U.S. taxpayers who pay wages or other amounts subject to withholding tax, such as interest, dividends, and fees to foreign persons, must report those amounts on IRS Form 1042-S. Certain FDAP (fixed, determinable, annual, or periodic income) payments, are reportable regardless of withholding. Tax professionals must be aware of withholding requirements for nonresident aliens (NRAs), the proper 1042-S reporting for various classes of income, and the exclusions of income payments not subject to NRA withholdings.

The final regulations adopt, with modifications, the January 2017 temporary regulations and incorporate modifications included in the 2018 proposed regulations, including the requirement to disclose the limitation on benefits clause used to claim treaty benefits.

The IRS' Foreign Payments Practice, a practice within the IRS' Large Business and International (LB&I) International Business Compliance division, is devoted to enforcing withholding and remittance of these required multinational payments. Failure to accurately report amounts paid to NRAs can lead to stiff penalties for the payer of the amounts--including secondary liability for the withholding tax, interest, and various penalties.

Outline:

 I.         Background

II.         When withholding and Forms 1042, 1042-S, and 1042-T are required

III.         Payments to foreign persons subject to federal withholding tax

IV.         Final regulations issued Dec. 27, 2019

V.         Exemptions

VI.         Reporting treaty positions

VII.         Completing the Form 1042-S

VIII.         New IRS enforcement initiatives

IX.         Avoiding noncompliance penalties