BMF International Adjustments Manual

MANUAL
TRANSMITTAL 21.8.2
Department of the Treasury OCTOBER 1, 2010
Internal Revenue Service
PURPOSE
(1) This transmits revised IRM Section 21.8.2, BMF International Adjustments.
MATERIAL CHANGES
(1) Editorial changes and revisions have been made throughout the IRM.
(2) IRM 21.8.2.1.5(5) - Updated list of designated PDS’s. (IPU 090958)
(3) IRM 21.8.2.1.9 - Removed reference to Form 5391.
(4) IRM 21.8.2.3.7(7) - Updated Excess FICA chart with 2010 information.
(5) IRM 21.8.1.2.3.8.1(7) - Added Item adjustment codes 115,116,117.
(6) IRM 21.8.2.3.8.1(10) - Added information regarding voluntary Form 944 program.
(7) IRM 21.8.2.3.8.1(12) - Added paragraph regarding HIRE Act.
(8) IRM 21.8.2.3.9(3) - Added information regarding voluntary Form 944 program.
(9) IRM 21.8.2.4(3) - Updated threshold amounts for House Hold Employment taxes.
(10) IRM 21.8.2.4.3(2) - Added Note and Exception concerning Schedule H interest computation dates.
Revised interest ascertained date instructions. Updated example and note.
(11) IRM 21.8.2.4.3(3) - Revised interest ascertained date instructions.
(12) IRM 21.8.2.5.1(3) - Added statement regarding FTD coupon usage to caution
(13) IRM 21.8.2.7.2 (2) Removed reference to quick pad.
(14) IRM 21.8.2.7..3.2(1) - Removed reference to command code CompaC, revised reference to DMI.
(15) IRM 21.2.8.1(2) - Changed address to Office of International Operations.
(16) IRM 21.8.2.9.2 - Deleted Paragraph (5) that contained duplicate instructions on Form 1120-F filing
instructions. (IPU 090958)
(17) IRM 21.8.2.9.3(2) - Added Note regarding FTD coupon usage.
(18) IRM 21.8.2.9.7(2) - Revised IRM citation.
(19) IRM 21.8.2.9.10(2) - Added Note regarding FTD coupon usage.
(20) IRM 21.8.2.9.12(1) - Added Form 1120–S to GATT rule.
(21) IRM 21.8.2.9.12.1(1) - Updated 990-T reference.
(22) IRM 21.8.2.9.12.1(6) - Added IRM citation referring to 45-day interest rule.
(23) IRM 21.8.2.9.13(4) - Removed 990-C reference and added 990-T and 1120 series language.
(24) IRM 21.8.2.10.6(10) - Added Bulgaria and Iceland to treaty country list.
(25) IRM 21.8.2.11(6) Inserted paragraph to add referral procedures for MFT 17. (IPU 100445)
Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2
Any line marked with a #
is for Official Use Only
Manual Transmittal Cont. (1)
(26) IRM 21.8.2.11(8) - Added paragraph and Exception to address the filing of consolidated Form 8288.
(IPU 100144
(27) IRM 21.8.2.11(9) - Added Note for new procedure to transfer FIRPTA payments from title company
accounts to transferee accounts. Revised IRM citation.
(28) IRM 21.8.2.11.2(2) - Revised IRM citation.
(29) IRM 21.8.2.12.2.1(13) - Replaced Form 7004 with Form 8809, Application for Extension of Time to
File Information Returns.
(30) IRM 21.8.2.12.4 - Added Paragraph 3 regarding FTD coupon usage.
(31) IRM 21.8.2.12.6(5) - Added statement to clarify Form 1042 penalty referral procedures. (IPU 100816)
(32) IRM 21.8.2.15.3 - Renamed subsection - “Processing Amended Form 8804 and CP 193 Notices”
(33) IRM 21.8.2.17(6) - Added sentence referring to increased penalty amounts under IRC § 6689.
(34) IRM 21.8.2.19.2(4) - Reworded sentence.
(35) IRM 21.8.2.19.4(3) - Revised mailing addresses for Forms 706–CE.
(36) IRM 21.8.2.20.2(2) - added a note regarding loose filed Forms 8891. (IPU 100816)
(37) IRM 21.8.2.20.3 (7)(8) - Removed instructions related to Mexican Residential land Trusts from IPU
090958.
(38) IRM 21.8.2.20.3(8) - Added that Form 3520 penalty reasonable cause requests are worked in PAMC
by the BMF International units.
(39) IRM 21.8.2.20.4(6)(8) - Removed instructions related to Mexican Residential Land Trusts, or
Fideicomisos from IPU 090958
(40) IRM 21.8.2.20.4(8) - Added that Form 3520-A penalty reasonable cause requests are worked in
PAMC by the BMF International units.
(41) IRM 21.8.2.21 - Removed reference to Form 5471, Schedule N in paragraphs 2 and 5.
(42) IRM 21.8.2.21(8) - Added paragraph for loose Form 5471 processing and routing instructions. (IPU
090940)
(43) IRM 21.8.2.21.2- Added references to new Penalty Reference Number (PRN) 599 for Form 5471
systemic penalty assessments beginning in 2010. (IPU 091049)
EFFECT ON OTHER DOCUMENTS

