Karen Russell: It is the top of the hour. For those of you just joining welcome to today's webinar Understanding Form 1042. We are super glad you're here with us today. My name is Karen Russell, and I'm a Senior Stakeholder Liaison with the Internal Revenue Service, and I will be your moderator for today's webinar, which is slated for 120 minutes. Now, before we begin, if there is anyone in the audience that's with the media, please send an e-mail to the address on the slide. Be sure to include your contact information and the news publication you're with. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. As a reminder, this webinar will be recorded and posted to the IRS Video Portal in a few weeks. And the portal is located at www.irsvideos.gov. Something very important to note is that continuing education credit and certificates of completion are not offered, if you view any version of our webinars after the live broadcast. We hope you won't experience any technology issues today. But if you do, this slide shows helpful tips and reminders. We've also posted a Technical Help document that you can download from the Materials section on the left side of your screen. And it provides the minimum system requirements for viewing the webinar, along with best practices and quick solutions. If you have completed and passed your system-check and you're still having problems, try one of the following. Close the screen where you're viewing the webinar and relaunch it or click on settings on your browser viewing screen and select HLS. You should have received today's PowerPoint and a reminder e-mail, but if not, you don't need to worry, because we got it for you. You can download it by clicking on the Materials drop down arrow on the left side of your screen as shown on this slide. We've also included Form 1042, and the Schedule Q for Form 1042 that you can download as well and follow along with today's presentation. Closed captioning is available during today's presentation. If you're having trouble hearing me or hearing the audio through your computer speakers, please click the Closed Captioning drop down arrow located on the left side of your screen. And this feature will be available throughout the webinar. Okey-dokey. So, if you have a topic specific question today, please submit it by clicking the Ask Question drop down arrow that will reveal a textbox. Type your question in the textbox and click send. And very important, please do not enter any sensitive or taxpayer specific information. During the presentation, we will take a few breaks to share knowledge based questions with you. And at that time or at those times a polling style feature will pop-up on your screen with a question and multiple choice answers. Select the response you believe is correct by clicking on the radio button next to your selection and then click submit. So, some of you may not get the polling question and that could be because your pop-up blocker is on. So please take a moment and disable your pop-up blocker now, so you can answer the polling questions. Okay, so we're going to take some time and test the polling feature. So, this is your opportunity to ensure your pop-up blocker is off, so you can receive the polling questions throughout the presentation. All right. How many times have you attended an IRS national webinar? Is it, A, Your first time; B, Have you joined it 1 to 5 times; C, Have you joined us 6 to 10 times; B, 11 to 15 times; or E, you have joined us 16 or more times on our national webinars? Take a moment and click the radio button that corresponds to your answer and click submit. So again, how many times have you attended an IRS national webinar? I'll give you a few more seconds to make your selection. Okay, let's go ahead and stop the polling, and let's see how often our audience has attended a national webinar. Okay. First time attendees, 20%, first time. Nice. B, 27% of you have attended 1 to 5; 15% have attended 6 to 10; 11% have attended 11 to 15; and 28% have attended 16 or more. That's terrific. Thank you so much. Okay.

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Okay. Again, welcome. We are glad you're here today and you joined us for our webinar. Before we move along, let's make sure you are in the right spot. Today's webinar is Understanding Form 1042 and it is scheduled for approximately 120 minutes. Please allow me to introduce our speakers today; Sean Crowley is a Senior Revenue Agent in the Foreign Payments Practice. Prior to joining the IRS in 2005, he worked as a Financial Analyst in private industry. He began his career with the IRS as a Revenue Agent for Small Business/Self-Employed and crossed over to Large Business and International in 2009. He later joined the NRA Withholding team in 2012. His background includes a BS in Business Administration from St. Michael's College and an MBA with a Finance Concentration from Clarkson University. He is also a licensed Certified Fraud Examiner and Certified Public Accountant. We have Edward Kromberg, as we known is a Senior Revenue Agent in LB&I Foreign Payments Practice in New York City. In this role, Ed is responsible for the Form 1042 and the Form 1042-S examinations of multi-national financial institution, brokerage firms, mutual firms, insurance companies and Tech companies, addressing Chapters 3 and 4, IRC Sections 1441 and 1471, issues that encompass U.S. information reporting and withholding tax. Prior to joining the IRS in 2009, Ed was employed by a large multi-national bank as a Senior Vice President in the Corporate Tax Department. Ed received a BA in Economics from the City University of New York, and an MBA in taxation from Pace University, NYC. So, you guys are in great hands today. And with that being said, I'm going to let Sean, get started. And over to you, Sean, to start the presentation. Sean Crowley: Okay. Thank you, Karen, for the introduction.

As stated earlier, my name is Sean Crowley and I'll be kicking off our presentation. Again, I'd like to thank everyone for attending today's webinar. Over the course of the next couple of hours, Ed Kromberg, and I will be presenting information to help you better understand the 1042.

The overall agenda for today's presentation involves us giving you a brief review of the various withholding regimes. We'll also provide a general overview of the Form 1042. And then, we'll go into some details of the Form by discussing each section line by line, as well as provide some examples of common errors when filing the Form and then open up the floor up for a Q&A session.

So, on the slide, you can see today's objectives. First, I'll be providing a general overview of the Form 1042, and then explain some recent developments. Also go through the general reporting requirements and provide some basic rules to keep in mind as the Form 1042 has been completed. Ed and I will go through each line item on the Form and describe some of the common errors that we've seen. So, before we go into the details on the Form 1042, let's take a step back and get a good picture of how and why the Form 1042 comes into play. So, in order to do this, I'd like to briefly review the different information reporting and withholding regimes. And this will help provide some context and some code sections of what types of information that you should populate on the Form 1042. Next, I'll go over the purpose of the Form, who should file, where and when it should be filed, along with some ramifications of non-compliance. And, then we'll go into some new and upcoming information related to the Form 1042. As indicated on the slide, the United States has three main information reporting and withholding regimes, Chapter 3, Chapter 4 and Chapter 61. And Chapter 3 is based on withholding uncertain payments to non-U.S. persons. The reporting under Chapter 3 is in respect to payments of U.S. source income that is Fixed, Determinable, Annual or Periodic, also known as FDAP, to nonresident aliens and foreign entities.

This reporting is done on Form 1042 and 1042-S. So, as you can see, there are a number of different Internal Revenue Code sections that apply to Chapter 3. But please note that there are different reporting requirements which apply under Section 1445 which is reported on Form 8288 and is the U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons in Section 1446, which is for reporting the partnership withholding tax on Forms 8804 and 8805. The second regime is Chapter 4, the Foreign Account Tax Compliance Act, also known as FATCA. And Chapter 4 is the withholding on nonparticipating foreign financial institutions or other foreign entities that do not qualify for an exception or provide information about their substantial U.S. owners.

Also, the participating foreign financial institutions may be required to withhold on payments they make to the nonparticipating foreign financial institutions or undocumented account holders. That is outlined in Section 1471-1474 of the code. FATCA that was enacted as part of the HIRE Act on March 18, 2012 and its purpose is to help reduce tax evasion by U.S. taxpayers that are holding assets in non-U.S. financial accounts and non-U.S. entities. The goal is to collect information on U.S. accounts, not withholding tax. Reporting under Chapter 4 is done on Form 8966, to report information on U.S. accounts, and, if withholding applies, on Form 1042 in 1042-S. Certain taxpayers also have a reporting requirement under FATCA on Form 8938. The third regime is Chapter 61. Chapter 61 requires reporting on certain types of payments made to U.S.

non-exempt recipients. It also involves reporting of any backup withholding imposed under Section 3406 with respect to undocumented U.S. non-exempt recipients. Reporting under Chapter 61 in Section 3406 is done on Forms 1099 and 945. Now, although they are separate and distinct withholding regimes, Chapter 61 is included when talking about information reporting and withholding requirements, with respect to payments to foreign persons, because the presumption rules may be applied in certain circumstances. This may result in a payment being treated as paid to an undocumented U.S. non-exempt recipient subject to backup withholding and reporting on Form 1099. The Form 1042 is the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. This is a tax return, not an informational return. This tax return acts as a reporting tool that should capture and consolidate various payments and withholding items. Some of the information on the slide reiterates what I mentioned on the prior slide. Remember, the reportable payments under Chapters 3 and 4 are required to be included on Form 1042. Basically, all the payments reported on Form 1042-S under Chapter 3 and 4 are reported on Form 1042. The 1042 acts as a summary of all the filed Forms 1042-S. Again, the tax withheld under Chapter 3 on payments of U.S. source FDAP income to foreign persons is reported on Form 1042. Now, regarding Sections 1445 and 1446. Section 1445 addresses the disposition of a U.S. real property interest by a foreign person that is subject to income tax withholding under the Foreign Investment in Real Property Tax Act of 1980 and it is also known as FIRPTA. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interest. Section 1446 covers Effectively Connected Income, which is generally dispersed from a partnership to its underlying partners. However, there are other distributions subject to withholding under Section 1445 and 1446 that are required to be reported on Form 1042-S. Again, the tax withheld under Chapter 4 on the withholdable payments are required to be reported on Form 1042. The Form 1042 is also used to report payments reported on Form 1000 for specified tax-free covenant bonds issued before January 1, 1934. Form 1000 is not filed with the IRS. This form is to be used by a U.S. citizen, resident individual, fiduciary partnerships or nonresident partnership all of whose members are citizens or residents, in connection with interest on bonds of a corporation containing a tax-free covenant and issued before January 1, 1934. But before we continue, I think, Karen has a polling question for us. Karen Russell: I sure do, Sean. Thank you. Okay. Audience here is our first polling question of the day. So, which of the following is reported on Form 1042? Is it; A, annual contributions to your 401(k); B, depreciation for a rental property; C, payments reported on Form 1042-S under Chapters 3 and 4; or D, none of the above. If you're not receiving the polling question, it's probably because you cannot get your pop-up blocker turned off. So, do that real quick and then answer the question, which of the following is reported on Form 1042? Is it; A, annual contributions to your 401(k); B, depreciation for a rental property; C, payments reported on Forms 1042-S under Chapters 3 and 4; or D, none of the above. Take a moment and click on the radio button that best answers this question and click submit. I'll give you a few more seconds to make your selection. Okay, let's go ahead and stop the polling. And we will share the correct answer on the next slide. And the correct response is C. Payments reported on Form 1042-S under Chapters 3 and 4. Let's see how everybody did. We got 89%. That's rocking it. Thank you.

