The Internal Revenue Service recently released an online tool to help U.S. withholding agents comply with withholding and reporting obligations on IRS Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Forms 1042-S are issued by withholding agents to non-U.S. beneficial owners of U.S. source FDAP income under Chapter 3 and to non-U.S. payees who receive U.S. source withholdable payments under Chapter 4. Given the complexity of the Form 1042-S, this tool provides withholding agents with an opportunity to screen their draft Forms 1042-S for errors prior to filing. The Form 1042-S Data Integrity Tool performs a quality review of data before IRS submission at no cost to the user.
The tool requires the user to provide Form 1042-S data by:
- uploading a file in the format required by the IRS Filing Information Returns Electronically (“FIRE”) system,
- uploading a comma separated values (“CSV”) spreadsheet using the template provided within the tool,
- uploading a Form 1042-S in PDF (single page or 8-page versions), or
- manually entering Form 1042-S data in a substitute form in the tool.
After entering the Form 1042-S data for validation, the user will receive a downloadable error list that references problem records with a “unique identifier” and a related “Record No.” as well as a short explanation of the data elements (Form 1042-S box numbers) and data combinations (multiple boxes) prompting the error or caution message.
A tutorial is available regarding this new Form 1042-S Data Integrity Tool. To view the tutorial and use the tool, users must register at Quick Modules Online, which can be found here.
Using the tool is voluntary and does not alter a withholding agent’s obligation to file Form 1042-S with the IRS and furnish a copy of the Form 1042-S to payees. Users also remain responsible for correcting errors before filing and furnishing Forms 1042-S. Importantly however, the IRS will consider the use of the tool when making enforcement and penalty decisions. Accordingly, using the tool benefits withholding agents by not only reducing form errors but also by influencing whether the IRS proposes penalties in the first instance. Further, withholding agents should consider identifying the use of the tool as a factor when seeking penalty relief for Form 1042-S reporting errors.