This material supersedes IRM 21.8.2, dated 10-1-2009. This document also incorporates Interim Procedural
Updates (IPU’s) 100816, 100445, 100144, 091049, 090958, 090940.
AUDIENCE
Employees in Wage and Investment, Accounts Management, Taxpayer Advocate Service, and all others who
perform international adjustment work.

Manual Transmittal Cont. (2)
EFFECTIVE DATE
(10-01-2010)
Jane E. Looney
Director, Accounts Management
Wage and Investment Division

Part 21 Customer Account Services IRM 21.8.2
Chapter 8 International
Manual
21.8.2 Transmittal
BMF International Adjustments
Table of ContentsTable of Contents
21.8.2.1 International BMF/NMF and CADE Overview

21.8.2.1.1 Campus Consolidation and Program Centralization
21.8.2.1.2 BMF/NMF Forms
21.8.2.1.3 Web Sites and Telephone Numbers
21.8.2.1.4 Translation Services
21.8.2.1.5 Timeliness Determinations
21.8.2.1.5.1 Calculation of Failure to File and Failure to Pay Penalties on Overseas Taxpayers
21.8.2.1.6 Related Publications
21.8.2.1.7 General Disclosure Guidelines
21.8.2.1.8 Referrals to the Taxpayer Advocate Service (TAS)
21.8.2.1.9 Technical Issues
21.8.2.1.10 Competent Authority Claims
21.8.2.1.11 General Adjustment Procedures For International Accounts
21.8.2.1.12 Use of Fax and Signature Stamps for Taxpayer Submissions
21.8.2.1.13 Examination Criteria
21.8.2.1.13.1 Protective Claims
21.8.2.1.14 Period of Limitation
21.8.2.1.14.1 Statute Year Claims
21.8.2.1.15 Unpostables
21.8.2.1.16 Telephone Excise Tax Refund (TETR) for Businesses
21.8.2.2 Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for
the Exclusions Provided by § 911
21.8.2.3 United States Possessions
21.8.2.3.1 Double Taxation
21.8.2.3.2 Residence and Source Rules Concerning U.S. Possessions
21.8.2.3.3 Puerto Rico
21.8.2.3.4 U.S. Virgin Islands, Guam, American Samoa & The Commonwealth of the Northern Mariana
Islands
21.8.2.3.5 Penalty and Interest - CNMI
21.8.2.3.6 Employment Tax Information
21.8.2.3.7 Wage Documents for Possession Employees
21.8.2.3.8 BMF Employment Returns - Form 940-PR, Form 941-PR, Form 941-SS, Schedule H-PR, Form
943-PR, Form 944-PR, and Form 944-SS
21.8.2.3.8.1 Adjusting the Tax on Form 941-PR, Form 943-PR, Form 941-SS, Form 944-PR, and Form
944-SS