Sean, I'm going to turn it back to you to discuss who must file Form 1042. Sean Crowley: Excellent. Yes, that's correct, Karen. The Form 1042 is required to be filed by Withholding Agents. A Withholding Agent is anyone who receives, controls, has custody of, disposes of, or pays a withholdable payments of U.S. source FDAP income. A Withholding Agent may be personally liable for any tax required to be withheld. The purposes of Chapter 3, if the Withholding Agent and the foreign payee fails to satisfy its U.S. tax liability, then both the Withholding Agent and Foreign person are liable for the tax, as well as interest and any applicable penalties.

Please note, the applicable tax will be collected only once. So. if the Foreign Person satisfies its U.S. tax liability, then the Withholding Agent is not liable for the tax. However, the Withholding Agent may still remain liable for any interest in penalties for failure to withhold.

The Form 1042 must also be filed by any publicly traded partnership or nominee that's making a distribution of Effectively Connected Income under Section 1446. Also, any qualified investment entities or publicly traded trusts that make distributions subject to Section 1445 are required to file the form. So, a Withholding Agent is required to file a Form 1042 when it's required to file or has filed a Form 1042-S. It doesn't matter if withholding was done or not, what does matter is that the Form 1042-S reporting was required. Under chapter 3, reporting may be required even when no withholding is due. For example, reporting Return of Capital or reporting interest payments that are exempt from withholding under the portfolio interest exemption. That's another option. Basically, if the 1042-S was filed, then the Form 1042 also needs to be filed. The 1042 is required to be filed regardless of the way the 1042-S was filed, which could have been done by paper or electronically. Form 1042 is also required to be filed by a Withholding Agent when it pays gross investment income to a foreign private foundation subject to section 4948(a). And this relates to foreign private foundations that are not completely exempt from withholding but instead are subject to a lower rate of withholding of 4%. A Withholding Agent is also required to file Form 1042 if it pays a federal procurement payment subject to withholding under Section 5000(c). Under Section 5000(c), there is a 2% tax imposed on any person that receives a specified federal procurement payment. A specified federal procurement payment is a payment made per contract with the United States government, for one, the provision of goods that are manufactured or produced in a country that does not have an international procurement agreement with the U.S., or two, the provision of services by a country that does not have an international procurement agreement with the United States. Finally, a Withholding Agent is required to file Form 1042 if it's a Qualified Intermediary, a Withholding Foreign Partnership, Withholding Foreign Trust, a Participating Foreign Financial Institution, or a Reporting Model 1 Foreign Financial Institution that's making a claim for a collective refund under the terms of its agreement with the IRS. Please note that Qualified Intermediaries, Withholding Foreign Partnerships, Withholding Foreign Trusts are still generally required to file a Form 1042 even if there is no collective refund claim. To the Form 1042. The form 1042 is prepared on a calendar year basis even if the Withholding Agent is a fiscal year of taxpayer Forms 1042 and 1042-S are filed with respect to payments made in the previous calendar year and are due by March 15. So, the payments made during calendar year 2022 are due to be reported by March 15, 2023. Recipient copies of Forms 1042-S are also due by March 15. A Withholding Agent can request an extension of time to file the Form 1042. And to request this extension, the Withholding Agent must file Form 7004. The automatic extension is for 6 months. However, the extension of time to file does not extend the time for the tax to be paid. The tax must still be paid timely. The Withholding Agent must deposit any tax withheld throughout the calendar year as the payments subject to withholding are made. Now, the timing and amount of the withholding dictates when the deposits should be made. All deposits must be made using the Electronic Federal Tax Payment System. Do not mail cash or check payments to the IRS. Payments must be made electronically to avoid a deposit penalty.

This slide shows the address of where to mail the Form 1042, It must be mailed in a flat envelope, not folded. The paper Form 1042-T and Copy A of paper Forms 1042-S are also filed to the same address. But it's important to note that the Forms 1042-S and Form 1042-T are informational returns. Again, the Form 1042 is the actual Tax Return. Just filing a Form 1042-S or Form 1042-T does not fulfill the requirement to file a Form 1042. The Form 1042-S may also to be e-filed using the FIRE System. And FIRE, stands for the Filing Information Returns Electronically, or any other filing system indicated in the Form 1042-S instructions and other IRS guidance. Please note that the Form 1042-S is required to be e-filed in certain cases, such as if the Withholding Agent is a Financial Institution, or the Withholding Agent is filing 250 or more Forms 1042-S. So, what happens if a Withholding Agent fails to file the Form 1042 as required? If the failure was not due to a reasonable cause or willful neglect, penalties may be assessed. Some possible penalties are for the late filing of the Form 1042, late payment of tax, or making a late deposit. The late filing a Form 1042 penalty is for not filing the Form 1042 when due, including extensions. The penalty is 5% of the unpaid tax for each month, or part of the month, the return is late, up to a maximum of 25% of the unpaid tax. The details of this penalty can be found under Section 6651(a)(1). The late payment of tax penalty is for not paying the tax when due. It's usually one-half of 1% or 0.5% of the unpaid tax for each month or part of a month the tax is unpaid. The penalty cannot exceed 25% of the unpaid tax. Section 6651(a)(2)

contains additional information about this penalty. The failure to deposit penalty is if the Withholding Agent failed to deposit tax withheld in a timely manner. This penalty is under Section 6656. This specific penalty ranges from 2% to 10% of the tax liability not timely deposited, depending on the number of days a deposit is late. If the taxes are not paid or deposited by the due date, interest may still be charged even if an extension of time to file the form has been granted. Other penalties may also be imposed for negligence, substantial understatement of tax and fraud. Section 6662 and 6663 provide more details on these penalties.

Now, I'd like to talk about some new and upcoming items. A little over a year ago, the notice of proposed regulation 102951-16 was issued. This proposed regulation would require certain filers to file the Form 1042 electronically. This new regulation would appear under Section 6011(e) and Regulation 301 6011-15. The purpose of this new regulation is to increase the timeliness and accuracy of processing refunds and credits mainly by foreign persons that have amounts withheld reported in Form 1042-S. The required e-filers will include: a Withholding Agent that files at least 10 returns of any type: the Forms 1099, Forms 1042-S, Forms W-2, et cetera. However, the proposed regulations basically exempt Withholding Agents that are individuals, estates or trusts from the e-filing requirement. Meaning that Withholding Agents that are individuals, estates or trusts, do not have to file the Form 1042 electronically even if they file more than 10 Forms 1042-S during that calendar year. Another required e-filer is Withholding Agents that's a financial institution. Financial institutions will always be required to file electronically regardless of whether they meet the 10-form threshold or not. Additionally, a Withholding Agent that's a Partnership with more than 100 partners will be a required e-filer. And based on the proposed regulations, this requirement will not kick in until March 15, 2023 filing, which is when the 2022 Forms 1042 are due. Please note, it's expected that waivers of this requirement will be available in cases of undue hardship. For additional detailed guidance, you can review the filing. Of course, the Form 1042 instructions, Publication 515 which explains the Withholding of Tax on Nonresident Aliens and Foreign Entities, Form 7004 that's the instructions for the Application for Automatic Extension of Time to File Certain Business Income Tax, Information and other returns. Publication 966, this is a guide to the Electronic Federal Tax Payment System.

And, of course, our website IRS.gov/form1042. And you can go to this site for the latest information about developments related to the Form 1042 and its instructions. Before I go to a next topic, Karen, let's pause for our next polling question. Karen Russell: Okay, let's do it.

Okay, audience our second polling question is, where can you obtain more information about Form 1042? Is it, A, Publication 3498; B, Notice 609; C, Form 1042 instruction; or D, all of the above. Again, where can you obtain more information about Form 1042; A, Publication 3498, B, Notice 609; C, Form 1042 instructions, or D, all of the above. So take a moment and click the radio button next to the selection that is the answer to this question. And I will give you just a few more seconds to make your decision. Okay. Let's go ahead and stop the polling and shared correct answer on the next slide. And the correct response is C, you can find more information in the Form 1042 instructions. So, let's see how many of you got that right. One second. Oh, 54%.

