Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

• Legal Form Number: 1042
• Issuer: Treasury Department
• Section: Treasury Department

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2023

Instructions for Form 1042

Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

Department of the Treasury

Internal Revenue Service

Section references are to the Internal Revenue Code unless

otherwise noted.

Future Developments

For the latest information about developments related to Form

1042 and its instructions, such as legislation enacted after they

were published, go to IRS.gov/Form1042.

What’s New

Section 1446(f) withholding. Starting for tax year 2023, a

withholding agent that is a broker for the transfer of a publicly

traded partnership interest is required to withhold tax under

section 1446(f) and report the withholding on Form 1042.

Electronic filing. New electronic filing requirements apply to

Form 1042 beginning for tax year 2023 (Forms 1042 filed in

2024). For general information about electronic filing, see Pub.

4163, Modernized e-file Information for Authorized IRS e-file

Providers for Business Returns. Also see Where and When To

File, later, for more information on the electronic filing

requirements for Form 1042.

Revised QI Agreement and QDD reporting. The qualified

intermediary (QI) agreement in Rev. Proc. 2017-15, 2017-3

I.R.B. 437, expired December 31, 2022, and the QI Agreement in

Rev. Proc. 2022-43, 2022-52 I.R.B. 570, applies beginning

January 1, 2023. Under the QI Agreement, any QI that was a

QDD (as defined later) or had a QDD branch during the tax year,

including a QI that was a partnership, must complete

Schedule(s) Q (Form 1042).

Reminders

Reliance on proposed regulations reducing burden under

FATCA and chapter 3. On December 18, 2018, the IRS and

the Department of the Treasury issued proposed regulations (83

FR 64757) to reduce the burden on taxpayers of certain

requirements under chapters 3 and 4 of the Internal Revenue

Code. The proposed regulations provide that, under section

7805(b)(1)(C), taxpayers may generally rely on the proposed

regulations until final regulations are issued. Specifically, for

purposes of these instructions, a withholding agent may rely on

the following provisions of these proposed regulations in

connection with completing Form 1042.

•Withholding and reporting in a subsequent year. A

partnership or trust that is permitted to withhold in a subsequent

year with respect to a foreign partner's or beneficiary's share of

income for the prior year may designate the deposit of the

withholding as attributable to the preceding year and report the

associated amounts on Forms 1042 and 1042-S for the

preceding year. See Foreign partners of U.S. partnerships and

foreign beneficiaries of U.S. trusts, later.

•Adjustments to overwithholding under the

reimbursement and set-off procedures. A withholding agent

may make adjustments to overwithholding using either the

reimbursement or set-off procedure until the extended due date

for filing Form 1042-S (unless the Form 1042-S has already been

filed or furnished). Additionally, a withholding agent may use the

extended due date for filing a Form 1042 to claim a credit for any

adjustments made to overwithholding.

Centralized partnership audit regime. Section 1101 of the

Bipartisan Budget Act (BBA) of 2015 repealed the TEFRA

partnership procedures and the electing large partnership (ELP)

provisions and replaced them with a new centralized partnership

audit regime effective for partnership tax years beginning on or

after January 1, 2018. The new regime provides for

determination, assessment, and collection of underpayments at

the partnership level unless certain elections are made by the

partnership. Under these rules, a partnership (or a pass-through

partner) may be required to withhold under chapter 3 or

chapter 4 when there has been an adjustment under the

centralized partnership audit regime to an item of income or gain

allocable to a foreign person (or any other person subject to

withholding). If the adjustment is to an amount subject to

withholding that is reportable on Form 1042, the partnership (or

pass-through partner) should report the withholding on Form

1042 for the year in which it pays the tax required to be withheld.

See section 6241(9).

Qualified derivatives dealers (QDDs). A withholding agent

that is a QI acting as a QDD must assume certain withholding

and reporting responsibilities with respect to payments made on

potential section 871(m) transactions in its QDD capacity. Form

1042 includes Section 4, which a QI that is a QDD (or has a

branch that is a QDD) must complete if it made any payments in

its QDD capacity that are reportable on this form. For more

information on the withholding and reporting requirements of a

QDD, see the QI Agreement in Rev. Proc 2022-43, 2022-52

I.R.B. 570, available at IRS.gov/irb/2022-52_IRB#REV-

PROC-2022-43. See also section 871(m) and Notice 2022-37,

2022-37 I.R.B. 234, available at IRS.gov/irb/

2022-37_IRB#NOT-2022-37.

These instructions provide guidance to QDDs regarding the

proper withholding agent status code to use when filing Form

1042 (and Form 1042-S). See Chapter 3 and 4 status codes of

withholding agent, later.

Potential 871(m) transactions. Section 3 of Form 1042

applies to payments made by a withholding agent under any

potential section 871(m) transaction (rather than just payments

made under notional principal contracts or other derivatives

contracts that reference a U.S. stock or underlying security). Any

withholding agent making such a payment must complete

Section 3.

Section 871(m) transition. On September 12, 2022, Notice

2022-37 was published announcing the Department of the

Treasury and the IRS intention to amend the section 871(m)

regulations to further delay the effective/applicability date of

certain rules in those final regulations and certain requirements

of a QDD.

Schedule Q (Form 1042). If the taxpayer, or any branch of the

taxpayer, is a QDD, the taxpayer must attach to Form 1042 a

Schedule Q (Form 1042), Tax Liability of Qualified Derivatives

Dealer (QDD), for each QDD. Schedule Q (Form 1042) replaces

the previous requirement to attach a statement to the Form 1042

to provide information regarding a QDD's tax liability.

Chapter 3 and 4 status codes. The chapter 3 and 4 status

codes of withholding agents are required regardless of the types

of payments reported on this form.

Oct 27, 2023 Cat. No. 54843T