Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities
An NQI and a flow-through entity are withholding agents and must file Forms 1042-S for amounts paid to recipients. However, an NQI or flow-through
entity is not required to file Form 1042-S if it is not required to file Form 1042-S under the Multiple Withholding Agent Rule on this
page. An NQI or flow-through entity must report payments made to recipients to the extent it has failed to provide to another withholding agent the
appropriate documentation and complete withholding statement, including information allocating the payment to each recipient.
Forms 1042-S must be filed in any case where the NQI or flow-through entity is making a payment to a recipient and tax has been withheld on the
payment by another withholding agent that did not report the payment on Form 1042-S to the recipient, even if the recipient should have been exempt
from taxation. Failure to file Forms 1042-S may not only result in penalties for the NQI or flow-through entity, but may result in the denial of any
refund claim made by a recipient.
If another withholding agent has withheld tax on an amount that should have been exempt (e.g., where the withholding agent applied the presumption
rules because it did not receive proper documentation or other required information from the NQI or flow-through entity), the NQI or flow-through
entity should report the tax rate and U.S. Federal tax withheld in boxes 5 and 7 and should enter the applicable exemption code using the instructions
for box 6 on page 12.
NQI or flow-through entity provides correct and complete information to another withholding agent yet the withholding agent underwithholds.
In this case, assuming that the NQI or flow-through entity knows that the withholding agent underwithheld, the NQI or flow-through entity must
withhold additional amounts to bring the total withholding to the correct amount. Furthermore, the NQI or flow-through entity must complete Form
1042-S and must include in boxes 5 and 7 the correct tax rate and the combined amount of U.S. Federal tax withheld by the NQI or flow-through entity
and any other withholding agent in the chain of payment that has withheld on the payment. See Example 2 below.
Example 1.
A foreign bank acts as a nonqualified intermediary (NQI) for four different foreign persons (A, B, C, and D) each of whom own securities from which
they receive interest. The interest is paid by a U.S. withholding agent (WA) as custodian of the securities for NQI. A, B, C, and D each own a 25%
interest in the securities. NQI has furnished WA a Form W-8IMY to which it has attached Forms W-8BEN from A and B. NQI's Form W-8IMY contains an
attachment stating that 25% of the securities are allocable to each of A and B, and 50% to undocumented owners. WA pays $100 of interest during the
calendar year. WA treats the $25 of interest allocable to A and the $25 of interest allocable to B as portfolio interest and completes a Form 1042-S
for A and for B as the recipients. WA includes information relating to NQI in boxes 17 through 20 on the Forms 1042-S for A and B. WA subjects the
remaining $50 of interest to 30% withholding under the presumption rules and reports the interest on a Form 1042-S by entering Unknown
Recipient in box 13 (and recipient code 20 in box 12), 30.00 in box 5 (tax rate), and $15 as the amount withheld in box 7. WA also includes
information relating to NQI in boxes 17 through 20 of the Form 1042-S and sends a copy of the form to NQI. Because NQI has not provided WA with
beneficial owner information for C and D, NQI must report the interest paid to C and D on Forms 1042-S. (Note that under the multiple withholding
agent rule, NQI is not required to file a Form 1042-S for A or B.) The Forms 1042-S for C and D should show $25 in box 2 (gross income) and $7.50 in
box 7 (U.S. Federal tax withheld). The rate of tax NQI includes on the Form 1042-S for C and D depends on the rate of withholding to which they should
be subject. Thus, if C and D provided NQI with documentation prior to the payment of interest that would qualify the interest as portfolio interest,
the rate entered in box 5 should be -0-. If they do not qualify for a reduced rate of withholding, NQI should enter 30.00 in box 5. In
any event, NQI must also enter 99 in box 6 (exemption code) of the Forms 1042-S it prepares for C and D. See instructions for box 6 on page 12.
Example 2.
