This article applies to withholding agents under the Foreign Account Tax Compliance Act (FATCA) and U.S. persons who hold foreign accounts.

Abstract: The IRS recently updated its general FAQs about the obligations of withholding agents under the Foreign Account Tax Compliance Act (FATCA). This article explains how the guidance provides relief for late filing of Forms 1042 and 1042-S, as well as late withholding with respect to these forms for 2020 and 2021.

IRS Provides Relief for Late Filing of Key FATCA Forms

On its website, the IRS recently updated its general frequently asked questions (FAQs) about the obligations of withholding agents under the Foreign Account Tax Compliance Act (FATCA). More specifically, the guidance provides relief for late filing of Forms 1042 and 1042-S and late withholding with respect to these forms for 2020 and 2021.

Withholdable Payments

FATCA requires that foreign financial institutions (FFIs) and certain other non-financial foreign entities report on the foreign assets they hold on behalf of their U.S. account holders or be subject to 30% withholding on withholdable payments to the FFIs and non-financial foreign entities unless they meet an exemption. Withholdable payments include payments of dividends, including dividend equivalents.

A FATCA withholding agent must report withholdable payments on either Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons,” or Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding.” A FATCA withholding agent that fails to file these forms is typically subject to various interest, penalties and additions to tax.

Previous IRS Statements

The IRS has previously said that, for 2017 through 2019, a FATCA withholding agent wouldn’t be subject to interest, penalties or additions to tax for failing to withhold and report by March 15 of the next year. This statement was made regarding payments of a dividend equivalent made with respect to a derivative referencing a partnership. The relief was applicable provided that the FATCA withholding agent withholds and reports on Form 1042 and Form 1042-S with respect to the payment by September 15 of the subsequent year.

In a case in which a FATCA withholding agent withholds after March 15, the IRS has stated that the agent should file a Form 1042 (if the dividend equivalent payments are the only payments reportable for the year) or an amended Form 1042 by September 15. The agent should write “Dividend Equivalent – Partnership” in the top center portion of Form 1042.

The FATCA withholding agent should also file Form(s) 1042-S or amended Form(s) 1042-S by September 15 for the dividend equivalent payment. Finally, when depositing the tax withheld for a dividend equivalent payment, the agent must designate the payment as being made for the appropriate calendar year in accordance with the instructions on Form 1042.

Updated FAQ

The IRS recently updated Q&A-23 in its set of General Compliance FAQs to provide rules for 2020 and 2021 that are like the rules in Q&A-23 for 2017 through 2019.

In the updated FAQ, for calendar years 2020 and 2021, a FATCA withholding agent won’t be subject to interest, penalties or additions to tax for a dividend equivalent payment made with respect to a derivative referencing a partnership. This is, again, provided that the agent withholds and reports on Form 1042 and Form 1042-S regarding the payment by:

• September 15, 2021 (for the 2020 calendar year), or
• September 15, 2022 (for the 2021 calendar year).

In a case in which a FATCA withholding agent withholds after March 15 of the subsequent year, the agent should file:

• A Form 1042 (if the dividend equivalent payments are the only payments reportable for the year), or
• An amended Form 1042 by September 15, 2021, or September 15, 2022 (as applicable).

The FATCA withholding agent should write “Dividend Equivalent – Partnership” in the top center portion of the 2020 or 2021 Form 1042. In addition, the agent needs to file Form(s) 1042-S or amended Form(s) 1042-S by the applicable date noted above with respect to the dividend equivalent payment.

Finally, when depositing the tax withheld for a dividend equivalent payment made in 2020 or 2021, the FATCA withholding agent must designate the payment as being made for the applicable calendar year in accordance with the instructions on Form 1042.

Ramifications of Obligations

If you hold a foreign account, be sure you’re aware of the identity of your withholding agent and are familiar with its obligations. Your tax advisor can help explain the ramifications of an agent’s obligations on your tax situation.

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