Beginning in tax year 2016, the IRS added support for the electronic filing of Form 1040-NR. In conjunction, an additional requirement was added to e-file a copy of Form 1042-S, Foreign Persons US Source Income Subject to Withholding, when applicable.
To support these new requirements, they instituted a number of highly complex business rules which specify certain income types can only be claimed under specific conditions. Many of these conditions are related to the Chapter 3 or Chapter 4 Exemption Code and the related income code. Lacerte has diagnostics to support these business rules.
To resolve the diagnostic:
- Go to Screen 58.2, Foreign Withholding (RRB-1042S, 1042-S, SSA-1042S).
- Review the income entered for Form 1040NR.
- Make sure that the income entered is greater than or equal to the total of all Form 1042-S amounts for that income category.
- For example, if you've received two Form 1042-S with $2,000 of dividends on the first form and $350 of dividends on the second form, then the amount entered on Form 1040-NR for dividends must be at least $2,350.
- Review each Form 1042-S and make sure you have entered the information correctly. In particular, the entries in Income code, Chapter indicator and Exemption code must be the same as the Form 1042-S.
- The income code and the exemption code are both dropdown menus with the potential entries as defined in the Form 1042-S instructions.
- Another common diagnostic is from dealing with the Schedule OI and various tax treaties. However, the income code referenced is the same one as above.
- For e-file purposes, Form 1040NR, line 10a, Ordinary dividends, plus dividend, net cap gain and other income amounts on Form 1040NR, Page 4, lines 1a, 1b, 9 and 12, columns (a), (b), (c) and (d), must be greater than or equal to the gross income from the sum of all Forms 1042-S, having and an exemption code for Chapter 3 not equal to 02 and an Income Code of one of the following: 06, 07, 08, 09, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 39, 40, 41, 52 or 53.
- For e-file purposes, if Form 1040NR, Schedule OI, Line L, Income Exempt From Tax contains the tax treaty article 15 for Australia, then the corresponding exempt income must not be greater than the sum of gross income on all Forms 1042-S, containing an income code of 18.