21.8.2.3.8.2 Form 941-X(PR) and Form 941-X(SS)

21.8.2.3.8.3 Sick Pay/SINOT
21.8.2.3.8.4 Adjusting the Tax on Form 940-PR (FUTA)
21.8.2.3.9 Form 944-PR/944-SS - Employer’s Annual Federal Tax Return
21.8.2.3.10 Form 945 - Annual Return of Withheld Federal Income Tax
21.8.2.4 Household Employment Taxes - BMF Procedures
21.8.2.4.1 Schedule H/H–PR - BMF Procedures
21.8.2.4.2 Loose Schedule H/H-PR
21.8.2.4.3 Interest-Free Adjustments
21.8.2.5 Deposit Requirements
21.8.2.5.1 FTD Payment System
21.8.2.5.2 Electronic Federal Tax Payment System (EFTPS)
21.8.2.5.3 Deposit Penalties and Penalty Relief
21.8.2.6 Excess FICA
21.8.2.7 VISA Holders - General
21.8.2.7.1 Foreign Student/Nonresident Visitors - Exemption from FICA Tax
21.8.2.7.1.1 Optional Practical Training
21.8.2.7.2 Validating Exemption/Qualification
21.8.2.7.3 Processing Employee Claims
21.8.2.7.3.1 Adjusting Employee Visa Claims (Employer’s Account - BMF)
21.8.2.7.3.2 Adjusting Employee Visa Claims (Employee’s Account - IMF)
21.8.2.7.4 Claims from the Employer
#
#
21.8.2.8 Totalization Agreements- Bilateral Social Security Agreements
21.8.2.8.1 Substantiation of Exempt Status
21.8.2.8.2 Social Security Tax Obligation
21.8.2.8.3 Claims of Exemption from FICA Tax by Reason of Bilateral Social Security Agreement
21.8.2.8.4 Processing Bilateral Agreement Claims
21.8.2.9 Foreign 1120 Series Returns
21.8.2.9.1 Form 1120-F, Income Tax Return of a Foreign Corporation
21.8.2.9.2 Form 1120-F Filing Requirements
21.8.2.9.3 Payment of Tax Due - Form 1120-F
21.8.2.9.4 Deposits Made by Foreign Corporations
21.8.2.9.5 Computing Tax on Form 1120-F
21.8.2.9.6 Tax Adjustments - Form 1120-F and Form 1120-FSC
21.8.2.9.6.1 Refundable Credits - Form 1120-F & 1120-FSC
21.8.2.9.7 Adjusting Penalty and Interest
21.8.2.9.8 Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation
21.8.2 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

21.8.2.9.9 FSC Repeal and Extraterritorial Income Exclusion

21.8.2.9.10 Payment of Tax Due - Form 1120-FSC
21.8.2.9.11 Underpayment of Estimated Tax - Form 1120-FSC
21.8.2.9.12 Claims for Refund of Backup Withholding on Form 1120-F or Form 1120-FSC
21.8.2.9.12.1 General Agreement on Tariffs and Trade (GATT)
21.8.2.9.13 Refunds on Form 1120-F/FSC That Include Interest
21.8.2.10 Foreign Tax Credit (Form 1116 and Form 1118)
21.8.2.10.1 Who May Claim the Foreign Tax Credit
21.8.2.10.2 Claiming the Credit for Foreign Taxes
21.8.2.10.3 Election - Foreign Tax Credit
21.8.2.10.4 Foreign Taxes for Which a Credit May Not Be Claimed
21.8.2.10.5 Statute of Limitation - Foreign Tax Credit
21.8.2.10.6 Computation - Foreign Tax Credit
21.8.2.10.7 Carryback and Carryover - Foreign Tax Credit
21.8.2.11 Form 8288, U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property
Interests, and 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real
Property Interests
21.8.2.11.1 FIRPTA Payments Received Without a Form 8288
21.8.2.11.2 Claims for FIRPTA Credits
21.8.2.12 Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
21.8.2.12.1 Withholding Agent/Withholding Tax
21.8.2.12.2 Form 1042
21.8.2.12.2.1 Form 1042-S
21.8.2.12.3 Form 1042 Filing Requirements
21.8.2.12.4 Form 1042 Federal Tax Deposits
21.8.2.12.5 Electronic Deposit Requirements
21.8.2.12.6 Deposit Penalties - Form 1042
21.8.2.12.6.1 Form 1042 FTD Penalty Resulting From Line 66 Entry
21.8.2.12.7 Exemptions from Chapter III Withholding (CTW)
21.8.2.12.8 Amended Returns - Form 1042
21.8.2.12.9 Processing Claim Adjustments for Form 1042
21.8.2.12.10 Qualified Intermediary Agreements (QI)
21.8.2.12.10.1 Refund Adjustments for Non Resident Alien (NRA) Over-Withholding
21.8.2.12.10.1.1 Adjustments for Non-Resident Alien (NRA) Over-Withholding by a Withholding Agent
21.8.2.12.10.1.2 Adjustments For Non-Resident Alien (NRA) Over-Withholding by a Qualified
Intermediary
21.8.2.12.10.1.3 Repayment of Backup Withholding
21.8.2.12.10.1.4 Credit or Refund Procedures for NRA Over-Withholding by a Qualified Intermediary on
an Amended Return