A U.S. withholding agent (WA) makes a $100 dividend payment to a foreign bank (NQI) that acts as a nonqualified intermediary. NQI receives the
payment on behalf of A, a resident of a treaty country who is entitled to a 15% rate of withholding, and B, a resident of a country that does not have
a treaty with the United States and who is subject to 30% withholding. NQI provides WA with its Form W-8IMY to which it associates the Forms W-8BEN
from both A and B and a complete withholding statement that allocates 50% of the dividend to A and 50% to B. A's Form W-8BEN claims a 15% treaty rate
of withholding. B's Form W-8BEN does not claim a reduced rate of withholding. WA, however, mistakenly withholds only 15%, $15, from the entire $100
payment. WA completes a Form 1042-S for each A and B as the recipients, showing on each form $50 of dividends in box 2, a withholding rate of
15.00 in box 5 (tax rate), and $7.50 as the amount withheld in box 7. Under the multiple withholding agent rule, NQI is not required to file a
Form 1042-S for A. However, because NQI knows (or should know) that B is subject to a 30% rate of withholding, and assuming it knows that WA only
withheld 15%, the multiple withholding agent rule does not apply to the dividend paid to B and NQI must withhold an additional 15% from the payment to
B. NQI must then file a Form 1042-S for B showing $50 of dividends in box 2, 30.00 in box 5 (the correct tax rate), and $15 withheld in box 7
(the combined amount withheld). NQI must also enter 00 in box 6 (exemption code). See instructions for box 6 on page 12.
Example 3.
A withholding agent (WA) receives a Form W-8IMY from a nonqualified intermediary (NQI). NQI's Form W-8IMY relates to payments of bank deposit
interest. NQI collects the bank deposit interest on behalf of A, B, C, and D, but does not associate Forms W-8, W-9, or other documentary evidence
with the Form W-8IMY that NQI provides WA. A, B, and C are foreign persons for whom NQI has valid documentation establishing their foreign status. D
is a U.S. person and has provided NQI with a Form W-9. Under the presumption rules, WA must treat the bank deposit interest as being paid to an
unknown U.S. person and apply backup withholding at 30%. WA must complete one Form 1099 for an unknown payee showing 30% backup withholding. A copy of
the form must be sent to NQI. Because NQI failed to provide the requisite documentation to WA and because the amounts have been subject to
withholding, NQI must report the amounts paid to A, B, C, and D. Accordingly, NQI must file a Form 1042-S for each A, B, and C showing deposit
interest (income code 29) as the type of payment in box 1; -0- in box 5 (correct tax rate); the actual amount withheld from the payment
allocable to A, B, and C in box 7; and exemption code 99 in box 6. NQI must also file a Form 1099 for D to report the actual amounts paid and
withheld.
Multiple Withholding Agent Rule
A withholding agent is not required to file Form 1042-S if a return is filed by another withholding agent reporting the same amount to the same
recipient (the multiple withholding agent rule). If an NQI or flow-through entity has provided another withholding agent with the appropriate
documentation from foreign beneficial owners, QIs, withholding foreign partnerships, and withholding foreign trusts, and has also provided a complete
withholding statement associated with its Form W-8IMY to those persons, the NQI or flow-through entity may presume that the other withholding agent
filed the required Forms 1042-S unless the NQI or flow-through entity knows, or has reason to know, that the required Form 1042-S reporting has not
been done.
The multiple withholding agent rule does not relieve withholding agents from Form 1042-S reporting responsibility in the following circumstances.
- Any withholding agent making a payment to a QI, withholding foreign partnership, or withholding foreign trust must report that payment as
made to the QI, withholding foreign partnership, or withholding foreign trust.
- Any U.S. withholding agent making a payment to an authorized foreign agent must report that payment to the authorized foreign
agent.
- Any withholding agent making a payment to a U.S. branch treated as a U.S. person must report the payment as made to that branch.
- Any withholding agent making a payment to a flow-through entity must report the payment as made to a beneficial owner, QI, withholding
foreign partnership, or withholding foreign trust that has a direct or indirect interest in that entity.
- Any withholding agent that withholds an amount from a payment under Chapter 3 of the Code must report that amount to the recipient from whom
it was withheld, unless the payment is reportable on another IRS form.
Furthermore, the multiple withholding agent rule does not relieve the following from Form 1042-S reporting responsibility.
