Podcast Ep2: Information Reporting

By Rasheed Khan
Read Time: 20 minutes
TAINA Podcast Ep2: Information Reporting with Rasheed Khan and Rich Kent

Information Reporting Podcast featuring Rasheed Khan & Kelli Wooten

TAINA Podcast Ep.2 Information Reporting featuring Rasheed Khan and Kelli Wooten.mp3
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2021 Information Reporting Changes and Common Errors

The season for information reporting has come again, and as such many firms have started and are in the process of making their electronic filings to the relevant tax authorities. Over the last tax reporting year, many information reporting and withholding changes have taken place including W8 form updates, CRS expansions and 1042S updates. In this week's episode we explore the information reporting and withholding changes and common errors that all financial institutions and tax operatives should be aware of for 2021 tax reporting.


Information Reporting Key Takeaways:

  • What are some of the key information reporting changes that you're seeing this year that people should be aware of?

  • What are some of the things that we should consider when we're thinking about extensions and filing extensions, both recipient and electronic filing extensions?

  • What are some of the other things that people should be looking at and making sure they pay attention to as they're doing their 1042S filings and mailings this year?



  • Rasheed Khan, Managing Director of TAINA North America

  • Kelli Wooten, Managing Director at KPMG Information Reporting and Withholding


Information Reporting Podcast Transcript:

Rasheed Khan
Hello there. My name is Rasheed Khan. And thank you for joining our TAINA Short series where we talk about various things within the industry from an information reporting and withholding perspective in short segments. I'm joined here with Kelly Wooten. Kelly, would you like to give a brief introduction to our audience?

Kelli Wooten
Thanks for Rasheed. Hi. My name is Kelly Wooten and I am a Managing Director in KPMG's Information Reporting and Withholding practice.

Rasheed Khan
Thank you, Kelly, for joining us. This week, we wanted to get into things around information reporting. It is the season for information reporting. As you know, the many firms are starting to kick off their filings. I do know that as we're talking about electronic filing, there are things that it may have changed over the year between last year filing and this year.

What are some of the things that you're seeing in the filing process this year that people should be aware of?

Kelli Wooten
I think this year one of the key items that I have seen a lot of is the change in some of the exemption codes for Chapter 3 and Chapter 4 on the Form 1042 S. And the IRS actually added a new Chapter 3 exemption code of 24 for entities which are exempt under section 892 and say that would be any of those foreign governments or international organizations that have given you a form W-8EXP

So that one that we're still seeing a lot of confusion on. So definitely want to go and read through those instructions and see those new codes. Because anything that you have historically reported as 02 you probably want to go back and look at, and make sure you understand what should now be reclassed to that new exemption code 24.

Rasheed Khan
I think that's an interesting one because I as we know foreign governments, the recipient codes are also evolving as they've revised the form to split out between integral and non integral foreign government entities. So I think that we're going to probably see more of those changes as we get into 2022 and beyond.

I know that extensions are something that people are starting to consider now and especially as you know the initial filings should have been done. And recipient extensions were always taboo back in the day. It's talking about this 20 years ago that anytime you send it sent in for recipient extensions, it was always a red flag or considered to be a red flag item. I know that's changed over the years.

What are some of the things that we should consider when we're thinking about extensions and filing extensions, both recipient and electronic filing extensions?

Kelli Wooten
It's interesting that you mentioned how taboo it was sort of back in the day. And that's a question that we get a lot of times from clients today because they're very concerned that it's gonna raise alarms or set off a red flag. I encourage everybody, if in doubt, go ahead and file that extension. It's always good to have there as a safety measure or you never know what's going to happen at the last minute.

And we actually saw that this year with some of the 1099 reporting headlines where the IRS fire system went down for considerable amounts of time on January 31st. So definitely always is a leading practice you want to file those extensions.

So a couple key considerations here. The form 8809, which is the extension for the IRS, copies of the forms 1042 S as well as that recipient statement extension letter. Those are both for 30 days. So a lot of people you tend to see year in year out, they say oh 30 days March 15th so that means April 15th . Sorry March has 31 days and so that actually makes it April 14th. It never fails. I always get a handful of phone calls on April 15th because somebody has just gone ahead and done that easy monthly math and missed the fact that it becomes April 14th. So go ahead and mark your calendars now for April 14th.