Okay. So, Sean, do you want to tell the audience why C is the correct response? Sean Crowley: Yeah. Absolutely. Yes, the Form 1042 instructions are a great resource to use when trying to obtain more information about the Form 1042. It provides information on future development, reminders, and general instructions. Karen Russell: Thank you for that. And so, you're going to continue on. So, I'm just going to hand the mic back to you. Sean Crowley: Okay. Thanks, Karen.

So, on the next set of slides, we'll go over the general requirements, some of the basic rules to keep in mind when completing the Form 1042 and then we'll provide a line by line explanation of the Form. Generally, the single Form 1042 is filed consolidating the information from all Forms 1042-S that have been filed by the same Withholding Agent. Since the Form 1042 as a tax return, there should be only one non-amended Form 1042 for EIN. Do not consolidate the information from multiple Forms 1042-S with different Withholding Agents EIN into one Form 1042.

In other words, do not combine 1042-S reporting from multiple Withholding Agents into a single Form 1042. A Withholding Agent must file separate Forms 1042 to the extent it acts in more than one capacity. For example, the Withholding Agent that can be acting as a Qualified Intermediary, QI, with respect to certain accounts and of the Non-Qualified Intermediary, NQI, with respect to others. So, in such cases, the Withholding Agent will file its QI related Form 1042 with its QI-EIN and then the same Withholding Agent can file its non-QI related Form 1042 with its non-QI-EIN. And, for those of you that are not familiar with the term Qualified Intermediary, these are foreign intermediaries that signed a qualified intermediary withholding agreement with the IRS. A QI is entitled to a certain simplified withholding and reporting rules. Once these entities enter into a QI agreement, they receive a special EIN to identify them as a QI, which is known as the QI-EIN. Some basic rules to keep in mind, when completing the Form 1042, make sure the correct tax year Form is being used. Fill out the Form completely, all the required fields, and make sure it's timely filed and all deposits are timely made. Make sure that return includes all required attachments when applicable. For example, copies of the Forms 1042-S in support of a credit claimed, the statement explaining why the return is being amended, Schedule Q if a return has been filed by an entity that is a QI, or has a branch, that's a Qualified Derivative Dealer.

So, in addition, don't enter negative amounts. Rounding is a must, so make sure to round amounts so that only whole dollar amounts are reported. Also, make sure all computational lines are completed correctly all required fields are included, including the Withholding Agents chapter 3 and chapter 4 status codes, and that the amounts on the 1042 are consistent with the amounts reported on all Forms 1042-S. Remember, the 1042 instructions and Publication 515 are great resources to use to help avoid making some common errors. So now that we went through the general requirements and some basic rules, let's begin by going through the details of a Form 1042.

Before we go line by line, we will show you a blank copy of the 2021 Form 1042. There are 4 sections of the Form 1042 that are spread out over the 2 pages. This is the first page with almost 100 entry points of for information. I'll be going through the details of the Line 60 and then Ed will take over from there. The Page 1 that includes Section 1, the record of Federal Tax Liability, which continues a little into Page 2. And this is the second page. So, Page 2 wraps up the Record of Federal Tax Liability and continues with the Computation of Tax Due or Overpayment. Section 2 provides an area for the Reconciliation of Payments of U.S. Source FDAP Income. Section 3 addresses the Potential Section 871(m) Transactions, while Section 4 focuses on the Dividend Equivalent Payments by Qualified Derivatives Dealer. There's not as many available data entry points on the second page, but of course, they're all just as important. So first, we'll go over the Tax Year. So, as you can see, the tax year is listed in the top right of the Form. This is a calendar year Form, not fiscal year. The form to be used must be for the calendar year that the payments were made. Do not cross out the year and write in a different year. If the entity's tax year starts after January 1 or ends prior to December 31, use the Tax Form Year for the calendar year that covered the activity. Next is the amended return indicator.

When filing a corrected Form 1042, this box should be checked, otherwise is should be left blank. Checking the amended return box, which is directly under the year, indicates that this Form 1042 overwrites any previously filed Form 1042 for the same year. The filer is required to attach a statement explaining why the Form 1042 is being amended. Please ensure that return, whether amended or not, is signed and dated before it's filed. This is very important to ensure accurate processing, especially when a Form 1042 is amended multiple times. When filing an amended Form 1042, it is very important to verify if the associated Forms 1042-S that were filed with the Original Form 1042 for the same tax year also need to be amended. Karen, how about another polling question? Karen Russell: I'm ready for that. But, Sean, before we go to the polling question. Audience, we got a couple of questions in about zip code on where to mail the Form 1042 and the complete zip code is 84409. Okay. And I do have another polling question, which I believe is our third. So, audience, when filing an amended Form 1042, what additional information needs to be provided? Is it, A, copies of Audited Financial Statements for the past 3 years; B, statement indicating why the Form 1042 is being amended; C, copies of Forms 1042 that were filed for the last 3 years; or D, copies of the Forms 1042 that were filed for the last 5 years. So, when you're filing an amended Form 1042, what additional information needs to be provided? A, copies of Audited Financial Statements for the past 3 years; B, statement indicating why the Form 1042 is being amended; C, copies of the Forms 1042 that were filed for the past 3 years; or D, copies of the Forms 1042 that were filed for the last 5 years. So, take a moment and click the radio button next to your selection and click submit, and I am just going to give you a few more seconds since I've read through the question. Okay. Let's go ahead and stop the polling and we will share the correct answer on the next slide. And the correct response is B, you need to include a statement of why the Form 1042 is being amended. Let's see how many of you got that right, 92%, way to go. Okay, Sean, so what's next? Sean Crowley: Thanks for asking Karen. Well, now I'd like to go over the Withholding Agent information. Name of the Withholding Agent, this is the name of the Withholding Agent that relates to the associated Employer Identification Number listed in the following box. The name entered here must match the name entered in box 12(d). Withholding Agent's name, on all the Forms 1042-S filed by the Withholding Agent for that calendar year. The withholding agent may be an individual, trust, estate, partnership, corporation, nominee, government agency, association or tax-exempt foundation, whether domestic or foreign. For purposes of chapter 4, a Withholding Agent includes a participating Foreign Financial Institution or registered deemed-compliant Foreign Financial Institution to the extent it is required to withhold tax. The Employer Identification Number, the filer is required to enter the Withholding Agent's 9-digit EIN. The EIN listed here must match the EIN listed in box 12(a). Withholding Agent's EIN, on the Forms 1042-S that are filed by the Withholding Agent. If they are filing the Form 1042 as a Qualified Intermediary, Withholding Foreign Partnership or Withholding Foreign Trust, the EIN to be entered in this field must be the Qualified Intermediary EIN or the Withholding Foreign Partnerships EIN, or the Withholding Foreign Trust EIN. The general rule is that a single Form 1042 is required per EIN, consolidating the information reported on all the Forms 1042-S filed by the Withholding Agent for that calendar year. Again, if the withholding agent is acting in more than one capacity, for example, if a Withholding Agent is required to file the Form 1042 as both a Qualified Intermediary and as a Non-Qualified Intermediary, the Withholding Agent would be required to file two separate Forms 1042, one in its capacity as a QI, using its QI-EIN and another one in its capacity as a NQI, using its NQI-EIN. So now on to the status code. The chapter 3 and chapter 4 status codes for the Withholding Agent are required fields, regardless of the type of payments being made. Filers must select the status code that more closely applies to them. The Withholding Agent's chapter 3 and chapter 4 status codes on the Form 1042 must be the same status codes listed in box 12(b) and 12(c), respectively, on each of the Forms 1042-S being filed. The chapter 3 and chapter 4 status codes are each a 2-digit code and a list of all the available status codes can be found in the instructions to the Form 1042-S. Withholding Agent's address, these are also required fields which indicate where the withholding agent resides. This information should match the number, street address, city, country and postal code information that's listed in boxes 12(h) and 12(i)

on the Forms 1042-S being filed. Future return filing, if the withholding agent does not expect to file a Form 1042 in the future, this box should be checked. The final income pay date, if the final return box is checked, the Withholding Agent must provide the date when the final income was paid. The date must be answered in the following format, 2 digits for the month, 2-digits for the day and 4-digits for the year. This date must be before the end of the tax period for which the final return is being filed. The tax liability for period, this section is for the Withholding Agent to enter the tax liability for the quarter monthly period in which the associated income was paid or distributed. This is not the amount of tax deposited with the IRS.

