March 9, 2010
Been Paying Foreign Persons? Deadline Looms for Telling the IRS All About It.
One of the Tier One issues for IRS examinations of U.S. companies is whether those companies are reporting properly their transactions with foreign companies and individuals. For example, this can involve the IRS examining a U.S. company's compliance with reporting requirements for Forms 1042 and 1042S. Both forms relate to the payment of U.S. source income, subject to U.S. withholding tax, which is paid to foreign persons during a calendar year, even if the payment is exempt from withholding under the Internal Revenue Code ("IRC") or an income tax treaty between the U.S. and the foreign person's country of residence.
Such amounts could be U.S. source income such as interest, rents, royalties, compensation for personal services, certain capital gains, etc. Under the IRC, this income is taxable and it is the responsibility of the U.S. payor, as the withholding agent, to deduct 30% U.S. tax from the payment.
In cases where the foreign person receiving the payment is claiming an exemption or reduced rate of tax, that person should have submitted the appropriate Form W-8 to the U.S. payor. In that case, the W-8 may act as justification for not withholding the full 30% and can be important in cases where the IRS might try to collect 30% withholding tax from the U.S. company that is the withholding agent for tax owed by the foreign person.
Form 1042S (Foreign Person's U.S. Source Income Subject to Withholding) is a form provided by the U.S. payor to each foreign person who has received a payment from it, with a copy going to the IRS. These forms are due March 15, 2010 with respect to payments made in 2009. A 30-day extension can be obtained by filing Form 8809. While a further 30-day extension may be available, it is not automatic.
Form 1042 is the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons and is also due March 15, 2010 with respect to payments made in 2009. Payment of the tax withheld may also be due at this time if it has not been paid previously. An automatic six-month extension of time to file Form 1042 is available by filing Form 7004.
In preparing and filing these forms it is a good opportunity for U.S. companies to review whether the appropriate documentation, such as a Form W-8, has been supplied by the foreign person and to request any additional information that may be needed. For example, a foreign person claiming an exemption from U.S. withholding tax on rental of tangible property used in the U.S., based on the U.S. tax treaty with the foreign country, would need to obtain a tax identification number in order to complete Form W-8BEN.
We have seen a higher level of scrutiny from the IRS in this area, including Information Document Requests to review Forms 1042 and 1042S as well as the W-8 forms submitted to U.S. companies.
For questions about these forms, the responsibility to withhold tax, or the application of income tax treaties in the case of payments to foreign persons, contact your UHY Advisors tax advisor.