Rasheed Khan
Do you see that it because of the file and some of the filing deadlines shift because of   the holiday happening over the 14th. Do you think that's gonna affect the electronic filing deadlines typically has not. It changes where individuals and recipients can file, but it doesn't seem to affect financial institutions and they're filing deadlines.


Kelli Wooten
Right. We don't really see a lot of impact from that. Obviously if April 14th is a Saturday, Sunday or a federal holiday, then it is going to get pushed to the next day. But we don't really see a lot of institutions trying to run up against that last minute. Always just a good plea to go ahead and file as soon as you have that good solid set of data to make sure you're not running into issues with system availability and uptime at the last minute.

Rasheed Khan
Just getting into things like the 1042 S filing. I know that 1042 S, you know one of the things that I always had to look at is when we collected our file, how many items flagged as recipient code 20, right. But you know the recipient code mappings is something that, you know, when you're translating information from your systems into the 1042S recipient codes always seem to run up against some issues. Sometimes you don't have a direct mapping. Sometimes it was a case where some of your information may be conflicting, so therefore it just defaulted to recipient code 20.

What are some of the other things that people should be looking at and making sure they pay attention to as they're doing their 1042S filings and mailings this year?

Kelli Wooten

Well first like you did with your organization. It's so, so important to do a thorough review of these and that's actually more important than ever because the IRS penalties in the space continue to increase. I think you probably remember as well as I do those what we call the good old days now where it was $100 per form as the Max penalty. nd that actually now for 2021 reporting is $280 per form.

If you think about the recipient copy as well as the IRS copy, you're well above $500 at that point. So you really wanna make sure that you're doing a thorough review on these forms.

I would say just kind of thinking through the form on gross income, the form 1042 S it's actually a dollar form. So the IRS is looking to have those amounts rounded to the nearest dollar and that's when they've started paying more and more attention to you because they've started noting this at various conferences when they're giving some of their own sort of warnings on form 1042 S compliance.

Also, one of the common questions that I get is regarding that chapter indicator, say where withholding agent determines whether it's a chapter 3. So our standard US nonresident withholding our Chapter 4 for FATCA reporting. And so the only time a payment should be reported under Chapter 4 is when FATCA withholding has been applied to the payment or it should have been applied, but it was not so. Anything else is going to go under that Chapter 3 indicator.

Rasheed Khan
I think that's an important one because I think most people, even if you're not fully FATCA compliant, don't realize there are some classifications that don't fall under Chapter 4. You know, things are related to real estate investment trust the recapital gains and things like that are not, you know, fall outside of outside of the scope, chapter 4. So you have to make sure that there are sometimes where you gonna have a combination of different 1042S’s that fall under different requirements.

Kelli Wooten
Absolutely. And just really sort of making sure that you're looking at that in combination with the other fields like the income code. So if you're saying FATCA withholding was applied, are you going to tell me that it's a royalty, for example, which is going to be inconsistent? So really making sure that the information from the income code to the exemption codes to your recipient codes is consistent.

I really spend a lot of time when I review files. Looking at those FATCA, exemption codes and the Chapter 3 exemption codes. So on those FATCA exemption codes you wanna make sure if it's an excluded non-financial payment that that income code is consistent. So sometimes I see that use, but then an income code for interest for example. And if it's the exemption code for effectively connected US source income, obviously there should be a US taxpayer identification number on the form.

Chapter 3 payments, you also want to validate those exemption codes. One for example in. This seems fairly common sense, but we do see it a good bit. If we're saying it's exempt under a tax treaty, is the jurisdiction listed a country which has a treaty with the US. So a lot of times somebody might be listening at different country, so they need to go back and look at that W8 and see what information they should be listing on the form.