Let me say that again, because this is really important. This is not the amount of tax deposited with the IRS. Lines 1 through 60 are to record the tax liability amounts with the payments being made, not the deposits made with the IRS. The date the tax liability arises is generally the date the payment is made, provided the payment is of an amount subject to withholding. The timing and amount of the withholding drives the timing of when the deposits are required to be made to the IRS. This section should not include any negative amounts. The tax liability shown in Section 1, specifically lines 1 through 60, take into account reductions attributable to the reimbursements and set-off procedures, if applied. Ed will go into the details of these procedures later. The estimated liabilities associated with escrow procedures, which are amounts not deposited with the IRS, should not be included in Lines 1 through 60. You can see regulations 1.1471-2(a)(5)(ii) or 1.1441-3(d) for more information. I'll speak a little bit more about this on the next slide. So, the totals for each quarter monthly period, for example, lines 1 through 4, must be summed and entered into the monthly total, for example, line 5 for the month of January. A quarter monthly period ends on the 7th, 15th, 22nd, and last day of the month. The total reported on Lines 1 through 60 must match the sum of the total net tax liability reported on Line 64(b), 64(c), and 64(d). Now, because of Record a Federal Tax Liability is broken up following the quarter monthly periods, the same way as the deposit schedule is, taxpayers often incorrectly complete this section indicating the amounts and dates of the deposits instead of indicating the amount of the tax liability and the date when the liability arose. Note that the date liability arises is generally the date the payment is made, provided the payment is an amount subject to withholding. The timing and amount of withholding drives the timing of when the deposits are required to be made to the IRS. When the return is filed, the Record of Federal Tax Liability is compared to the dates that the deposits were actually made by the taxpayer to determine if the payments were timely made or if the late deposit penalty applies. So, when are the deposits generally required to be made? If at the end of a quarter monthly period where the total amount of undeposited taxes is $2,000 or more, you must deposit the taxes with the IRS within 3 business days of the end of the quarter monthly period. If at the end of any month and the total amount of undeposited taxes is at least $200, but less than $2,000 then you must deposit the taxes with the IRS within 15 days after the end of the month. If at the end of the calendar year and the total amount of undeposited taxes is less than $200, then you may either pay the taxes with your Form 1042 or deposit the entire amount by March 15. All payments should be made in U.S. dollars. And, again, do not pay this liability by cash or check use the Electronic Federal Tax Payment System. Now, as mentioned on the prior slide, I'd like to touch upon the Escrow procedures. These are the rules that provide that if a Withholding Agent can't determine the portion of a payment, subject to withholding, a Withholding Agent can withhold 30% of the entire payment and deposit the withheld amount in an escrow account, and not with the IRS. An example of this would be in the case of dividends being paid, but the E&P computation is still pending. So, with respect to such payment that withholding will be due to the IRS the earlier of the date a determination is made with respect to the amount actually subject to withholding or 1-year from the date the amount is placed in escrow.

Generally, an amount placed in escrow during one calendar year will be reported on a Form 1042 the following year. Therefore, that's why the instructions to the Form 1042 require amounts that are placed in escrow are excluded from the tax liability and the amounts withheld. Next. Ed will continue with the remaining portion of Section 1 and I'll finish up with the rest of the return.

Ed, over to you. Edward Kromberg: Thank you, Sean. That was great. Thank you, Sean. Thank you, Karen. So just a quick review because I think this is important. Sean touched upon this. The regulations currently require filers who issue 250 or more Forms 1042-S information returns for any calendar year to file those returns electronically. The number of forms filed is reported on Line 61 on Page 1. The 250 or more requirements applies separately for original and amended returns. So, for example, if a withholding agent has 100 Forms 1042-S to amend, the returns can be filed on paper because they fall under the threshold of 250. However, if the issuer has 300 Forms 1042-S to amend, the Forms must be filed electronically. Please note, and this is important, as was mentioned, financial institutions that are required to report payments made under chapter 3 or 4 must electronically file Forms 1042-S regardless of the number of forms to be filed. Lastly, if the withholding agent is a partnership, it must file electronically if it has more than 100 partners or it's required to file 150 or more information returns for the tax year 2019 and thereafter. Again, as reported on an earlier slide, proposed regulations will lower to 10 from 250 the thresholds for filing electronically. Based on these proposed regulations requirements will not kick in until March 15, 2023 filing, which is when the 2022 Forms 1042 are due. And just to note the final regulations are yet to be issued. Line 62a reports the total amount of the U.S. source FDAP income payments that were reported on all Forms 1042-S in Box 2, the gross income box, and any Forms 1000 that are being filed for the calendar year.

This amount should not include substitute payments listed on line 62b. Line 62b (1) reports the total amount of U.S. source substitute dividend payments reported on all Forms 1042-S in Box 2.

An example of a substitute payment is when, for example, a Withholding Agent has borrowed a U.S.

equity and is required to make a substitute payment in lieu of a dividend to the lender if the stock is borrowed over a dividend payment date. Substitute payments are usually associated with financial institutions. Line 62b (2) reports the total amount of U.S. source substitute payments other than substitute dividend payments reported on all Forms 1042-S and Box 2, for example, a substitute payment in lieu of interest. Line 62c is the sum of the gross income reported on line 62a through 62b. This number should reconcile to the sum of the gross income reported in Box 2 of all the Forms 1042- S file for that year and all amounts of gross income included on Forms 1000.

Now, just to know this is an important check for me when I begin audits ensuring that the aggregate gross income reported from all the Forms 1042-S and Forms 1000, equals the amount reported on Line 62c. Line 62d reports the gross amounts that were actually paid during the calendar year only if different from the gross amounts reported on Forms 1042-S and Forms 1000.

And this is not a common occurrence. Again Form 1000, as Sean mentioned earlier is the Ownership Certificate is provided to the Withholding Agent for interest payments on bonds that have a tax free covenant and that were issued before 1934 by a domestic corporation or resident or nonresident foreign corporation. If the withholding agent chooses to allow a third-party to discuss the Form 1042 the IRS, this section must be completed by checking the, Yes, box in the Third-Party Designee section. Otherwise, the filer should check the box, No, and not complete the remaining boxes in this area. Checking, Yes, authorizes the designee to answer questions, exchange information, request information and receive written information related to the return.

If designating a third party in this section, filers should provide the designee's name, phone number and the 5-digit Personal Identification Number, PIN, that the designee has chosen. The authorization on this form applies only to this specific tax form and year. Form 1042 must be signed by the Withholding Agent, if the Withholding Agent is an individual, or by an authorized representative or officer of the Withholding Agent. The signature must include the date that the form was signed and the capacity or title of the person that's signing the Form on behalf of the Withholding Agent. The paid preparer section is completed when the Form 1042 is prepared by someone or an entity other than the Withholding Agent. So, before we continue, let's pause for another polling question. Karen? Karen Russell: Thank you, Ed. Okay, audience here is our fourth polling question. So, financial institutions are required to file Forms 1042-S with the Service electronically through the FIRE system, which stands for Filing Information Returns Electronically, and not on paper, when the number of forms filed by the financial institution exceeds what number? Is it, A, 250; B, 150; C, 100; or D, at least one or more. Again, financial institutions are required to file Forms 1042-S with the Service electronically through the file FIRE system, and not on paper, when the number of forms filed by that financial institution exceeds what number? Is it, A, 250; B, 150; C, 100; or D, at least one or more. So, take a few minutes, read over the question one more time if you need to. Click the radio button next to the selection that you believe is the correct answer and click submit. And I'm going to give you just a few more seconds. All right. Let's close out the polling. And let's go to the next slide to reveal the correct response. I'm hoping for 100% on this the correct response is, D, because it's a financial institution, one or more, answer is at least one or more. Oops. And our accuracy rate is 43%. Ed would you please explain to the audience. Edward Kromberg: 43%, oh, I'm hurt by that. I think some people may have thought this is a trick question or they were misunderstanding. The 250, I said, 250 was the majority of the responses, but 250 is the general answer. If you are an entity other than a financial institution, or perhaps a partnership, but for financial institutions, there is no threshold amount. Even if you file one Form 1042-S, if you're a financial institution, you must file electronically. There is no threshold other than one. So, the financial institutions out there and you know who you are. And I'm sure you're doing this already. If you file one or more, it's filed electronically. So, I'm sorry that we got a poor response on that, but we are trying to do better. Karen Russell: That's all right. So, Ed, I see that you're going to continue and we're moving down the form to Line 63. Edward Kromberg: Correct. Karen Russell: Okay. Edward Kromberg: All right. So, Line 63a reports the amount of tax actually withheld at source on payments made throughout the calendar year that were reported on Form 1042-S before any adjustments made pursuant to reimbursement or set-off procedures, The reimbursement and set-off procedures will be discussed in a few moments. Line 63b (1) reports the amount of tax withheld by other Withholding Agents, other than the withholding agent filing the Form 1042, with respect to payments other than substitute dividends reported on Forms 1042-S.

Line 63b (2) reports the amount of tax withheld by other withholding agents for all subsequent dividend payments reported on Form 1042-S. And just a note there are situations when amounts are withheld by other withholding agents and this also will be discussed in a little bit. Line 63c (1), Adjustment to Overwithholding, reports any amounts that were repaid to the beneficial owner or payee pursuant to the reimbursement or set-off procedures. The amounts reported in this line include amounts repaid to the recipient, provided it was repaid before the earlier of the issuance of the Form 1042-S to the recipient, or the due date, of the Form 1042-S, March 15. The amount reported in this line should be equal to the total amounts reported in Box 9, of the aggregate Forms 1042-S filed by the Withholding Agent for the calendar year. Let's talk a little bit about the reimbursement procedure. Under the reimbursement procedure, the Withholding Agent repays the beneficial owner or payee an amount that was over withheld. Withholding Agent may use its own funds for this repayment. So, let's go through an example of the reimbursement procedure.