21.8.2.12.10.2 Adjustments for NRA Under-Withholding Before Form 1042 is Filed

21.8.2.12.10.2.1 NRA Under-Withholding After Form 1042 is Filed
21.8.2.12.10.2.2 Special Rule Regarding Failure to Deposit Penalties
21.8.2.12.10.3 Amended Form 1042 Returns with Line 66 Changes for Qualified Intermediaries
21.8.2.12.10.3.1 Multiple Duplicate Filing (TC 976)
21.8.2.12.10.3.2 Adjusting Form 1042 when Credit for Line 66 Entry Was Not Posted to Accounts During
Initial Processing for Calendar Years 2001, 2002 and 2003
21.8.2.12.11 Loose Forms 1042-S
21.8.2.12.12 Withholding at Source Refund Requests from Exempt Organizations and Private Foundations
21.8.2.12.13 Central Withholding Agreements
21.8.2.13 Exchange of Information With Treaty Countries, Form OECD
21.8.2.14 CTW Reconciliation - Validation of Form 1042 and Form 1042-S
21.8.2.14.1 Procedures for Working the Under-Withheld Form 1042-S Correspondence Listing (CTW 25-45)
21.8.2.14.2 Processing Responses from the Withholding Agent
21.8.2.14.3 Processing Discrepancy Items When the Withholding Agent Did Not Respond
21.8.2.14.4 Acceptable Substantiation for Math Errors
21.8.2.15 Withholding Tax on Foreign Partners - Form 8804
21.8.2.15.1 Applicable Forms - W/H Tax on Foreign Partners
21.8.2.15.2 Form 8804 Estimated Tax Penalty
21.8.2.15.3 Processing Amended Form 8804 and CP 193 Notices
21.8.2.15.4 Form 8804 §1.1446 Elections
21.8.2.15.5 IRC § 1446 Withholding Tax on Foreign Partners
21.8.2.16 Form 1041, U.S. Income Tax Return for Estates and Trusts
21.8.2.16.1 Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts
21.8.2.17 Form 1065, U.S. Return of Partnership Income
21.8.2.17.1 CP 282 - Form 1065
21.8.2.18 Withholding Certificates
21.8.2.18.1 Form W-8, Certificate of Foreign Status
21.8.2.18.2 Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding
21.8.2.18.3 Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With
the Conduct of a Trade or Business in the United States
21.8.2.18.4 Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United
States Tax Withholding
21.8.2.18.5 Form W-8 IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S.
Branches for United States Tax Withholding
21.8.2.18.6 Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits
21.8.2.18.7 Form 8233, Exemption From Withholding on Compensation for Independent (and Certain
Dependent) Personal Services of a Nonresident Alien Individual
21.8.2 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

21.8.2.18.8 Form W-9, Request for Taxpayer Identification Number and Certification
21.8.2.19 Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return
21.8.2.19.1 Estate Tax Treaties
21.8.2.19.2 Form 706-NA Adjustment Procedures
21.8.2.19.3 Estate Tax Provisions in the 1995 Canadian Protocol Article XXIXB
21.8.2.19.4 Form 706-CE, Certificate of Payment of Foreign Death Tax
21.8.2.20 Information Reporting Under IRC § 6048
21.8.2.20.1 Penalties Assessed Under § 6677 - Form 3520 & Form 3520-A
21.8.2.20.2 Interim Reporting Regime for Canadian Registered Retirement Savings Plans and Registered
Retirement Income Funds
21.8.2.20.3 Form 3520 & Applicable Penalties
21.8.2.20.4 Form 3520-A & Applicable Penalties
21.8.2.20.5 Form 3520 & Form 3520-A Possible Duplicate Filing Conditions (CP 193)
21.8.2.21 Form 5471 - Information Return of U.S. Persons with Respect to Certain Foreign Corporations
21.8.2.21.1 Form 5471 Penalties
21.8.2.21.2 Form 5471 Penalties Systemically Assessed from Late Filed Form 1120
Exhibits
21.8.2-1 Failure To File - Form 5471 Decision Tree