Rasheed Khan
I think the one thing I would note to people is that cross check it against the tables. The IRS has, as you know, tables 1 through 4. And they're very useful in cross checking how you're applying some of  these codes. And they've actually updated those tables to include some of the 1042S as income codes where it's allowable. So it makes it a little bit easier for you to reconcile.

Kelli Wooten

Yes, it definitely. And the other piece here is you definitely want to be looking at those recipient Chapter 3 in Chapter 4 status codes and how they play into it. So for instance, you know, if I see a form where it's a dividend income and they've used a corporation as the recipient code, some countries, the United Kingdom for example, that's reasonable. But for most countries, that's gonna raise a red flag. And should it be maybe that they are using a pension code or something like that where there's some special term and condition that they're eligible for that zero percent rate of withholding.

And it's really important to think through all of these because what you don't want to do is sort of leave that breadcrumb trail for the IRS auditor to come through and start looking at your reporting. You want to make sure that you sort of buttoned up all of these issues in advance to make sure everything's as clean as possible.

Some other key items that we see on those recipient codes is you know these theoretically should be coming from your forms W 8 and just to go ahead and do a plug for the importance of validating those forms W8 which I know you were very interested in.

You know it's. I always tell everybody sort of garbage in, garbage out. If you're not validating that form at the beginning of the process and ensuring you're getting that good quality data, then you're not going to be able to do accurate reporting. You're not going to be able to calculate accurate withholdings, so incredibly important to get that validation process in place to make sure that you are able to take and translate those codes effectively to the 1042 US.

I've seen a number of passive NFFE lately that have tried to provide global intermediary identification numbers or those indicator the GIIN that should only be assigned to an FFI. So that raises red flags. I'll say I see entities where I think it's somebody's picking it up incorrectly from the W8.

So just a plea to sort of really work through that matching of codes where we see certified deemed compliant sponsored closely held investment vehicles where they have a GIN that would have been issued to the FFI itself. So like an NE or LE for example, whereas you probably would expect an SP GIIN

Rasheed Khan
For our standpoint, we tend to validate that the GIIN type looking at those two characters are in line with the elections that are on the form. You know, I I think what we've seen is an evolution of error expansion of the GIIN types. Especially for the sponsored entity type of GINs that we've had to closely reconcile against the specific sponsored elections that are within the W8.

Kelli Wooten
Yes. And I know to you it's one of the other ones that we're seeing is the reporting Model 1 and Model 2 entities using SP GIINs.  And very likely somebody has just sort of picked up the wrong GIIN and is using that. So things that can get caught as part of that validation process early. So you're not spending a lot of time at the 11th hour of the reporting process trying to get this correct.

A couple more key points that I'd highlight LOB provisions are now required. So you want to make sure and again that's something that should be coming through straight from the form W 8.

And then account numbers, and this is something that we're seeing a lot of issues with. But if you're a financial institution and you're reporting amounts paid to a direct account holder and that account was maintained and at US office or US Branch. Then you have to have an account number.

So what I always do is I filter by US withholding agent. So if it's an FI and I know that there aren't any intermediary details that gives me a red flag if there isn't an account number. Now, it still can be right to say it may not be maintained in the US, for example, but it's something to follow up on. I generally see funds having this issue in particular.

Rasheed Khan
Yeah, I think that's the one that I was going to highlight is that funds typically have a client ID as opposed to an account number. And what are we even what we've actually advised some of our fund clients is to use the fund ID in combination with some type of sequence as to the investor sequence in order to create your own the fund ID and sequence or client ID and sequence in order to come up with a unique account number schema to provide the IRS.

Because this will also provide you with two things. One, a way of filing, but also if you need to file a corrected return of ensuring that you are replacing the original return that was filed.

Kelli Wooten
Absolutely, but that's great advice for them.

Rasheed Khan
So I think if we were to look at the 1042. And I think you know, one of the things I wanted to point out is that you mentioned the the filing penalties. I do state back to a point where it was $25 per form and it had a max threshold of $100,000 as the Max penalty you'd have to pay. So unfortunately, I've been around for quite some time. I've seen the dollar thresholds not only have they increased to 280, even the max thresholds. I think in some cases there isn’t any max threshold anymore.

