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IRS Form 1042-S: How Can Recipients Receive a Refund of Withheld Money?

October 1st, 2014 11 comments

This is a common question.  You received Copy B of IRS Form 1042-S in the mail or by e-mail.  The form says that a US company withheld some amount of money from you and sent that withheld money to the IRS.  How can you, the recipient of this 1042-S form, get that withheld money?  Its your money.

Form 1042-S, Chapter 3, Non-Resident Withholding

The withheld amounts are known as Chapter 3 payments, and the IRS actually makes it easier for non-residents than US citizens to apply for a refund using Form 1040NR, the current non-resident alien income tax return.  This has wide application to foreign students who are on scholarship or otherwise earn taxable US income.  In many cases, a tax treaty may exist between the US and the non-resident’s home country that would supersede the withholding requirement, or reduce the taxable amount.

On Form 1040NR, Line 12 the filer can list 1042-S scholarship payments as an income amount, and Line 22 is available to list the amount of income exempt under a tax treaty.  Any remaining amounts are subject to US taxation after deductions. Presumably, other types of income would be listed as wages or other type of investment gain that would be listed in the appropriate spaces.

More importantly, amounts withheld for any reason and reported on 1042-S would be listed under Payments, Line 61 (d) on 1040NR.  This would be a credit against any tax owed on any type of income, and in case no tax is owed, then a refund would be available even to an address or account outside the US.

This process is identical to where anyone filing taxes may have had amounts withheld that exceed their tax, and have to wait for a refund.  There is no form or method to simply request a return of over-withheld amounts, and the non-resident is limited to the standard filing and refund process.  This may be frustrating for those non-residents who will not owe any tax in the end, but nonetheless have had amounts withheld.

Form 1042-S, Chapter 4, Non-Resident Withholding

Withholding agents who make payments from a US source to non-US financial institutions are required to file informational Form 1042-S as a part of FATCA, designed to identify US account holders who have assets outside the US borders.  1042-S can also include payments to non-US citizens receiving payments from a US source.  Each type of payee is designated differently, as either Chapter 3 (non-US citizens) or Chapter 4 (FFIs with US account holders).

Typically, the withholding agents are banks or other payers in the US that are making the payments to foreign financial institutions (FFI), who have a US account holder.   These withholding agents are the ones who file the form with the IRS, and if the FFI is not registered with the IRS and does not have a Global Intermediary Identification Number, then the US source must withhold 30% of the payment, and deposit that money with the IRS.

The withholding amount of 30% would be deposited with the IRS, similar to the way that tax is withheld on employee wages.  This information would be supplied to the payee in Copy B of Form 1042-S that would detail the amount withheld from the payment, similar to a W-4.  The question for many recipients of these forms is how to obtain the withheld amount, assuming the transfer was legitimate and not an effort to avoid payment of tax or a taxable inclusion in gross income.

The amounts withheld would be presumably treated like any amounts withheld and deposited with the IRS, and would be available for refund with the filing of the US taxpayer’s annual return.  On Form 1042-S, Box 1 requires an income code for the US sourced payments (i.e. dividends, independent contractor services, capital gains, etc.).  It would depend upon the type of payment and whether it would be included on the 1040 annual return as taxable income for possible refund amounts.

Form 1040: No Place to List 1042-S Payments

The real issue is that there is no place on Form 1040 to list the 1042-S withheld amounts, since the recipient was technically the FFI.   The US citizen as the ultimate beneficiary simply receives the 1042-S copy B to list the amounts withheld, similar to a W-2 for employees.  Assuming that the payment was not taxable, then the only place to list the withheld amounts is Line 67 on the 1040, which is “Reserved”.  An alternative is to list it on Line 62 with amounts withheld in Forms W-2 and 1099.   Then one could attach Copy C of 1042-S to the return to document the amount.  This differs dramatically from the other instance where 1042-S Chapter 3a mounts are listed for non-residents.  The 1040-NR has two places to list amounts withheld under 1042-S, making the process easier.

The fact that the IRS has implemented an international network of FFIs to monitor US account holders is not a surprise.  However, the fact that there is no specific instruction or form to request withheld amounts makes the 30% almost appear to be a tax penalty for holding assets offshore.  In other words, a US taxpayer should make sure that an FFI is registered with the IRS and has a GIIN prior to making any US sourced transfers.  Failure to do so could result in a long delay in receiving withheld amounts under 1042-S.

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