A comprehensive guide to the 2023 revisions of Form 1042-S by the IRS


On March 3, 2023, the Internal Revenue Service (IRS) rolled out new instructions for the 2023 version of Form 1042-S.

In a recent post by TAINA Technology, the company provided a comprehensive guide to the revisions made earlier this year.

This form serves to report the US Source Income, subjected to withholding, for foreign (non-resident) persons. Withholding agents utilise this form to detail amounts disbursed to foreign individuals, encompassing a range of income types, from salaries and interest to pensions and scholarships, deriving from US sources in the preceding year that falls under withholding.

The most recent instructions feature significant modifications to Chapter 3 and Chapter 4 status and exemption codes. In addition to these, new income codes have been ushered in, dealing with the regulations surrounding trading interests in Publicly Traded Partnerships (PTP). It’s crucial to note that these regulations became effective from January 1, 2023. The alterations, in essence, have a profound impact on the Foreign Account Tax Compliance Act (FATCA), influencing Financial Institutions bound by 1042-S reporting duties. It’s also worth mentioning that the IRS issued a revision to these instructions on August 17.

A concise summary of the changes brought to the 2023 Form 1042-S and its instructions can prove insightful given their expansive nature, spanning 42 pages. Some of these shifts include:

  • The introduction of income code 57 to the 2022 Form 1042-S to be utilised by brokers from 2023 for reporting amounts tied to transfers of PTP interests, falling under Regulations section 1.1461-1(c)(2)(i).
  • The debut of income code 58 in 2023, meant for nominees recording on Form 1042-S when there’s an ambiguity regarding income characterisation linked to a PTP distribution.
  • New chapter 3 status code 39 (Disclosing QI) to be applied when payments are made by brokers, PTPs, or nominees to a QI acting in the capacity of a disclosing QI.
  • Adjusted reporting guidelines concerning territory financial institutions.

Furthermore, on August 17, the IRS divulged specific revisions to the 2023 Instructions for Form 1042-S. Two pivotal updates were centred around Publicly Traded Partnerships (PTPs), clarifying specific IRS tips and elaborating on reporting standards.

Given these adjustments, how are financial institutions affected? Financial entities, acting as withholding agents, are obligated to file 1042-S by March 15 of the subsequent calendar year of the paid income’s reportage. Institutions filing over 250 of these forms must do so electronically. It’s imperative for these entities to deploy the accurate Form 1042-S correlating with the income paid for that particular year. For instance, incomes paid in 2023 should be reported using the 2023 Form 1042-S. It’s been observed that penalties tied to Form 1042-S are escalating. Utilising an incorrect form or late filings can lead to hefty penalties, barring instances where the failure stems from reasonable grounds and not deliberate neglect.

To uphold the precision of Form 1042-S reporting and curtail potential tax and penalty risks, the TAINA platform is integrating these recent changes with assistance from Big Four. This synchronisation guarantees compliance during data validation, API, and export file stages, facilitating clients in generating accurate form 1042-S reports, thereby diminishing the chances of IRS scrutiny.

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