Kelli Wooten

Right. The max thresholds go away in cases of intentional disregard.

Rasheed Khan
And yeah, that which brings us right into the 1042, right. The 1042 which essentially should and for all intents and purposes be a reconciliation and a summary of what you put on the 1042S. I think what I've seen in the past is that there have been various points where there may be a breakdown in the information that's provided.

One of the biggest things that I've seen my teams do in the in the past and my former life was that they've accumulated all the 1042S’s that they filed, not taking into consideration if one was a corrected form. So essentially you've overstated how many 1042S’s you've actually filed as opposed to recording each one of the replacements and as a single form. So I think it's one of those things that I think we would we kept aware of.

What are some of the other things that you think people should be looking out for when they're filing their 1042?

Kelli Wooten

And this is actually an easy one, but the IRS has been commenting on it. The Chapter 3 and Chapter 4 status codes in the withholding agent on detail. Those actually should tie out to the Chapter 3 in Chapter 4 status codes on the forms 1042S. Now, about two years ago, the IRS had updated it.

And so instead of using the Chapter 3 status code of 01 or 02 for us withholding agents. You're supposed to use the more specific one. I think a lot of withholding agents spot that right on the 1042S, but they didn't make that connection to change that on the 1042. So that's definitely something you want to take a look at and ensure that that has been updated.

I think one of the other key pieces is that Section 1, Liability section. And making sure that you get a copy of your transcript before completing section one. I know when I was in house, it never failed that there would always be some type of change between what we thought was sitting in the account versus what the IRS had. Maybe a deposit hadn't gotten credited to the right account. Maybe the IRS saw credit on the account. And they said, ooh, there's a debit on this other account over here. So I'm just going to move the funds there. The carryover wasn't the amount that we had anticipated for some reason or another. So you always want to get that transcript.

They're sort of two key ways to do that. You can use the transcript delivery system or TDS. You do need to make sure that you have a valid form 2848 or power of attorney in place. And that that is a fairly straightforward way to do that. Or you can also request using the IRS Form 4506 T and fax that to the IRS. You just wanna make sure that you include form 1042 on that to make sure you're getting the appropriate transcripts.

Rasheed Khan
Yeah, I would think that the one of the things that I always know from a 1042 perspective is that when you're filing an amended or corrected 1042, always remember you have to replace your carryover amount and adjust your liabilities based upon the last 1042 filed with the IRS.

So as long as you've made a file in with the IRS, you cannot just replace that. You have to actually affect your balance, your balance, your carryover balance based upon what the adjusted carryover balance was from your last 1042 filed, even if you're correcting for the same year.

And that's something that if I know that they, they have picked up on. Now if you make that type of adjustment and it carries out and it shows 2 high of a carryover because they've already adjusted your net carryover based upon your last filing, they will reject your filing. Your updated filing.

Kelli Wooten
Yes, we've, we've seen that with a number of clients over the years. So you do want to make sure you're doing that. I know in some cases where our original returns had a credit due that they've wanted refunded to them. You know, we've made sure to put in big bold font at the bottom of the form that that refund has already been paid out and things like that just to make sure that it's clear to whoever is processing that return exactly what is happening there.

Rasheed Khan
I think that comes to our time. I'd like to thank you, and really appreciate your time helping us and giving us some insight around the reporting process and some of the things that you've seen this year. Really appreciate it and would welcome you back anytime on any topics that you'd like to discuss in the future.

Kelli Wooten
Thanks Rasheed. It's been fun. I've enjoyed talking with you and look forward to speaking again.

Rasheed Khan
Thank you all for joining us and really appreciate you listening to our podcast and catching up on different topics that are happening in the industry until next time. Thank you.


We would love to talk to you more about your current tax validation and tax reporting processes. We would love the opportunity to share with you how our clients are using our award-winning FATCA and CRS Validation platform to improve the quality of their data and make annual information and withholding filings a more efficient and predictable process.

For more information on how our fully automated FATCA and CRS Validation platform can add value to your business, get in touch or request a demo to see it in action.

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