So, we have James Smith. James Smith is a resident of the United Kingdom. In December 2021, Domestic Corporation M paid a dividend of $100 to James, at which time, M withheld $30 under chapter 3 and paid the balance of $70 to James. In February 2022, two months later, James gave M, a valid Form W-8BEN with a signed affidavit of unchained status. James advises M that under the income tax convention with the United Kingdom only $15 should have been withheld from the dividends and is requesting repayment of the $15 that was over withheld. Now, although M Corporation had already deposited the $30, the corporation chose to apply the reimbursement procedure and repaid James $15 before the end of February after receiving the Form W-8BEN. Note that the repayment must be made by the earlier of the issuance of the Form 1042-S to James or the due date of the Form 1042-S without extension that would have been March 15, 2022. Also note that, although, not finalized yet proposed regulations per the burden reduction regulations will allow the repayment to be made until the extended due date as well. So, continuing with the example, so during 2021, M made no other payments from which tax had to be withheld. On its timely filed 2021 Form 1042, M reports $15 as its total tax liability and $30 as its total deposits. M requests that the $15 overpayment be credited to its 2022 Form 1042 rather than refunded. The Form 1042-S that M files for the dividend paid to James in 2021 must show a tax withheld of $30 in Box 7a, $15 as an amount repaid in Box 9 and a total withholding credit of $15 in Box 10. And in June 2022, the following year, M made payments from which it withheld tax of $200. On July 15, 2022, M deposited $185. That's the $200 less the $15 credit claimed on its Form 1042 for 2021. M timely filed its Form 1042 with 2022 showing a tax liability of $200, $185 deposited, and a $15 credit carryover from 2021. Turning to the set-off procedure. Under the set-off procedure, the Withholding Agent repays the beneficial owner or payee, the amount over withheld by reducing the amount that the Withholding Agent would have been required to withhold on later payments it makes specifically to that person or entity. So, the mechanics of the set-off procedure and reimbursement procedure are a bit different, but the intent of both is to reimburse the payee for amounts that may have been over withheld if the repayment is done timely by the Withholding Agent. Just touching again, I know, Sean, touched on this with respect to escrow. As we discussed earlier, but I think it's worth repeating, a Withholding Agent that withheld tax in escrow during calendar year 2021 and that was not required to deposit with the IRS the amount of tax withheld during calendar year 2021 should not report such amount as a liability on Lines 1 through 60 or Lines 64a through 64d and should not report such amount as withheld on Line 63a through 63d until the tax year such amount is deposited with the IRS. Depending upon when the tax is placed in escrow, a final determination may be made in the same

calendar year or not until the following calendar year. Line 63c (2) addresses adjustments for under withholding. Line 63c (2) withholding of additional tax is required when under withholding occurs. A Withholding Agent may withhold tax from future payments made to a beneficial owner that should have been withheld from previous payments to that beneficial owner under chapter 3 of the Internal Revenue Code. In the alternative, the Withholding Agent may satisfy the tax from other property that it holds in custody for the beneficial owner or other property over which it has control. Such additional withholding or satisfaction of the tax owed may only be made before the date that the Form 1042 is required to be filed, not including extensions, for the calendar year in which the under withholding occurred. Adjustments to under withholding is reported on Line 63c (2). The tax paid by the Withholding Agent is reported on Line 63d. Include on Line 64a any adjustments to the total net tax liability. You would report an adjustment to the net tax liability when, for example, a determination was made by the distributing corporation, at a time reasonably close to the date of payment, of the extent to which the distribution will constitute a dividend as defined in Section 316. The determination is based upon the anticipated amount of accumulated earnings and profits and current earnings and profits for the taxable year in which the distribution is made. When there is certainty as to the amount of the dividend as defined in Section 316. The distributing corporation pays over the under withheld amount on or before the due date for filing a Form 1042 for the calendar year in which the distribution is made. The amounts reported as adjustment on Line 64a are not included in the record of federal tax liability on Lines 1 through 60 of Page 1 of the Form 1042. Please note that the net tax liability must be separated between the total net tax liability under chapter 3 is reported on Line 64b, and the total net tax liability under chapter 4, which is reported on Line 64c. As we discussed earlier, Line 64d reports the tax liability associated with withholding done pursuant to Section 5000C, which imposes a 2% tax on certain federal procurement payments. U.S.

government agencies must collect this tax via withholding on applicable payments. U.S. government contracts covered by Section 5000C are generally for goods produced or for services provided in a foreign country by a foreign person for the U.S. Government's benefit. To reiterate the sum of lines 64b, 64c, and 64d must equal the totals in the record of federal tax liability on Lines 1 through 60 of Page 1 of the Form 1042. Karen, how about another polling question? I hope we do better than last one. Karen Russell: Yes, I hope so too. That works for me, Ed. Okay, audience our fifth polling question. Line 63c (1) adjustments to over withholding report any amounts that were repaid to the beneficial owner or payee pursuant to what procedure? A, reimbursement procedure; B, set-off procedure; C, escrow procedure; or D, reimbursement and set-off procedures.

And, Ed, I don't think you're muted. Okay. Again, let's read the question one more time, Line 63c (1) adjustment to over withholding report any amounts that were repaid to the beneficial owner or payee pursuant to what procedure? A, reimbursement procedure; B, set-off procedure; C, escrow procedure; or D, reimbursement and set-off procedures. So, take a moment, read the question, and then click the radio button next to the selection that you believe is the correct response. I'll give you a few more seconds to make your selection. Okay. Let's close the polling and share the correct answer on the next slide. And the correct response is D, its reimbursement and set-off procedures. Let's see how everybody did, 64%. Yeah. That's okay, Ed. We need your insight, please. Edward Kromberg: Okay. So, again, adjustments for withholding the 2 procedures that are applicable or that are available to Withholding Agents are the reimbursement and set-off procedures. Those are the, it's not just the reimbursement procedure. It's not just the set-off procedure. It would be both reimbursement and set-off procedures may be used to repay beneficial owners if there are situations when the Withholding Agent may have over withheld on tax withholding. Karen Russell: Thank you for clarifying that. That's great. Hopefully that helps the audience. Okay. So, it looks like there is more of the Form 1042 to review. Edward Kromberg: Yes, there is, Karen. When reporting total payments Line 65a reports total tax paid during the calendar year, whereas line 65b reports total tax paid during the subsequent year. An example of when you would report an amount on Line 65b, tax paid in subsequent year, is when the withholding agent is a partnership or a trust. For partnerships and trusts, withholding normally occurs on actual distributions of U.S. source FDAP income to foreign partners at the time they are made.

If an actual distribution is not made in the year the partnership earned the income, withholding will occur on the foreign partner's allocable share with U.S. source FDAP income in the subsequent year. This may cause a mismatch between the time the income was earned versus when the tax was withheld. To address what's commonly referred to as the lag method of reporting, proposed regulations issued on December 18, 2018 now allow partnerships or trust to withhold in a subsequent year with respect to a foreign partner's or beneficiary's share of income for the prior year and designate the deposit of the withholding as attributable to the preceding year.

So, for example, if a partnership withholds on April 1 of 2022, with respect to a foreign partner's share of undistributed income for the 2021 calendar year, the partnership may designate the deposit as made for 2021 and report the liability and tax withheld on the 2021 Form 1042 and 2021 Form 1042-S for the partner. The partnership or trust must, this is important, must ensure a withholding partnership or withholding trust, if applicable, to avoid any potential late that its chapter 3 status code properly reflects its status as a partnership or trust, including deposit penalties assessed by the Service Center. The associated liability should be reported on Line 59, with the share of income to the partner or beneficiary reported on Line 62 and the amount withheld reported on Line 65b. Line 66 relates to an overpayment reported in the prior year Form 1042 for its Line 71 had the Credit box checked and not the Refund box. Line 67a and 67b reports any credit being claimed by the Withholding Agent for amounts withheld by other Withholding Agents. These are amounts that were reported on Form 1042-S issued to the Withholding Agent as the recipient. This is common when the withholding agent is a Non-Withholding Qualified Intermediary, and tax was withheld by other Withholding Agents. Another scenario of tax withheld by other Withholding Agents is if the Withholding Agent is a Non-Qualified Intermediary and a Form 1042-S was issued to Unknown Recipient, shown in the recipient's name box of the Form 1042-S and reflecting the name of the Non-Qualified Intermediary and in the intermediary fields of the Form 1042-S. As a simple example, a U.S. Withholding Qualified Intermediary that does not assume primary chapters 3 and 4 withholding responsibility. Agent, a broker dealer for instance, makes it withholdable payment of U.S. source dividends to a

The withholding statement provided by the QI allocates 100% of the dividends to a 15% withholding rate pool. The broker-dealer, the Withholding Agent, completes a Form 1042-S for the dividends allocated to the chapter 3, 15% withholding rate pool, showing the QI as the recipient. When the QI prepares its own Form 1042 it will show the tax withheld by the broker-dealer on Line 67 of the QI's Form 1042. An amount reported on Line 67a and 67b must be substantiated by attaching the recipient copy of the Form 1042-S that reports the amount of tax withheld being claimed as a credit on Form 1042. A copy of the Form 1042-S attached must show the Withholding Agent as the recipient. Thus, the QI, in the previous example, must attach the Form 1042-S that it received from the broker-dealer to receive credit for the tax claim on Line 67. The information on the Form 1042-S must match the information on the Form 1042 being filed, name of the Withholding Agent, Employer Identification Number, the amounts, et cetera. In addition, the IRS will verify that the copy of the Form 1042-S attached to the Form 1042 in support of a Line 67a or 67b credit claim matches this Form 1042-S that was filed with the IRS by the Withholding Agents that did the withholding for which a credit is being claimed. Any inconsistencies will cause delays in the processing of the Form 1042 or denial of the credit being claimed. Note that it's possible that a Form 1099 be attached in support of a credit claimed on any of these lines. In such a case, the same rules noted above apply. The IRS will not accept any other document as substantiation of this credit besides a Form 1042-S or Form 1099. Note that if the Withholding Agent filing the Form-1042 claiming a Line 67a or 67b credit was a Non-Qualified Intermediary, the copy of the Form 1042-S attached would show the Withholding Agent not the recipient but instead as the intermediary, in Box 15 of the Form 1042-S, as generally in those cases the 1042-S would list Unknown as the recipient in Box 13(a) that box being the recipient's name box of the Form 1042-S.

