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Virtually every US company that does business internationally must file Forms 1042-S, Foreign Person's U.S. Source Income Subject to Withholding by March 15 of this year. Just as payments made to US persons are subject to Form 1099 reporting, payments of the same type that are earned inside the US (i.e., US-source) and made to foreign persons are generally subject to Form 1042-S reporting. US-source income includes payments for services performed in the US, fees for licenses used in the US and royalties for copyrights exploited in the US. Forms 1042-S are required to report these payments, as well as any associated withholding tax required on payments to foreign persons.

Similarly Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is required to summarize the total payments and withholding tax reported on all Forms 1042-S. Both Form 1042 and 1042-S are due to the IRS by March 15 of the year succeeding the year of the payment, with extensions available.

These forms and the required determinations are surprisingly complicated, and many companies struggle with their timely and accurate completion. The most common payments subject to reporting, and often withholding tax, made by multinationals are (i) vendor payments such as compensation for services, license fees, software, rents, royalties and director's fees, and (ii) related-party payments such as intercompany interest, dividends or royalties. However, multinational companies often have other paying functions or operations that require Form 1042-S reporting, including customer financing, lending arms, employee stock plans, pension plans or financial trading/risk control.

With the Form 1042 / 1042-S filing deadline just days away, keep in mind the following key points regarding Form 1042 and 1042-S preparation and filing:

• The Form 1042 and Form 1042-S instructions contain a lot of useful information. Although long (the 2018 Form 1042-S instructions are 37 pages), the instructions contain a lot of valuable information. Of particular note are the box-by-box instructions and Appendices A, B and C, which contain code explanations and descriptive but concise reporting examples. Reading the instructions, and referencing them for various boxes, substantially decreases the likelihood of errors and the receipt of notices from the IRS.
• Treaty claims to reduce withholding require a US or foreign taxpayer identification number (TIN) on Form 1042-S, Box 13e or 13i. Claiming a lower withholding tax rate due to a treaty requires a foreign TIN or a US employer identification number (EIN) to be provided in box 13e or 13i, respectively, unless the income subject to withholding is dividends or interest paid on actively traded securities. The country reflected in box 13b must be a country with which the US has an income tax treaty. The country codes and income codes allow the IRS to determine whether the correct withholding rate was applied.
• Form 1042-S Boxes 9 and 11 have been switched. Tax Paid by Withholding Agent used to be Box 9 (on the 2017 Form 1042-S), but is now Box 11 on the 2018 Form 1042-S. Similarly, Box 11 on the 2017 Form 1042-S, Amount Repaid to Recipient, is now Box 9 on the 2018 Form 1042-S, Overwithheld tax repaid to recipient pursuant to adjustment procedures (see instructions).
• Form 1042-S Box 11 highlights a withholding agent's liability for any tax that should have been withheld but was not. Form 1042-S Box 11, Tax Paid by Withholding Agent (Amounts Not Withheld), is specifically included to highlight amounts paid by withholding agents that were not deducted from payments made to recipients. This often happens when payments are made and not properly withheld upon. Since withholding agents are also liable for the tax, they will sometimes pay the tax and not seek reimbursement from the payee.
• Form 1042 Lines 63 a — e must match the sum of Forms 1042-S amounts. This section (Total tax reported as withheld or paid by withholding agent on all Forms 1042-S and 1000) summarizes the Forms 1042-S as filed and should match to the dollar. If the lines do not match to the dollar of the Forms 1042-S, the filer should expect an automatically generated notice from the IRS to challenge the mismatch.
• Form 1042 Section 2 must be completed. Form 1042 Section 2, Reconciliation of Payments of U.S. Source FDAP Income, must be completed for all filings even if a withholding agent has not withheld any amounts under the Chapter 4 FATCA provisions. If this section is not completed, the filer should expect an automatically generated notice from the IRS. Further, if the amounts in this section do not reconcile to the Forms 1042-S associated with the Form 1042, an explanation of the variance on the Form 1042 may prevent additional follow-ups from the IRS.
• Automatic extensions for Form 1042 / 1042-S are still available. To extend deadlines for Form 1042 / 1042-S filings, three separate extensions are necessary: (1) a Form 8809 to extend for 30 days the due date for filing Form 1042-S with the IRS, (2) a letter to the IRS Extension of Time Coordinator to extend for 30 days the due date to furnish copies of Forms 1042-S to the recipients, and (3) a Form 7004 to extend for 6 months the due date for filing Form 1042 with the IRS. All extensions must be filed by March 15, the original due date of the forms.
• Form 1042-S penalties continue to increase. For calendar year 2018 reporting, the penalty for failure to properly and timely file an information return (including Form 1042-S) with the IRS and/or failure to properly and timely furnish copies to recipients has increased to $270 per form ($540 combined), up to a maximum of $3,282,500.

As complicated as the particulars of these form requirements are, accurate reporting can be achieved consistently with effective processes, checks and controls. Since Form 1042 and 1042-S reporting is only as accurate as the information that drives it, the processes, checks and controls that are applied to the payment process throughout the year are just as relevant as those applied to year-end reporting. This includes identifying payments that are subject to reporting, determining and documenting the source of amounts paid, and ensuring tax is withheld on the correct amounts and at the proper rates. This, along with consideration of the previously mentioned points, should help produce accurate Forms 1042 and 1042-S, minimizing tax and penalty exposure, as well as unwanted IRS scrutiny.

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