IRS Form 1042 - Report Payments to Foreign Businesses
Businesses paying U.S. source income ( including interest, dividends, rents, royalties, wages, fees) to any foreign company, foreign individual, foreign partnership, etc. (foreign persons”) must report the payments and the amount of U.S. tax, if any, that was withheld to the IRS on Forms 1042 and 1042-S.
The IRS is enforcing withholding compliance associated with Forms 1042 and 1042-S. The IRS will attack businesses failing to withhold the correct amount of U.S. taxes. For example, if a business withheld the wrong amount of U.S. tax from a payment it made to any foreign persons, the U.S. taxpayer will have to pay the tax due plus penalties and interest.
The IRS has shown its determination to intimidate taxpayers into compliance by releasing a new provision in its audit manual: IRM 4.10.21, "U.S. Withholding Agent Examinations -- Form 1042". This manual explains the procedures to be followed by the IRS during an examination of a U.S. withholding agent's Form 1042 filings. Since this audit procedure is now part of the IRS’ manual, you can expect questions from IRS agents about payments made to foreign persons and the tax that you withheld