What Form 1042 (2017) Is For
Form 1042 (2017) is the annual withholding tax return that U.S. withholding agents must file to report tax withheld from payments made to foreign individuals, such as foreign corporations, foreign partnerships, and foreign financial institutions. It ensures that taxpayers holding financial assets and foreign entities with U.S. source income meet their income tax and federal tax liability obligations.
The form covers taxes on dividends, royalties, and gross income subject to withholding tax, helping the Internal Revenue Service combat tax evasion involving foreign financial assets and foreign financial accounts.
When You’d Use Form 1042 (2017)
You must file Form 1042 if you are a withholding agent who makes payments to foreign individuals or foreign financial institutions during the tax year. These payments may include scholarship or fellowship grants, eligible deferred compensation items, and certain income from foreign subsidiaries or flow-through entities.
The due date for filing Form 1042 for the 2017 income tax return was March 15, 2018. Extensions can be requested using Form 7004, although it only extends the filing time, not the payment of any unpaid tax or federal tax liability owed to the Internal Revenue Service.
Key Rules or Details for 2017
- Who Must File: Any financial institution, foreign corporation, foreign trust, or foreign government that pays U.S.-source income to foreign individuals must file this annual withholding tax return and report the tax withheld and foreign financial assets reported to the IRS.
- Qualified Intermediaries and Financial Institutions: Certain foreign financial institutions acting as intermediaries must file under a central withholding agreement if they manage financial accounts held by non-resident aliens or foreign corporations that are reported.
- Specified Federal Procurement Payments: Payments made to foreign corporations or foreign subsidiaries under U.S. government contracts are subject to withholding tax under section 5000C.
- Reporting Thresholds: Taxpayers with financial assets that have a fair market value above the reporting threshold must report foreign financial assets, foreign gifts, and foreign financial assets held through electronic filing.
- Treaty Benefits and Certain Income: Those claiming treaty benefits must ensure compliance with the tax treaty provisions when reporting effectively connected income or certain income exempt from withholding.
- Foreign Branch or Flow-Through Entities: A foreign branch flow-through entity with foreign financial accounts must report financial assets offshore and report payments made to foreign individuals under applicable Internal Revenue Code sections.
- Mark-to-Market Elections: Qualified investment entities, certain insurance companies, or domestic bankruptcy trusts with foreign assets may apply mark-to-market elections for foreign financial accounts or other financial assets.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step Filing Process (High Level)
Step 1: Gather Required Documentation
Collect all Forms 1042-S issued to foreign individuals, showing gross income, tax withheld, and foreign financial assets reported. Keep records of deposits, reasonable estimates, and related financial accounts.
Step 2: Verify Employer Identification Number
Confirm that your employer identification number matches your entity type, specifically whether you are a financial institution, foreign corporation, or withholding agent managing financial accounts for foreign entities.
Step 3: Complete Withholding Agent Information
Enter accurate details such as your name, address, income tax status codes, and federal tax liability classification to ensure all foreign financial reporting aligns with IRS requirements.
Step 4: Record Federal Tax Liability
Report your total federal tax liability by period, reflecting tax paid and any unpaid tax related to foreign financial assets or foreign financial accounts. Ensure your figures reconcile with Forms 1042-S.
Step 5: Reconcile Foreign Financial Assets and Income
Summarize all foreign financial assets and financial assets offshore to confirm that every foreign financial asset held or foreign financial account is accurately represented on the annual withholding tax return.
Step 6: Adjust Withholding and Report Payments
Adjust for overwithholding or underwithholding where applicable, ensuring that all report payments to foreign individuals or foreign corporations are consistent with IRS reporting thresholds.
Step 7: File Electronically by the Due Date
Submit your completed Form 1042 via electronic filing to the Internal Revenue Service by the due date. Late filing can result in penalties and additional interest on unpaid taxes.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Incorrect EIN Reporting: Using the incorrect employer identification number can cause delays. Avoid this by confirming your EIN type before filing.
- Omitting Chapters 3 and 4: Missing these status codes can lead to processing issues. Prevent errors by using the official IRS status code list for foreign financial institutions.
- Inconsistent Totals: Mismatched figures between Form 1042 and Forms 1042-S cause audits. Reconcile all foreign financial assets reported before submitting.
- Late Electronic Filing: Missing the due date incurs penalties. File your annual withholding tax return early and verify electronic filing confirmations.
- Incomplete Reconciliation: Failing to reconcile foreign financial accounts may result in IRS correspondence. Review all foreign assets and ensure that the totals align with the financial accounts held.
- Incorrect Treaty Benefit Claims: Filing incorrect treaty benefits can cause rejections. Always validate the tax treaty provisions before reporting payments.
- Missing Adjustments for Deferred Compensation: Failure to include eligible deferred compensation items leads to underreporting. Ensure all adjustments appear in your income tax return.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
Once submitted, the Internal Revenue Service reviews Form 1042 to verify that all foreign financial assets reported, tax withheld, and foreign financial accounts align with your federal tax liability. If your foreign corporations or foreign partnerships show discrepancies, the IRS may send notices requesting clarification. Any unpaid tax accrues interest until the full amount is paid. Keep copies of your annual withholding tax return, related financial accounts, and income tax documents for at least three years for compliance verification.
FAQs
Do I need to file Form 1042 if no tax was withheld on the income of foreign individuals?
Yes, you must still file Form 1042 (2017) if you have foreign financial assets or foreign financial accounts, even if no tax was withheld due to treaty exemptions.
Can I report foreign financial assets through electronic filing?
The IRS allows electronic filing for Form 1042 to simplify the reporting of foreign financial assets, foreign financial accounts, and offshore financial assets for the 2017 tax year.
How do foreign financial institutions report gross income for nonresident aliens?
Foreign financial institutions report gross income paid to nonresident aliens on Form 1042-S and summarize totals on Form 1042 when filing their annual withholding tax return.
How should I report foreign gifts and other financial assets?
Include foreign gifts reported and other financial assets under the specified foreign financial assets section. Ensure each foreign financial asset held meets the reporting threshold.
What happens if a foreign corporation has a foreign branch or subsidiary?
Each foreign branch or foreign subsidiary must report its financial accounts and financial assets held to ensure complete disclosure of foreign financial assets to the IRS.
Can taxpayers claim treaty benefits to reduce income tax withheld?
Taxpayers may claim treaty benefits to reduce their income tax on certain types of income, provided that documentation supports their eligibility under the applicable tax treaty.