Line 68 is the sum of total amount, total payments made by the Withholding Agent, credit claimed from prior years, and credit claim for amounts withheld by other Withholding Agents. Line 69 represents the additional deposits that the withholding agent is required to make to satisfy the net tax liability. Lines 70a and 70b represent an overpayment that the Withholding agent may claim as a refund or as a credit to be applied in the subsequent year. Line 71 indicates if a credit or refund will be claimed. Only one box may be checked. If none are checked, the default is applied as a credit for the subsequent year. If the reimbursement or set-off procedures were utilized after the calendar year-end, the Withholding Agent should request that the overpayment to be applied as a credit to the subsequent year. The completion of Section 2 is mandatory. It is not optional, as is the belief of some withholding agents. Some may find the section a bit confusing. The section is useful as the IRS expands its audit work. The intent of the section is for Withholding Agents to differentiate between the total U.S. source FDAP income required to be withheld under Chapter 4 that's reported on Line 1, and the total income required to be reported, but not withheld under Chapter 4. And that's reported on Line 2a through 2d. As indicated on the slide, Line 1 of this section again reports the total FDAP gross income amount listed on all Forms 1042-S that was required to be withheld upon for Chapter 4 purposes, including what was done under escrow procedures. In a moment, I will provide examples of the types of payments that comprise Lines 2a through 2d. I think in Section 2 as nothing more than another way to display, or segregate, or illustrate the aggregate gross income of all Forms 1042-S, which is reflected on Line 4 into specific categories, that is shown on Line 1 and Lines 2a through 2d. Thus, Line 3, which is the total of Line 1 and 2a through 2d, should equal Line 4, otherwise, an explanation must be provided on Line 6. Line 2a report the amount of FDAP income that was reported to recipients that have a chapter 4 status, based on documentation provided to the Withholding Agent, that established no withholding under chapter 4. For example, a payment that's made to an individual. Another example of a type of payment that would be included in this line would be a payment made to a recipient that indicates its status as a Participating Foreign Financial Institution. Please note that the amount reported on this line should generally equal the aggregate amount reported in Box 2 of all Forms 1042-S filed by the Withholding Agent for the calendar year for which exemption code 15, Payee not subject to chapter 4 withholding, was reported in Box 4a of the Form 1042-S. Line 2a of Section 2, will in addition to exemption code 15, as I just mentioned, also include amounts reported in box 2 of all the Forms 1042-S filed by the Withholding Agents for the calendar year for which Chapter 4 exemption codes 17, 18, 19, 20 and 21, are reported in Box 4a of the Forms 1042-S. Line 2b reports excluded non-financial payments, for example, services, including wages, use of property, office and equipment leases, royalties, software licenses, transportation and freight, gambling winnings, awards, prizes and scholarships. Please note the amount reported in this line should generally equal the aggregate amount reported in Box 2 of all the Forms 1042-S filed by the Withholding Agent for the calendar year for which chapter 4 exemption code 16, Excluded non-financial payment, was included in Box 4a of the Form 1042-S. Line 2c reports FDAP income reported but was not withheld upon because the payments are considered grandfathered payments. The amount reported on this line should generally equal the aggregate amount reported in Box 2 of all the Forms 1042-S filed by the Withholding Agent for the calendar year for which Chapter 4 exemption code 13, Grandfathered payment, was included in Box 4A of the Form 1042-S. Please see Treasury Regulation section 1.1471-2(b) for more information about Grandfathered payments. Finally, Line 2d reports FDAP income reported but was not withheld upon because these specific payments are considered Effectively Connected Income, ECI. The amount reported in this line should generally equal the aggregate amount reported in Box 2 of all the Forms 1042-S filed by the Withholding Agent for the calendar year for which the chapter 4 exemption code 14, Effectively Connected Income, was included in Box 4a of the Form 1042-S. As I mentioned earlier, Line 3 and Line 4, should equal each other. If not, you must provide an explanation as to why there is such a variance. Line 6 is used if additional spaces needed, a statement can be attached if more space is needed. Section 871(m) generally treats a dividend equivalent payment or DE, on a Section 871(m) transaction, as the U.S. source dividend for IRC Sections 871 and 881 tax and withholding provisions. Section 871(m) imposes nonresident alien, NRA, withholding on certain derivative contracts or notional principal contracts held by non-U.S. persons that references, in whole or in part, a U.S. stock or underlying security. The purpose of Section 871(m) is to ensure that non-U.S. persons cannot replicate the economic benefits of owning a U.S. security using a derivative while simultaneously reducing the non-U.S. persons withholding tax rate. Further discussion with respect to 871(m) is beyond the scope of this presentation. Withholding Agents should consult with their tax advisor as to the applicability of IRC section 871(m) to their specific business activity and after the completion of Section 3 of the Form 1042. As to Qualified Derivative Dealers, QDD, note that Revenue Procedure 2017-15 allows certain non-U.S. derivatives dealers and securities lenders to enter into an agreement with the IRS to act as Qualified Derivative Dealers, QDD, and avoid Section 871(m) withholding on certain transactions. The QDD regime is intended to address the issue of cascading withholding on certain derivative contracts and securities lending transactions where the QDD is acting in an equity derivatives dealer capacity. The QDD regime introduces the concept of a QDD tax liability. QDDs are required to calculate what's referred to as their Net Delta exposure to an underlying security and self-assess tax where applicable. If a Qualified Intermediary was a QDD during the tax year, check the box in Section 4, enter the regular EIN, if any, of the QDD, not the QI-EIN, in the field provided and attach Form 1042, Schedule Q for each QDD. You must complete and attach Schedule Q Form 1042, even if the QDD has a zero tax liability. For further discussion with respect to QDDs. Since it is beyond the scope of this presentation Withholding Agents that are Qualified Derivatives Dealers should consult with your tax advisor as to the completion of Section 4 of the Form 1042 and Schedule Q if applicable. The Schedule Q attachment to the Form 1042 is used by the Qualified Derivatives Dealer to calculate its tax liability. A Qualified Derivative Dealer must apply to enter into a Qualified Intermediary Agreement and include information on the application that specifically relates to the activities of the QDD. Again, further discussion with respect to QDD is beyond the scope of this presentation. The following slides, I believe, the next 4 slides will address common errors. Common errors by Withholding Agents when submitting Forms 1042. The Service is finding several issues when processing the Forms 1042 and 1042-S. These errors are noted on the following slides. The main consequence for taxpayers as a result of these errors are delays in the processing of returns and refund claims and in certain cases denial of the refund claims.

