United States

New FAQs provide penalty relief and clarify withholding requirements

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The Internal Revenue Service has updated FATCA Frequently Asked Question (FAQ) Q23 to extend penalty relief for 2018 to withholding agents that withhold on and report certain dividend equivalent payments made for derivatives referencing partnerships. The IRS has also published a new FAQ (Q24) that clarifies withholding and reporting requirements for certain partnerships and trusts reporting and depositing taxes in 2019 from undistributed earnings reported in 2018. These FAQs supplement previous guidance under proposed regulations for chapters 3 and 4 and section 871(m) that were published last year and clarify that:

  1. For the 2017 and 2018 calendar years, a withholding agent will not be subject to interest, penalties, or additions to tax for failing to withhold and report by March 15 of the subsequent year a dividend equivalent payment made with respect to a derivative referencing a partnership provided that the withholding agent withholds and reports on Form 1042 and Form 1042-S with respect to the payment by Sept. 17, 2018 (for the 2017 calendar year) or Sept. 16, 2019 (for the 2018 calendar year).
  2. A partnership or trust that is permitted to withhold in 2019 with respect to a foreign partner’s or beneficiary’s share of undistributed income for the 2018 year, can designate the deposit of the withholding as for the 2018 year and report the associated amount on the 2018 Forms 1042 and 1042-S.

A more detailed discussion of the guidance and each FAQ appears below.

Updates to FATCA FAQ Question 23 provides relief for 2018 dividend equivalent payments

On March 5, 2019, the IRS updated question 23 (Q23) of the FATCA FAQs found here. The update provides relief for withholding agents that failed to withhold and report on certain dividend equivalent payments made in 2018. According to Q23, withholding agents will not be subject to interest, penalties, or additions to tax for a dividend equivalent payment made with respect to a derivative referencing a partnership so long as the withholding agent withholds and reports the payment on Forms 1042 and 1042-S by Sept. 16, 2019.

According to the guidance, where a withholding agent withholds after March 15, 2019 (for the 2018 calendar year) and the dividend equivalent payments are the only payments reportable for the year, the withholding agent should file a Form 1042. If a Form 1042 has already been filed, an amended Form 1042 should be filed by Sept. 16, 2019 with the words “Dividend Equivalent—Partnership” written across the top center portion of the 2018 Form 1042. Forms 1042-S or amended Forms 1042-S should also be filed by the withholding agent by the Sept. 16, 2019 deadline. Finally, when depositing the tax withheld for a dividend equivalent payment made in 2017 or 2018, the withholding agent must still designate the payment as being made for the applicable calendar year in accordance with the instructions to Form 1042. The requirement that the withholding agent designate the payment as being made for the applicable calendar year (i.e. 2018) when depositing the tax withheld with respect to the dividend equivalent payment remains the same.

Newly added FAQ 24 clarifies partnership lag method reporting for 2018

On Dec. 18, 2018, the IRS published proposed regulations that allows for a partnership or trust that withholds in a subsequent year (i.e. 2019) on a foreign partner’s or beneficiary’s share of undistributed income from a prior year (i.e. 2018) to deposit the withholding tax and attribute it to the prior year (i.e. 2018) and report the income on Form 1042 and Form 1042-S in the following year (i.e. 2019). In accordance with these proposed regulations, the IRS added a new question 24 (Q24) to the FATCA FAQs found here.

The proposed regulations also extend the reporting due date for partnerships to file Form 1042-S until Sept. 15 for those partnerships that withhold after March 15 of the subsequent year (i.e. 2019) and associates the deposit with the preceding year. In accordance with the proposed regulations, the IRS will be updating the 2019 instructions for Forms 1042 and 1042-S to reflect this new rule.

The new FAQ specifically states that for the 2018 tax year, penalties will not be assessed to any calendar year partnership or trust that relies on and applies the aforementioned proposed regulations. If penalties are assessed, the partnership may have them abated. This is welcome relief for taxpayers struggling to understand the implications of the new rules and scrambling to make adjustments to their systems and procedures for withholding and remitting taxes timely and reporting amounts correctly. In the meantime, we await the final regulations and updated Form 1042 and 1042-S instructions on what is essentially the elimination of the lag method as we know it.

For further information on the above, please refer to our FATCA page.

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