- Any QI required to report an amount to a withholding rate pool and
- An NQI or flow-through entity that has not transmitted a valid Form W-8 or other valid documentation to another withholding agent together
with the required withholding statement.
Penalties
The following penalties apply to the person required to file Form 1042-S. The penalties apply to both paper filers and to magnetic media/electronic
filers.
1. Late filing of correct Form 1042-S. A penalty may be imposed for failure to file each correct and complete Form 1042-S when due
(including extensions), unless you can show that the failure was due to reasonable cause and not willful neglect. The penalty, based on when you file
a correct Form 1042-S, is:
- $15 per Form 1042-S if you correctly file within 30 days; maximum penalty $75,000 per year ($25,000 for a small business). A small business,
for this purpose, is defined as having average annual gross receipts of $5 million or less for the 3 most recent tax years (or for the period of its
existence, if shorter) ending before the calendar year in which the Forms 1042-S are due.
- $30 per Form 1042-S if you correctly file more than 30 days after the due date but by August 1; maximum penalty $150,000 per year ($50,000
for a small business).
- $50 per Form 1042-S if you file after August 1 or you do not file correct Forms 1042-S; maximum penalty $250,000 per year ($100,000 for a
small business).
If you intentionally disregard the requirement to report correct information, the penalty per Form 1042-S is increased to $100 or, if greater, 10%
of the total amount of items required to be reported, with no maximum penalty.
2. Failure to furnish correct Form 1042-S to recipient. If you fail to provide correct statements to recipients and cannot show
reasonable cause, a penalty of $50 may be imposed for each failure to furnish Form 1042-S to the recipient when due. The penalty may also be imposed
for failure to include all required information or for furnishing incorrect information on Form 1042-S. The maximum penalty is $100,000 for all
failures to furnish correct recipient statements during a calendar year. If you intentionally disregard the requirement to report correct information,
each $50 penalty is increased to $100 or, if greater, 10% of the total amount of items required to be reported, and the $100,000 maximum does not
apply.
3. Failure to file on magnetic media. If you are required to file on magnetic media but fail to do so, and you do not have an approved
waiver on record, you may be subject to a $50 penalty per return for failure to file information returns on magnetic media unless you establish
reasonable cause. The penalty applies separately to original returns and corrected returns.
Specific Instructions for Withholding Agents
Note:
All amounts must be reported in U.S. dollars.
Rounding Off to Whole Dollars
To round off amounts to the nearest whole dollar, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. If you
have to add two or more amounts to figure the amount to enter on a line, include cents when adding and only round off the total.
VOID and CORRECTED Boxes at Top of Form
See Correcting Paper Forms 1042-S on page 14.
PRO-RATA BASIS REPORTING Box
Withholding agents must check this box to notify the IRS that an NQI that used the alternative procedures of Regulations section
1.1441-1(e)(3)(iv)(D) failed to properly comply with those procedures. See Pro-rata reporting on page 7 for additional information and
examples.
Box 1, Income Code
All filers must enter the appropriate 2-digit income code from the list on page 13.
Income Codes, Exemption codes, and Recipient Codes
Income Codes, Exemption Codes, and Recipient Codes
Box 1. Enter the appropriate
income code. |
Box 6. If the tax
rate entered in box 5 is 0%, you must generally enter
the appropriate exemption code from the list below (but
see the Caution below). |
Code |
Interest Income |
Code |
Authority for Exemption
|
01 |
Interest paid by U.S. obligors
- general |
01 |
Income effectively connected
with a U.S. trade or business |
02 |
Interest paid on real property
mortgages |
02 |
Exempt under an Internal Revenue
Code section (income other than portfolio interest) |
03 |
Interest paid to controlling
foreign corporations |
03 |
Income is not from U.S. sources
4 |
04 |
Interest paid by foreign corporations
|
04 |
Exempt under tax treaty |
05 |
Interest on tax-free covenant
bonds |
05 |
Portfolio interest exempt
under an Internal Revenue Code section |
29 |
Deposit interest |
06 |
Qualified intermediary that
assumes primary withholding responsibility |
30 |
Original issue discount (OID)
|
07 |
Withholding foreign partnership
or withholding foreign trust |
31 |
Short-term OID |
08 |
U.S. branch treated as a U.S.