Processing issues with Form 1042 may be attributed to the following common errors. These errors are not in any particular order. The wrong version of the Form is being used, for example, the wrong tax year, incomplete Form, missing codes, missing required attachments, math errors are more common than you think, Line 67(a) and/or 67(b) is not substantiated, Forms 1042-S aggregate totals do not reconcile with the amounts reported on the 1042, Reporting amounts that were withheld and/or deposited with the IRS on Lines 1 through 60 of Form 1042, instead of reporting the tax liability. Lines 1 through 60 must show the withholding agents record of federal tax liability by quarter monthly periods attributable to the time the income was paid. This section reports the tax liability, not the tax deposited by the Withholding Agent. Yes, sure, it may be where the amount of the deposit is the same as the liability, but for a large filer, this is usually not the case. So, the last point, because the record of federal tax liability is divided into quarter-monthly periods, same as the deposit schedule, taxpayers they often incorrectly complete this section indicating the amounts and dates of the deposit instead of indicating the amount of the tax liability and the date when a liability arose. Note that the date the liability arises is generally the date the gross income payment is made provided the payment is in amount subject to withholding. The timing and amount of withholding drives the timing of when deposits are required to be made to the IRS. The record of federal tax liability is compared by the Service Center to the dates deposits were actually made by the taxpayer to determine if payments were timely made or if the late deposit penalty applies. IRC Section 6656 imposes a penalty of between 2% and 10%. The sum of the monthly totals in Section 1 should match the amount of the total liability reported on Line 64b and 64c. When the total net liability reported on Lines 64b and 64c does not match the amounts reported on Line 1 through 60 the IRS corresponds with the taxpayer to correct these discrepancies. Continuing our list of common errors, missing Withholding Agent's Chapter 3 and Chapter 4 status, starting in 2015 both the chapter 3 and chapter 4 status codes of the Withholding Agents are required in all cases regardless of the types of payments reported on the form Line 60. We have found Lines 64a to 64e are blank, left blank when a net tax liability was in fact reported on Lines 1 through 60. Withholding Agents are required to complete the section of withholding tax liability with respect to the payments made during the calendar year for which the Form 1042-S is being filed. However, we have seen a number of situations where our internal generated transcripts report a net tax liability, yet the section was left blank. Another issue related to Line 64 is that Line 64b, chapter 3 tax liability, and 64c, chapter 4 tax liability, are left blank. Withholding Agents are required to designate the tax liability as a liability under chapter 3 on Line 64b or as a liability under chapter 4 on Line 64c. Again, Section 2, the reconciliation section is left blank, or all zeros even when gross income was reported on Line 62. Again, Section 2 as previously mentioned, I mentioned it again, it is a mandatory section. Last but not least, we find the Withholding Agent does not file a Form 1042, when the Withholding Agent actually filed Forms 1042-S and/or made deposits. Even if the Form 1042-S report zero tax withheld a Form 1042 must be filed. Karen, how about one last polling question? Karen Russell: I can assure you that this is the final polling question for the day. Not that we're over yet. Okay. Common errors identified by the Service when processing Forms 1042 include: A, reporting amounts withheld and/or deposited with the IRS on Lines 1 through 60 of Form 1042 instead of reporting the tax liability; B, Lines 67a and/or 67b amounts withheld by other Withholding Agents is not substantiated; C, Form 1042 Section 2 Line 5 indicates a variance but no explanation of the variance is listed on Line 6 or in an attachment; D, Line 64a through 64e are left blank when a net tax liability is reported on Lines 1 through 60; or E, all of the above. So common errors identified by the Service when processing Forms 1042 include what? A, B, C, D or E. I would love to read those answers to you again, it's quite a mouthful. So, I'll give you a second to read the question, read over these possible answers and make your selection. So don't forget to click the radio button next to the response that answers this question. Again, common errors identified by the service when processing Forms 1042 include what? All right. I'm going to give you a few more seconds to make your selection. All right.

We're going to stop the polling now. And let's share the correct response on the next slide. Open for 100%. And the correct response is E, everything that was listed are errors that have been identified by the service. And we have 90% accuracy rate. Edward Kromberg: Oh, thank you. Thank you. Karen Russell: Okay. So that was the saving grace. Okay. So, Ed, it does look like you're going to do the summary for now. Edward Kromberg: Yeah, I'll start. So just a final comment for me. I believe that being, I just want to say that I believe the instructions to the Form 1042 are really, really good. So please refer to them when preparing your Form 1042. And, again, I just want to thank everyone for taking the time to attend the presentation. Thank you to Karen, our coordinator, and special thanks to my co-pilot, Sean Crowley, for helping me do this. So, Karen, I will throw it over to you for, I guess, Q&A. Karen Russell: Thank you so much. All right. Thank you, Ed. So, hello, everyone. It's me, Karen Russell, and I will be moderating the Q&A session.

And before we start, I want to thank you all for attending today's presentation Understanding Form 1042. Earlier on, I mentioned we want to know what your questions are, the questions you have for presenters, and this is your opportunity. So, if you haven't already input your question, there's still time, go ahead and do that right now. Click on the drop down arrow next to the Ask Question field, type in your question and click send. Sean and Ed are staying on to answer to questions that we can get to. And while actually so I got ahead of myself. So, one thing before we do start, we are not going to have time to answer all the questions submitted, because there have been plenty, but we will get to as many as we can. And let me mention something else before we start the Q&A. If you're participating to earn a certificate and related continuing education credit, you will qualify for one credit by participating for at least 50 minutes from the official start time, which was the top of the hour of this webinar. And you will qualify for two credits by participating for at least 100 minutes from the official start time of the webinar, which of course means that first few minutes I spent chatting before the top of the hour, that does not count towards your 50 or 100 minutes. So, let's go ahead and get started with these questions. And, Sean, I'm going to start with you. We've got someone in the audience that wants to know, where can I find information on withholding and Form 1042? Sean Crowley: Great question. Sure, you can find more information about this about withholding and the Form 1042 in the instructions to the Form 1042. And for more information about recent developments on the Form 1042, as I mentioned previously is the IRS.gov/Form1042. Another good resource is the IRS Publication 515. That's the Withholding of tax on Nonresident Aliens and Foreign Entities.

Those are really good sources to go get some information. Karen Russell: Thank you. And I hear a recurring aim is the Form 1042 instruction so that must just have a ton of information on there.

So, following-up with that, do you know are the instructions to Form 1042 translated it to other languages? Sean Crowley: I agree, the 1042 instructions have a lot of information, chock-full of information. And unfortunately, those instructions are only available in English. But we are currently working on translating this presentation to other languages. So, it can be available as a resource for others when completing their Form 1042. Karen Russell: Sure. That's something to look forward to, thank you for that. Ed, I've got some questions for you. So, I've got a CPA, this is a 3 part question from a CPA. When will we be required to file electronically? When will the final regulations be issued? And when will guidance be published with those requirements?

Edward Kromberg: Okay. So, first, the requirements to file Form 1042 electronically will be effective starting in 2023. So, tax year 2022 Forms that are due March 15, 2023, will be required to be e-filed if the criteria under the regulation, we said the thresholds going down to 10 is met. And none of the exceptions alluded to in our earlier presentation we mentioned individuals and trusts apply. So, I think that answers it. So, the regulations have not been finalized yet.

But it will be one of the thresholds that will be going down to 10. Karen Russell: Okay. All right. And that information will be on IRS.gov I'm assuming? Edward Kromberg: Yes, ma'am. Karen Russell: Okay. So then let me ask you this, something that piggybacks on that when we file the Form 1042 electronically? Are we required to attach a copy of the Forms 1042-S to support Line 67 credit? And if so, how? Edward Kromberg: Yeah. Yeah. Yeah. You will still be required to attach a copy of Forms 1042-S or 1099s in support of a credit claimed by tax withheld by other Withholding Agents on Line 67a or 67b. I believe the system was developed to allow filers to include copies of the 1042-S and/or any 1099s they have in support of Line 67 credit. Again, additional guidance I believe on how filers will do that will be provided at a later time. Karen Russell: Terrific. Okay. That's good to know. So, they just need to check IRS.gov and things like that for updates and possibly subscribe to Quick Alerts on new subscriptions. Sean, I got something for you. Take it back to you. So, I've got a question. And the person says what if I was withheld, but didn't receive or can't find a Form 1042-S to support the credit claimed on Line 67? Can I attach a statement from the withholding agent or another document instead? John, did you hear the question? If you did, you might be muted. We lose Sean - Ed, do you - might you be able to answer that we might have lost Sean? Operator: Hey, can you hear me This is Kim. Karen Russell: Yes, Kim, I can hear you. Operator: Hi, our phones went down. They are coming. We will be answering that question shortly. So, can you repeat the question again? Karen Russell: I certainly can. So, the question that came in was, what if I was withheld but didn't receive or can't find a Form 1042-S to support the credit claimed on Line 67? Can I attach a statement from the Withholding Agent or another document instead? Sean Crowley: That's a good question, sorry about the technical difficulties. But unfortunately, no, the IRS only allows copies of the Forms 1042-S and Forms 1099 in support of Line 67 credit. Nothing else. The copy of the 1042-S attached must show the withholding agent as the recipient or as the intermediary if the Form is issued to an unknown recipient and all the information on that form or forms must match the EIN and the amounts. Karen Russell: Okay. All right. So, yeah, that's a big fat negative they need the Form 1042 and your Form 1099 to support the Line 67 credit. Thank you so much. And I'm glad you guys were able to get back online. So, Ed, are you on the call? Were you able to rejoin, because I have a real long question for you? Edward Kromberg: Okay. Yeah. I am here. Karen Russell: Okay. All right. So, I'm really happy that this person provided a lot of background information and facts about this. This question has been submitted. So it says, I'm employed by a mutual fund company, the management company, that operates and manages approximately 150 separate and distinct mutual funds, each with their own unique Employer Identification Number, to whom distributions of dividends, interest and other Fixed or Determinable Annual or Periodical (FDAP) payments are made to non-U.S. recipients. Each individual fund files separate Forms 1042-S reporting the individual fund as a Withholding Agent and reporting the fund's unique employer identification number on the Form 1042-S. Are we permitted to file a consolidated Form 1042, in effect, aggregating all of the Forms 1042-S and reporting the information on one consolidated Form 1042 under the name and employer identification number of the management company? If you need me to repeat any of that I can. Edward Kromberg: No. No. No. I think I got it. I think that question can be answered in three words. No. No. No. You cannot file consolidated 1042 for various individual entities. I think, Sean, went over this in his part of the presentation. If you have an entity that has its own EIN, and they're issuing 1042-S under that EIN, and they made deposits under that EIN, it must file a separate 1042. There are no consolidating entities into one 1042, because we never would be able to reconcile the 1042-S to 1042. So, the answer to that is, no. Karen Russell: Sean, I bet the person in the audience that asked that is a little not very happy with us right now. Let's keep going. We got a little bit more time for questions. So, this is from Anne. And she says, are you covering 1042-S? Or will you cover 1042-S with all the online business going on? It is difficult to determine the type of payment foreign nationals whether payment is U.S. source or foreign source subject to withholding. And she wants to know when are we going to cover the 1042-S? Sean Crowley: Yeah.

