April 11, 2013: Draft 2014 IRS Form 1042
Foreign Account Tax Compliance Act (FATCA)
The IRS has published the new draft 2014 Form 1042. Similar to Form 1042-S published in early April, the draft Form 1042 includes changes to incorporate the new FATCA reporting requirements that begin in March 2015 with respect to the 2014 calendar year. Large scale changes to the draft Form 1042 include an increase from one to two pages, and in addition to the FATCA specific requirements, include additional questions regarding substitute payments. The addition of detailed substitute payment reporting further bolsters Treasury’s increased focus on substitute payments. Another change unrelated to FATCA is the addition of a prior line item last seen on the 2010 version of the Form 1042 to allow a filer to indicate that it satisfied its withheld tax deposit requirements for the quarter-monthly deposit using the 90% rule (i.e., you deposit at least 90% of the actual tax liability for the deposit period).
Other changes to the form include the following:
- Chapter 3 and chapter 4 status codes for the filer on the top section of the first page (below the name of the withholding agent);
- Checkbox box on the top section of the first page to indicate the filer made quarter-monthly deposits using the 90% rule (second sentence below the fields for City and Zip code);
- The former line 62a has been expanded in line 62 for gross amounts reported as opposed to reporting only gross income paid as was the case in the old version of the form. The expanded line includes sub-line items for U.S. source FDAP income reported (other than substitute payments), U.S. source substitute dividend payments reported, other U.S. source substitute payments reported, and two additional lines to indicate the difference between gross amounts reported versus what was actually paid (if different);
- The former line 62b is the new line 63, and has been expanded to include additional details on the taxes withheld or assumed (the older version had only one line item). The line
includes sub-line items for taxes withheld by the withholding agent (the filer), taxes withheld by other withholding agents (sub-divided by substitute dividends and other substitute payments), reimbursements, and taxes assumed by the withholding agent. The reimbursement line appears to be related to the reimbursement procedures for chapter 3 and chapter 4 withheld amounts;
- Line 64 for the net tax liability (formerly line 63) has two new sub-line items to split the tax liability between chapter 3 and 4. The line adds a new-sub line item for what used to be line 71 (excise tax on specified federal procurement payments);
- Line 67 for a credit for amounts withheld by other withholding agents (formerly line 66) has added two additional sub-line items for substitute dividend payments and other substitute payments;
- A new Section 2 was added to detail U.S. source FDAP income required and not required to be withheld under FATCA. This later addition is further divided into the reasons why withholding was not required (i.e., not required to withhold on recipient, nonfinancial payment, grandfathered obligation, effectively connected income). The section also includes line items to report U.S. source FDAP income that is FATCA reportable and that were actually reported on all Forms 1042-S. If the two fields differ, an additional line is provided for an explanation; and
- A new Section 3 checkbox was added to indicate that the withholding agent made derivative equivalent payments (i.e., payments under a derivative contract that reference a U.S. security), presumably referring to section 871(m) payments.
The changes made to the Form 1042 are quite substantial and will significantly impact existing technology processes and procedures for withholding agents that currently file the form. Withholding agents, service providers and other impacted parties should carefully study the form and the new changes to identify the updates required to internal policies, procedures and systems. Although the form seems fairly self-explanatory, some of the new fields will need further explanation. Clarifications will likely be provided when the instructions to the form are published; however, similar to the other recently released forms, the instructions will likely be released only in final form and not in the short term.
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