization now. The review should focus on the effectiveness of controls for identifying payments subject to reporting, for calculating and remitting any required withholding, and for timely filing any required returns. To the extent that there are gaps in systems and processes that may result in potential exposure under exam, they should be remediated as soon as possible with budgets for system upgrades, training of personnel and engagement of vendors in place well before you are ever contacted by the IRS.
For more information on ways that RSM can assist you with preparing to meet the challenge of the IRS’ new compliance campaigns targeting tax information reporting and withholding issues, please consult our FATCA and Global Information Reporting page.
