NOTES ON RECENT NEWS AND TAX GUIDANCE
Federal backup withholding rate drops from 28% to 24% effective January 1, 2018.
The new tax Act leaves I.R.C. section 3406(a) in effect, requiring that in backup withholding situations
“the payor shall deduct and withhold from such payment a tax equal to the product of the fourth lowest
rate of tax applicable under section 1(c) and such payment.” Thus, effective January 1, 2018, the
federal backup withholding rate is 24% because under the new tax Act the section 1(c) tax rates are
10, 12, 22, 24, 32, 35 and 37 percent.
ALERT: IRS posts a message correcting two Income Codes which are incorrect in the 2017
Instructions for Form 1042-S
See the IRS correction message at https://www.irs.gov/forms-pubs/corrections-to-two-income-codes-
For 2017 reporting, the IRS changed the use of Income Code 54 on form 1042-S, and announced
the change on page 1 of the 2017 Instructions for form 1042-S … but left the old 2016 list of Income
Codes on page 21 deeper into the Instructions. If you consulted only the code list on page 21 of the
form instructions, a payment for services would be mislabeled as a securities substitute payment.
Page 1 of the Instructions explains the correct usage for 2017 Form 1042-S: “Income code 54 has
been changed from “Other income” to “Substitute payments - interest from certain actively traded or
publicly offered securities.” Withholding agents should use income code 23 (Gross income - Other) to
report payments of income for which no other income code applies. Withholding agents should use
code 54 to report payments of interest on actively traded or publicly offered securities if the interest is
described in Treasury Regulations section 1.1441-6(c)(2) and the withholding agent reduced the rate
of withholding under an income tax treaty.”
This change for 2017 Forms 1042-S is of particular importance for reporting payments for services,
which use the “Other income” code. The code was “50” for 2013 and a number of previous years;
changed to “51” for 2014; changed to “54” for 2015 and 2016; and now for 2017 it is “23”. If your
organization makes reportable “other income” payments in 2017 to beneficial owners you previously
reported for 2016, take care not to pick up last year’s income code.
De minimis threshold for filing corrected Forms 1099
In IRS Notice 2017-9 the IRS has established its administrative plans for implementing the changes
made by the PATH Act regarding the de minimis error safe harbor from information reporting penalties
under IRC sections 6721 and 6722 as well as any payee election (also provided for in the new law) to
override the payer’s safe harbor. The IRS has plans to ultimately issue regulations, and to the extent
the regulations incorporate the rules contained in this notice, the regulations will be effective for
returns required to be filed, and payee statements required to be furnished, after December 31, 2016.
Under the safe harbor, an error on an information return or payee statement is not required to be
corrected, and no penalty is imposed, if the error relates to an incorrect dollar amount and the error
differs from the correct amount by no more than $100 ($25 in the case of an error with respect to an
amount of tax withheld). However, new IRC sec. 6722(c)(3)(B) provides that the safe harbor does not
apply to any payee statement if the payee makes an election that the safe harbor not apply; the
election to be made at such time and in such manner as the Secretary may prescribe. Section 6721(c)
(3)(B) provides that the safe harbor does not apply with respect to any incorrect dollar amount to the
extent that such an error on an information return relates to an amount with respect to which a payee
election is made under section 6722(c)(3)(B). Accordingly, if an election is in effect, a payer may be
subject to penalties for an incorrect dollar amount appearing on an information return or payee
statement even if the incorrect amount is a de minimis error.
Notice 2017-9 addresses the method for a payee to make such an election and also clarifies that
the de minimis error safe harbor does not apply in the case of an intentional error or if a payer fails
altogether to file an information return or furnish a payee statement.
ITINs. Notice 2016-48 provides that there will be no incorrect-TIN penalties for using expired ITINs on
information returns. Filers of information returns (including the 1099 and 1098 series and Form 1042-
S) who file and furnish information returns with an expired payee ITIN will not be subject to information
return penalties under IRC sections 6721 or 6722 solely because the ITIN is expired. ITINs may
continue to be used for information return purposes regardless of whether they have expired for
individual income tax return filing purposes. And, an individual whose expired ITIN is used only on
information returns filed and furnished by third parties is not required to renew the ITIN unless the
person is also required to file a U.S. tax return.
COKALA Tax Information
Reporting Solutions, LLC
|COKALA Tax Information Reporting Solutions, LLC - telephone 734.629.5155
PO Box 2224, Ann Arbor MI 48105-2224 - fax 734.428.0702