This is Sean. I've got some great news. Yes, absolutely. We will have another webinar focused on the Form 1042-S. Yeah. I understand sometimes determining whether a payment is subject to these rules. It's not an easy task. And so, it's good to consult with your tax advisors to help make that determination. Karen Russell: Okay. Perfect. Go ahead. Sean Crowley: The webinars, we're scheduling it in September so be on the lookout for them. Karen Russell: Oh, nice. Okay. I can't remember which of you asked about, we answered a filing electronically but someone in the audience is asking how is 1042 required to be filed electronically and using FIRE or other method? You've shown the� Edward Kromberg: I'm not sure but I'll take that one. I think that was asked by Donna. Yeah, Form 1042 would be filed electronically through the MeF system. MeF stands for Modernize Electronic Filing. This is the same system used to file other income tax returns, for example, 1120-F. So, it would be through the MeF system. Or the same way, we shared. Karen Russell: That our tax returns from real time are processed in real time. Okay. So, Sean, I've got a question from China. And that's actually the first name. So, if the Withholding Agent is an individual then can the Withholding Agent used their Social Security number as you would use for the EIN? I actually know the answer of that. Sean Crowley: I'm going to quote my friend, Ed, and No. No. No. So, all types of Withholding Agents are required to obtain an EIN in order to file the Form 1042, an individual social security number is not acceptable for purposes of filing the Form 1042. Karen Russell: Great. Thank you. Okay. So, Ed, we've got a question from Megan. So, how can an NQI deposit withheld pass on EFTPS, if it does not have a QI-EIN or EIN must apply for an EIN or make the deposit in a different way? Edward Kromberg: No. An NQI that needs to make deposits of withholding tax and file Forms 1042 and 1042-S must obtain an EIN in order to do so.

So, they must have an EIN to do that. Karen Russell: Okay. Okay, let's see here. Jan has a question, is a nonprofit organization that is educational and host tournaments required to withhold income taxes for foreign participants who win prize money. Sean, I think, I'm going to shoot that one to you. Sean Crowley: Yeah. Sure. So, determining whether withholding is required under chapter 3 is based on the types of the payments being made, the source of the payment and who you are making the payments to. That's the determining factors. Karen Russell: Okay. Okay. I'm looking, Ed, if I have contracts, contractors in the UK, Peru, should I file 1042? Edward Kromberg: It's a loaded question. We may need a separate seminar on this. But I think this, the answer, I think is the same as what Sean said, determining whether withholding is required under chapter 3, it's based on the types of payments being made the source of the payment, and who you are making the payment to. So, there's a lot to that question. I think it's a little bit beyond what we tried to do today. Karen Russell: Okay. Okay. Is there any way that you can refer them to any publications that would be like the 1042 instructions or anything like that? They have not been able to find more. Edward Kromberg: 1042-S instructions are a good start. The Publication 515 is good. 1042-F instructions are good. Yeah. Karen Russell: Terrific. Thank you. Edward Kromberg: And then, I mean, there's also the regulations 1441 through 1445. That's if you really want to get into the weeds. Karen Russell: Into the weeds. Exactly. Okay. So, I think I'm going to ask, Sean, this question. So, U.S. citizens should not receive these forms? If they do, is it in an error on the reporting company? And should the reporting company correct, and report the information on a 1099 instead? Sean Crowley: Great question. Generally, the payments to U.S.

persons are subject to reporting on Forms 1099. So that's the first part. However, there are presumption rules under chapter 3 and chapter 4, that may result in an U.S. person being treated as a foreign person, subject to the maximum rate of withholding and recording on a Form 1042-S.

Karen Russell: Okay. I'm seeing if we have time for one more question. Okay. Let's see if I can find one that you guys can answer kind of fast. Okay, Ed, how - oh, I think, I might have run out. Okay. I'm good. How do you request 1042, 1042-S instructions on extensions? After filing the extension, when is the extended due date and should the payment be made when the 1042 was filed?

Edward Kromberg: Okay. So, in order to request an extension to file Form 1042, you would have to file the Form 7004 before the due date for filing the Form 1042 that would be on or before March 15. The extensions is for 6 months that's until September 15. Now, note that the extension to file the Form 1042 does not extend the time for payments, deposits, even though you get extra time as mentioned to file, deposits must be made timely. The process for obtaining an extension to file Forms 1042-S can be found in the instructions to the Form 1042-S. Note that Withholding Agents generally only have a 30-day extension for filing Forms 1042-S, not the 6-month extension.

So, the extensions for 1042-S are not the same as the extension for the 1042. So, one is the 6 months, and one is a 30-day extension. Karen Russell: Awesome. So, audience that is all the time that we have for questions right now. And I definitely want to thank Sean and Ed for sharing their knowledge and expertise and for answering as many questions as they did. And before we close the Q&;A, or before we close out, Sean, what key points do you want the attendees to remember from today's webinar? Sean Crowley: Well, it's definitely important to understand the basics of the Form 1042 including who's required to file, what to file, when and where to file it, basically, the responsibilities of the Withholding Agent. As I just mentioned, the instructions are a great resource. Definitely ensure that return is timely filed and that the deposits are timely made throughout the year to avoid any potential penalties. Definitely keep informed of any upcoming changes to the way the Form 1042 is filed on our website as well, that's another great spot. And definitely, carefully review the Form 1042 prior to submitting it, just to make sure there's no errors that can prevent the timely processing of the form and any potential refunds or credits claims. And definitely, please make sure that the return is signed to go over some of yours? Edward Kromberg: Thanks, Sean, you stole my thunder. Most of my and dated just as it's ready to be filed. And that's about it for my key points. Ed, do you want takeaways were the same as yours, but just a couple of others. Just be prepared that the lowering threshold for filing electronically is going to be going down all the way down to 10. So, I know a lot of you are used to filing on paper. But if you have 10 or more, you're going to have to now get prepared to file electronically. Second point, I spent some time although the polling question didn't reflect this, but I did spend time on the reimbursement and set-off procedures.

These are procedures that can help your customers it can help your payee. So, you might want to be a little familiar with that with those two procedures, because it may benefit your underlying payees. Third, just to reiterate again, instructions, instructions, instructions, I think the instructions, as I said, and I can't say it enough, the instructions to 1042 are really, really good. I've been looking at IRS instructions for more years than I care to think about and I think the instructions to 1042 are good. So don't be afraid to look at them if you have to. With that. I will throw it back to you, Karen. Karen Russell: Thanks, guys. That was a terrific presentation. Awesome job. So, audience, we are planning additional webinars throughout the year and to register for upcoming webinars visit IRS.gov. Do a keyword search, Webinars, and select Webinars for Tax Practitioners or Webinars for Small Businesses. And when appropriate, we will offer certificates and CE credit. We do invite you to visit our video portal at www.irsvideo.gov.

There you can view archived versions of our webinars, and again, continuing education credit and certificates of completion are not offered if you view any version of our webinars after the live broadcast. Another shout out to our speakers, Sean Crowley and Ed Kromberg, they were terrific. This was a great webinar. We appreciate them sharing their experience and answering your questions. And I absolutely want to thank you today the audience for attending the webinar Understanding Form 1042. If you attended today's webinar for at least 100 minutes after the official start time you qualify for 2 possible CE credits. If you stayed on for at least 50 minutes from the official start time you qualify for one possible CE credit. Again, that time we spent chatting before the top of the hour does not count towards those times of 100 or 50 minutes. If you're eligible for continuing education from the IRS and registered with your valid PTIN then your credit will be posted to your PTIN account. If you qualify and have not received your certificate and/or credit by August 25, my brother's birthday by the way, please e-mail us at the cl.sl.web.conference.team@irs.gov. So, it's cl.sl.web.conference.team@irs.gov. That's a lot of dots. The email address is on the slide too. If you're interested in finding out who your local Stakeholder Liaison is, just in case you don't know you can send an e-mail using this address as well and we'll send that information to you. We would appreciate it if you would take a few minutes to complete a short survey before you exit. If you'd like to have more sessions like this one, let us know. If you have thoughts about how we can make them better let us know that too. If you have any requests for future webinar topics or if you have pertinent information you would like to see on IRS.gov, or in a Fact Sheet or Tax Tip or FAQ that we have on IRS.gov, then please include your suggestions in the comment section of the survey. And how you can start the survey, just click the survey button on the screen to begin, if it doesn't come up, check to make sure your pop-up blocker is disabled. Again, it's been a real pleasure to be with you today. And on behalf of the Internal Revenue Service and our presenters, we would like to thank you for being here with us. We know your time is valuable. It's important for the IRS to stay connected with the tax professional community, individual taxpayers, industry associations along with federal, state and local government organizations, because you make our jobs a lot easier by sharing information that allows for proper tax reporting. So, thank you again for taking time out of your day to attend the webinar. We hope you found the information useful and helpful. And you may exit the webinar at this time.