Do you issue 1099-Misc forms to foreign citizen clients who own rental property?
It’s time to stop!
The IRS penalizes property managers who don’t file form 1042-S to report rental income collected for foreign clients. The penalty comes a couple of years after the reporting error because of the IRS system backlog. The IRS has up to 7 years to send the notice and they are not interested in speeding up the penalty notices because it means more penalty/interest revenue for them.
So if you have been issuing 1099-Misc forms incorrectly and haven’t received a penalty yet…it doesn’t mean you won’t.
Penalties For Late Filing of Correct Form 1042-S
A penalty may be imposed for failure to file each correct and complete Form 1042-S when due (including extensions), unless you can show that the failure was due to reasonable cause and not willful neglect.
This penalty is based on when you file a correct Form 1042-S:
- $15 per Form 1042-S if you correctly file within 30 days; maximum penalty $75,000 per year ($25,000 for a small business). A small business, for this purpose, is defined as having average annual gross receipts of $5 million or less for the 3 most recent tax years (or for the period of its existence, if shorter) ending before the calendar year in which the Forms 1042-S are due.
- $30 per Form 1042-S if you correctly file more than 30 days after the due date but by August 1; maximum penalty $150,000 per year ($50,000 for a small business).
- $50 per Form 1042-S if you file after August 1 or you do not file correct Forms 1042-S; maximum penalty $250,000 per year ($100,000 for a small business).
If you intentionally disregard the requirement to report correct information, the penalty per Form 1042-S is increased to $100 or, if greater, 10% of the total amount of items required to be reported, with no maximum penalty.
Penalty For Failure to Furnish Correct Form 1042-S to Recipient
If you fail to provide correct statements to recipients and cannot show reasonable cause, a penalty of $50 may be imposed for each failure to furnish Form 1042-S to the recipient when due. The penalty may also be imposed for failure to include all required information or for furnishing incorrect information on Form 1042-S. The maximum penalty is $100,000 for all failures to furnish correct recipient statements during a calendar year.
If you intentionally disregard the requirement to report correct information, each $50 penalty is increased to $100 or, if greater, 10% of the total amount of items required to be reported, and the $100,000 maximum does not apply.
New Reporting Requirements for 2014
The reporting requirements for foreign investors have become increasingly complex starting with tax year 2014. The IRS has implemented sweeping new changes in their computer systems to track foreign income in the United States. Beginning in 2014, the 1042 reporting requirements are tougher and more thorough. You will note major changes to form 1042-S, which must be filled out and reported to the IRS no later than March 15, 2015. As a direct result of these reforms, form W-8ECI (which is where the information for the 1042-S is derived and is required to have on file for your foreign investors) has changed.
You will note a new feature of the form is to require that individual list their date of birth and foreign companies or trusts list their foreign tax identification number. This information will be used on the 1042-S reporting form going forward.
Although form W-8ECI is valid for three years from date of signature, it is a best practice to have a new form updated and signed every year as part of the property management agreement renewal package.
Richard Hart EA, CAA
Hart & Associates
Offices in Las Vegas NV, Manhattan NY and Beverly Hills CA
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