BMF International Adjustments 21.8.2 page 1
21.8.2.1 (1) This IRM provides adjustment procedures for international returns processed to
(10-01-2009) the Business Master File (BMF). As an additional reference, the basic BMF
International BMF/NMF account resolution/adjustment procedures are found in IRM 21.7, Business Tax
and CADE Overview Returns and Non-Master File Accounts. Non-Master File (NMF) International
Adjustments procedures can be found in IRM 21.8.3.
Note: Individual Master File (IMF) International Adjustments are found in IRM
21.8.1.
(2) CADE is the Customer Account Data Engine. CADE will gradually replace
Master File functionality. Through a number of incremental increases, CADE
will ultimately replace the Master File and enable replacement of the Integrated
Data Retrieval System (IDRS) components. Taxpayer records are being moved
from the current processing environment to CADE using a release-based
approach starting with the simplest taxpayer accounts.
(3) Use the general processing procedures outlined in this IRM in conjunction with
the following IRMs:
• IRM 13, Taxpayer Advocate Service

• IRM 21, Customer Account Services
• IRM 25, Special Topics
• IRM 20, Penalty and Interest
(4) Contact representatives using this IRM must have had basic BMF Adjustments,
IDRS, Correspondence Imaging System (CIS), and AMS (Account Manage-
ment Services) training to effectively use the material presented in this
International Manual. AMS provides an integrated display of tax account infor-
mation that is systemically acquired from a key collection of designated
systems. It also provides an open and assessable single repository for
taxpayer account history, as well as various case processing tools such as:
• Representative Authorization alerts

• Contact tool to update taxpayer’s address and telephone number
• Automated computation worksheets
• Enterprise logistics Information technology (ELITE) to order forms and pub-
lications
• On-line inquiry referral (E-4442)
• On-line Application for Taxpayer Assistance Order (E-911)
• Reasonable cause assistant
• Self-selected IDRS command code “Hot Lists”
• Direct links to frequently accessed sites such as SERP and ITLA
• A payoff calculator
• A message center for national and group messages
(5) Integrated Automation Technologies (IAT) are tools that assist employees with
IDRS research. The screens access numerous IDRS control codes multiple
times to improve quality by simplifying and standardizing research paths and
consolidating IDRS Command Code responses on one screen. These tools
are:
• IAT Legacy-Jeeda tool which is available at all Accounts Management sites.

• Legacy-SWFT (Standard Work Flow Tool) which currently is only available
at the Ogden, Oakland, Nashville, Memphis, Cincinnati, and Buffalo sites.
(6) “IRC Sections” and “Regulation numbers” may be used interchangeably in

Publications, Form Instructions, or IRMs.
Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2.1
page 2 21.8 International
(7) See IRM 21.8.2.1.2 for the forms addressed in this IRM.
21.8.2.1.1 (1) As a result of the ramp-down of the Philadelphia Submission Processing

(10-01-2009) Campus (PSPC), international BMF Master File return processing moved in its
Campus Consolidation entirety to the Ogden Submission Processing Campus (OSPC) on January 1,
and Program 2007. However, Philadelphia Accounts Management Campus (PAMC)
Centralization continues to process BMF international Accounts Management work.
(2) Correspondence and/or amended returns involving the following issues are
considered “BMF International Issues” and are worked at PAMC:
• Form 1120–F, Form 1120-FSC, Form 940-PR, Form 941-PR, Form 941-SS,
Form 943-PR, Form 944-PR, and Form 944-SS
• Form 8288 series
• Form 8804, Form 8805, and Form 8813
• Foreign Withholding Form 1042 series
• Form 843 Visa claims
• Form 1120X with Document Locator Number (DLN) Filing Location Codes
98, 66, 60 or 78
• Form 8873 Extraterritorial Income Exclusion
• Form 1120X Foreign Tax Credit carryback claims
• Form 1118 Foreign Tax Credit attached to Form 1120-F or Form 1120-FSC
• Amended Form 1040NR Fiduciary
• Requests for reasonable cause relief from systemically assessed Form
5471 penalties
• Inquiries and notices on Form 3520, Form 3520-A, and Form 8891
• Spanish language correspondence related to BMF international
Note: Form 706-NA back-end work is processed at the Cincinnati campus. This
was worked at PAMC prior to October 2007.
(3) Non-Master File (NMF) account processing also ceased at the Philadelphia
Submission Processing Campus (PSPC) in 2006. NMF is now centralized at
the Cincinnati Submission Processing Campus (CSPC).
Note: The Campus Program Locator Guide provides information on the continuing
(Wage and Investment) W&I and Small Business Self Employed (SBSE)
program consolidation and centralization. The guide is on SERP at: http://
serp.enterprise.irs.gov/databases/who-where.dr/transshipment.dr/
campus_locator_guide/01_cplg_toc.htm
21.8.2.1.2 (1) BMF International Corporate Income Tax Returns:

