Issue

As the March 15th deadline for filing Form 1042 and Forms 1042-S approaches, the IRS has released Fact Sheet 2017-3 with reminders for non-U.S. Citizen taxpayers (such as international students) and withholding agents (this may be you) of their obligations with respect to filing.

Situation

Troas Bible College (TBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). TBC has four students enrolled at the institution who are non-U.S. Citizens and receive scholarships that include payments for room & board. TBC’s Controller calls us and says that one of these students has asked about a Form 1042-S.

We tell TBC that they generally would have a filing requirement for the room & board (payments for other than qualified education expenses) to these students. The filing requirements may include Form 1042-S – provide to the students and filed with the IRS, Form 1042, and 14% income tax withholding (if the students are not from a “treaty country” – see IRS Publication 901). In Fact Sheet 2017-3, the IRS provides some updates and guidelines plus a list of common errors.

There is a lot going on with Form 1042-S and the instructions are anything but clear.

Rules

From Form 1042-S Instructions:
Who Must File
Every withholding agent (defined in Definitions, later) must file an information return on Form 1042-S to report amounts paid during the preceding calendar year that are described under Amounts Subject to Reporting on Form 1042-S, later.
From Fact Sheet 2017-3:
Common Errors
Each year, the IRS sees a series of common errors made by withholding agents that can be easily corrected. Errors may lead to delays in processing the recipient’s return and claims for credit or refund. Often, these errors involve a withholding agent providing different information on copies of the Form 1042-S. Here are a few common errors:
• Recipient’s name is not exactly the same on all copies A through E.
• Using a prior-year Form 1042-S for the current calendar year.
• Dollar amounts include cents on one copy and not on the other ($100 vs $100.25). Form 1042-S is a dollars-only form. Round numbers to the nearest dollar.
• Tax rates are not exactly the same on all copies A through E (for example, using 30.00 on one copy and 29.50 on another copy).
• The “Amended” box is checked on the copy filed with IRS, but the withholding agent has not provided a copy of the amended form to the recipient.
• Truncating the recipient’s taxpayer identification number in a format that is inconsistent with the IRS truncation rules (as provided in the instructions to the Form 1042-S).
• Both Chapter 3 and Chapter 4 are indicated on a single Form 1042-S. As of calendar year 2016, the Chapter 3 and Chapter 4 checkboxes have been removed and withholding agents must instead enter either “3” or “4” as the chapter indicator (not both).
• The box used to indicate that a withholding agent is applying the escrow procedure (and thus has not deposited the withheld amounts that are being reported) is checked on one copy of the form but not the others.

Bottom Line

Many institutions do not understand all of the requirements for filing Form 1042-series returns, nor do they know of the ramifications for not filing. It is good to check with your tax advisor on these issues, he or she will be able to help you navigate these potentially treacherous waters.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.