IRS Updates 2023 Withholding Tax Forms 1042 and 1042-S for Foreign Persons’ U.S. Income

The IRS in December 2023 released updated 2023 withholding tax forms for foreign persons’ U.S. income, including:

• Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons,”
• Form 1042-S, “Foreign Person's U.S. Source Income Subject to Withholding,” and
• Schedule Q (Form 1042), “Tax Liability of Qualified Derivatives Dealer (QDD).”

New Form 1042 Requirements for Tax Year 2023

New electronic filing requirements apply to Form 1042 beginning with tax year 2023 forms filed in 2024. For tax year 2023, electronic filing of Form 1042 is required for a withholding agent that is a financial institution and for withholding agents that are required to file 10 or more information returns during the year or that are partnerships with more than 100 partners.

Also beginning with tax year 2023, withholding agents that are brokers for the transfer of a publicly traded partnership interest must withhold tax under Internal Revenue Code Section 1446(f) and report the withholding on Form 1042.

The qualified intermediary (QI) agreement in Revenue Procedure 2022-43 applies beginning January 1, 2023, succeeding the QI agreement in Revenue Procedure 2017-15 that expired in December 2022. Under the QI agreement, any QI that was a “qualified derivatives dealer” (QDD) or had a QDD branch during the tax year must complete Schedule Q (Form 1042).

Although these new and revised requirements apply for the 2023 tax year, the 2023 Form 1042 itself is substantively consistent with the prior year’s form.

Form 1042-S Code Changes for 2023

The 2023 Form 1042-S adds new income code 58 for nominees to report when they are unable to determine the characterization of income associated with a publicly traded partnership (PTP) distribution and therefore apply Reg. §1.1446-4(d)(1) to withhold on the distribution in the absence of a qualified notice specifying the income attributable to the distribution. Forms 1042-S that report new income code 58 must be issued with respect to each PTP making the distribution.

The 2023 form also adds new chapter 3 status code 39 (Disclosing QI) for when a broker, PTP, or nominee makes a payment of an amount realized or PTP distribution to a QI acting as a disclosing QI.

There are also several codes that appeared in the 2022 form that have been removed from the 2023 Form 1042-S:

• Authority for exemption code 09: Territory financial institution (FI) treated as U.S. Person,
• Chapter 3 status code 03: Territory FI—treated as U.S. Person, and
• Chapter 3 status code: Territory FI—not treated as U.S. Person.

New footnotes in the 2023 form to chapter 3 status code 05 (U.S. branch—treated as U.S. Person) and chapter 3 status code 06 (U.S. branch—not treated as U.S. Person) specify that these codes can be used, respectively, by a Territory FI that is treated as a U.S. person and a Territory FI that is not treated as a U.S. person.

Insight

Filing Form 1042 electronically requires access to the IRS Modernized e-File (MeF) system.

The registration process is not an easy or quick process; it might take months to complete it from beginning to end. Withholding agents should ensure that they are working with a provider that is prepared to handle the IRS updating the filing requirements for Form 1042 to be electronic.