“Form 1042-S reporting has always been complicated, but the complexity has multiplied.  Form 1042-S reporting now reflects a series of significant changes in information reporting that have occurred over the last 5 years – from FATCA to 871(m).”

Last week Nelson Suit, Tax Counsel and Director of Regulatory Compliance at Scivantage, conducted a webinar where he shared his insights on the current state of 1042-S Tax Reporting and tips for next year’s 1042-S filing season.  Below is a recap of his presentation.

What have we learned from this 1042-S Tax Reporting Season?

  • For brokers with a traditionally domestic-oriented customer base, systems may be built on top of onboarding systems geared for Form 1099 reporting which may be insufficient to handling some of the new reporting requirements.
  • In particular, we’ve seen discrepancies and issues with handling of FATCA-relevant data fields, such as FATCA recipient statuses.
  • Processes for handling of tax identification numbers may need to be better rationalized – from new requirements for reporting Foreign TINs to US TINs to GIINs.
  • We see unexpected effective withholding rates for different income payment types which may suggest that the broker withholding processes may be worth reviewing.

What’s New for 2019?

There are not many changes currently for the 2019 Form 1042-S:

  • The IRS added a box 7c to accommodate change in what is known as “lag method” reporting
  • New Income Code 55 – Taxable Life Insurance Benefits on Insurance Contracts
  • Instructions to Form 1042-S provide additional guidance on selection of a withholding agent’s Chapter 3 and Chapter 4 status codes
  • Looking into the future, we are monitoring: (1) additional guidance expected on lag method reporting on Form 1042 instructions and (2) proposed regulations on broker withholding on sales of publicly traded partnerships under section 1446(f)

Best Practices for Form 1042-S Tax Reporting

  1. Form 1042-S reporting needs to be viewed as part of an integrated information reporting process that begins with onboarding
  2. This requires a look at form validation at onboarding as well as withholding processes and how information from these two functions flow to reporting
  3. In terms of reviewing or designing processes, it may be helpful to view Form 1042-S and Form 1042 reporting through the lens of an IRS auditor
    a.    Review IRS 1042-S/1042 Audit Guidelines issued last year
    b.    Reconciliation of Form 1042 and Forms 1042-S
    c.     Form validation checks
    d.     Sample checks to see if Form 1042-S reported income and withholding are supported by documentation
    e.    Audit guidelines emphasize a holistic view of systems, processes and procedures and set forth a list of policy and procedure documentation that may be requested

Parting Thoughts

If you would like more information on any of these topics, please contact us at info@scivantage.com.

This is the first in a series of webinars on tax insights and developments.  Throughout the year we will be presenting ideas, thoughts and discussion on various topics such as:  FATCA and You, What Do We Know About Crypto, Brokers and the Current State of Section 871(m).  If you wish to receive an invite to our webinars, please click here.