Regulatory Updates

IRS Announces Online Tool to Validate Form 1042-S Data

The IRS has announced the launch of a new online tool designed to assist U.S. withholding agents in complying with their reporting and withholding obligations with respect to Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. The tool accepts data in certain common file formats and reports potential errors that the withholding agent can review before submitting Forms 1042-S to the agency.

Form 1042-S is commonly used when potentially taxable distributions are made to non-U.S. citizens from certain accounts, including IRAs. Unlike distributions paid to U.S. citizens within the U.S., noncitizens generally cannot waive tax withholding. But, by providing the payor organization with Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individual), foreign recipients can generally avoid otherwise-mandatory 30 percent withholding.

By doing so, they may instead have withholding applied at a rate determined by a tax treaty—if there is one—between their home country and the U.S. Withholding and related information about the recipient is then reported to the IRS on Form 1042-S.