Yesterday the IRS published a new practice unit titled “Adjustments for Overwithholding on Form 1042.” This practice unit discusses adjustments for overwithholding of tax done on payments of U.S. source income to foreign persons on Forms 1042 tax returns and Forms 1042-S information returns.
As discussed in the practice unit, how corrections to overwithholding are made depends on the timing of when the overwithholding is discovered. Three time periods are discussed:
- Before last deposits for the year,
- Before Form 1042-S due date (with additional limitations), or
- After that.
1. A withholding agent that discovers overwithholding before the withholding agent’s final deposits are made for the year can make balancing payments to the payees and to the IRS. In this case the withholding agent never needs to report the errors or corrections to the IRS.
2. A withholding agent that has overwithheld and already completed its deposits for the calendar year but whose Forms 1042-S have neither been sent out nor are overdue, may adjust the overwithheld amount using one of the following methods:
- a. Reimbursement Procedure (Treas. Reg. §1.1461-2(a)(2)) or,
- b. Set-off Procedure (Treas. Reg. §1.1461-2(a)(3)).
3. A withholding agent that discovers overwithholding after the Form 1042-S has been filed (or after its due date, including extensions) must report the overwithholding on Form 1042-S and the recipient must claim a refund for the overwithholding.
The practice unit notes that overwithholding “[m]ost commonly * * * seems to occur because a payee has not supplied complete documentation that allows a [withholding agent] to withhold less than 30%.” Typically, this would mean that the payee has not provided a Form W-8BEN or W-8BEN-E.
We have added this practice unit to our Practice Units By Topic page.