IRS Launches New Quality Review Tool for Form 1042-S

November 30, 2021

At a glance

  • The main takeaway: The Internal Revenue Service’s new quality review tool for Form 1042-S will help withholding agents comply with reporting responsibilities regarding Form 1042-S.
  • Impact on your business: Withholding agents, in general, must file an information return on Form 1042-S to report amounts paid from U.S. sources to foreign persons.
  • Next steps: Aprio’s team of International Tax experts can help you navigate the registration process and ensure your reports are within compliance.

Schedule a consultation with Aprio today.

The full story:

On November 16, the Internal Revenue Service (IRS) launched Form 1042-S Data Integrity, a new online tool to assist U.S. withholding agents in complying with their reporting and withholding responsibilities regarding Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

The software program is a no-cost standalone tool that performs a quality review of data before submission to the IRS. Using the tool does not change a withholding agent’s obligations to file Form 1042-S with the IRS and furnish a copy of the Form 1042-S to the payee. The IRS will consider a withholding agent’s use of the tool when making enforcement and penalty determinations.

Who classifies as a withholding agent?

The definition of a withholding agent is very broad and includes any person, U.S. or foreign, that has control, receipt, custody, disposal or payment of amounts that are subject to the rules under Internal Revenue Code Chapter 3 (Withholding of Tax on Nonresident Aliens and Foreign Corporations) or Chapter 4 (Taxes to Enforce Reporting on Certain Foreign Accounts, i.e., FATCA or the Foreign Account Tax Compliance Act).

A withholding agent can be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Internal Revenue Code) or any other entity, including any foreign intermediary, foreign partnership or U.S. branch of certain foreign banks and insurance companies. You can be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.

How to use the Data Integrity Tool

The IRS has provided a tutorial on how to use the tool, which can be viewed online or downloaded. However, the withholding agent (i.e., the user) needs to:

  1. Register at Log In – Quick Modules Online
  2. Input Form 1042-S information in the Form 1042-S Data Integrity Tool
  3. Receive a notification when the error-checking results file is ready for download. Small files are processed in less than a minute and can be downloaded from the same screen.

In step 2, Form 1042-S data can be entered by:

  1. Uploading a file in the format required by the IRS’s Filing Information Returns Electronically (FIRE) system,
  2. Uploading a comma separated values (CSV) spreadsheet using the template available in the tool,
  3. Uploading a single-page or eight-page version of Form 1042-S in PDF form or
  4. Manually entering individual Form 1042-S data in a substitute form provided by the tool.

In step 3, the downloadable list of errors will reference the Form’s “unique identifier” and the “Record No.” that had the problem and provide a short explanation of data elements (1042-S Box numbers) and data combinations (multiple boxes) for which an error or caution was identified.

The tool also allows interactive input and error reporting for an individual Form 1042-S. Even though the tool may identify data errors, the withholding agent remains responsible for making any necessary changes to the data on the agent’s system of record before submission to the IRS.

The tool can be used as many times as necessary on new or revised data. The IRS has no access to an individual user’s data. The IRS only tracks summary statistics on the types of errors uncovered by the tool. The user can access its data for 90 days, after which time it is purged.

The bottom line

In general, withholding agents must file an information return on Form 1042-S to report amounts paid from U.S. sources to foreign persons. The withholding agent is responsible for accurately inputting data into the tool and reconciling any errors that are identified by the IRS. Aprio’s International Tax advisors are well-versed in foreign matters and can help you navigate the Form 1042-S Data Integrity Tool.

Schedule a consultation with Aprio today.

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About the Author

Jed Rogers

Jed is a Tax Partner at Aprio who counsels clients on international tax matters and M&A transactions. Jed has a deep knowledge of federal tax law and transactional tax planning, including serving more than a decade as in-house counsel for technology corporations and as a member of multinational professional services firms. He routinely advises multinational clients on a broad array of inbound and outbound U.S. and international jurisdiction tax matters, including repatriation planning, international tax credit planning, holding company and financial structures, foreign exchange matters, internal reorganizations and post-acquisition integrations. His background is invaluable as he works with clients to develop tax saving strategies.