person |
Code |
Dividend Income |
09 |
Qualified intermediary represents
income is exempt |
06 |
Dividends paid by U.S. corporations
- general |
Caution: See the
instructions for box 6 on page 12 for information on
additional codes (00 and 99) that may
be required. |
07 |
Dividends qualifying for direct
dividend rate |
Box 12. Enter the appropriate
recipient code. |
08 |
Dividends paid by foreign
corporations |
Code |
Type of Recipient |
Code |
Other Income |
01 |
Individual 2 |
09 |
Capital gains |
02 |
Corporation 2 |
10 |
Industrial royalties |
03 |
Partnership other than a withholding
foreign partnership 2 |
11 |
Motion picture or television
copyright royalties |
04 |
Withholding foreign partnership
or withholding foreign trust |
12 |
Other royalties (e.g., copyright,
recording, publishing) |
05 |
Trust |
13 |
Real property income and natural
resources royalties |
06 |
Government or international
organization |
14 |
Pensions, annuities, alimony,
and/or insurance premiums |
07 |
Tax-exempt organization (IRC
section 501(a)) |
15 |
Scholarship or fellowship
grants |
08 |
Private foundation |
16 |
Compensation for independent
personal services 1 |
09 |
Artist or athlete 2 |
17 |
Compensation for dependent
personal services 1 |
10 |
Estate |
18 |
Compensation for teaching
1 |
11 |
U.S. branch treated as U.S.
person |
19 |
Compensation during studying
and training 1 |
12 |
Qualified intermediary |
20 |
Earnings as an artist or athlete
2 |
13 |
Private arrangement intermediary
withholding rate pool - general 5 |
24 |
Real estate investment trust
(REIT) distributions of capital gains |
14 |
Private arrangement intermediary
withholding rate pool - exempt organizations 5
|
25 |
Trust distributions subject
to IRC section 1445 |
15 |
Qualified intermediary withholding
rate pool - general 5 |
26 |
Unsevered growing crops and
timber distributions by a trust subject to IRC section
1445 |
16 |
Qualified intermediary withholding
rate pool - exempt organizations 5 |
27 |
Publicly traded partnership
distributions subject to IRC section 1446 |
17 |
Authorized foreign agent |
28 |
Gambling winnings |
20 |
Unknown recipient |
32 |
Notional principal contract
income 3 |
|
|
50 |
Other income |
|
|
1 If compensation
that otherwise would be covered under Income Codes 16-19
is directly attributable to the recipient's occupation
as an artist or athlete, use Income Code 20 instead. |
2 If Income Code
20 is used, Recipient Code 09 (artist or athlete) should
be used instead of Recipient Code 01 (individual), 02
(corporation), or 03 (partnership other than withholding
foreign partnership). |
3 Use appropriate
Interest Income Code for embedded interest in a notional
principal contract. |
4 Non-U.S. source
income paid to a nonresident alien is not subject to U.S.
tax. Use Exemption Code 03 when entering an amount for
information reporting purposes only. |
5 May be used only
by a qualified intermediary. |
If you are paying bank deposit interest, you should use code
29, not code 01 (interest paid by U.S. obligors-general).
If you paid more than one type of income to or on behalf of
the same recipient, you must complete a separate Form 1042-S
for each income type.
Note:
Although income codes are provided for deposit interest, short-term OID, and notional principal contract income, those items are not always subject
to reporting on Form 1042-S. For example, bank deposit interest is reportable if it is income effectively connected with the conduct of a U.S. trade
or business or is paid to a resident of Canada. Short-term OID or bank deposit interest may need to be reported by an NQI or flow-through entity if
those amounts are paid to foreign persons and another withholding agent backup withheld on those amounts under the presumption rules. (See
Example 3 on page 10.) Notional principal contract income is reportable if it is income effectively connected with the conduct of a trade
or business in the United States. For more information, see the regulations under Chapter 3 of the Code and Pub. 515.
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