(12-02-2008)
BMF/NMF Forms • Form 1120 and Form 1120-C with Form 1118, Form 5712, Form 5712-A,
Form 5735, and Schedule P
Note: American Samoa Economic Development Credit, reported on Form 5735,

was extended until 1/1/2010 and modified to apply for the first four taxable
years by H.R. 1424, Title 1, The Troubled Assets Relief Program (TARP).
Schedule P (Form 5735) is now obsolete and will not be revised.
• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation

• Form 1120-FSC (Foreign Sales Corporation) and Form 8279 (FSC election)
21.8.2.1.1 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

Note: Form 1120-FSC is being phased out. For new elections, Form 8873, Extra-
territorial Income Exclusion, can be filed as an attachment to an income tax
return.
(2) BMF International Employment Tax Returns:
• Form 940-PR
• Form 941-PR
• Form 941-SS
• Schedule H (PR) (estate or church employees)
• Form 943-PR
• Form 944-PR
• Form 944-SS
(3) BMF Foreign Withholding Tax Returns:
• Form 1042
• Form 8804
• Form 8288
(4) BMF Foreign Estate Tax Returns:
• Foreign and possession addressed Form 706

• Form 706-NA
(5) Foreign Trust and Estate Tax Returns:
• Form 1040NR (Fiduciary)

• Form 3520
• Form 3520-A
(6) BMF Foreign Exempt Organization Returns:
• Foreign and possession addressed Form 990

• Form 990-PF and Form 990-T with Form 1118, Form 5712, Form 5712-A,
Form 5735, or Schedule P attached. See Note in (1) above regarding Form
5735 and Schedule P.
(7) BMF Foreign Information Statements:
• Form 8805
• Form 8813
• Alien Exemption Certificate Form W-8, Form 1001, Form 1078, Form 4224,
Form 8233, and Form 8709
Note: These Alien Certification Forms, except Form 8233, became obsolete on
December 31, 2000.
• Alien Exemption Certificate Form W-8BEN, Form W-8ECI, Form W-8EXP,

Form W-8IMY, and Form W-8CE.
(8) NMF International Income Tax Returns:
• Form 1120-IC-DISC K-1

• Form 926
• Form 8404
• Form 1040NR Fiduciary
(9) Forms Associated with Foreign Withholding Tax Returns:

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2.1.2
• Form 8288A
• Form 8805, Form 8813
• Form 1042-S, Form 1042-T
21.8.2.1.3 (1) The following Web-sites are helpful when researching international issues:
(10-01-2010)
Web Sites and • Submission Processing Web-site at http://win.web.irs.gov/SP/index.htm
Telephone Numbers • IRC codes listed here by section number at http://www.fourmilab.ch/ustax/
ustax.html
• Tax treaties on line at http://www.irs.gov/business/international/article/
0,,id=96739,00.html
• various international topics at http://www.irs.gov/business/international/
index.html
• IRS Bulletins, Notices, Announcements, etc. at http://www.irs.gov/irb/
• U.S. Citizenship and Immigration Services (USCIS) Web-site at
http://www.uscis.gov
• Lexis-Nexis at http://www.lexisnexis.com/clients/irshome/
• The Social Security Administration web-site http://www.ssa.gov/
• Qualified Intermediaries at http://www.irs.gov/business/corporations/article/
0,,id=150934,00.html
• Electronic Tax Law Assistance at http://www.irs.gov/help/page/
0,,id=133197,00.html
• United States Department of State at http///www.state.gov/
• International dialing codes at http:// www.countrycallingcodes.com/
• IR Web research center at http://rnet.web.irs.gov/index1.htm
(2) Helpful telephone numbers for working international issues:
Phone Fax
Accounts Manage- 215-516-2000** 215-516-2825
ment
ACS Support 215-516-2004** 215-516-3413
Automated Underre- 215-516-1625**
porter (AUR)
Electronic Federal 303-967-5916
Tax Payment System
(EFTPS)
Form 2290 Call Site 859–669–5733
International Exami- 215–516–3537**
nation
Offer in Compromise 215–516–2004** 787-759-5466
(OIC) - General
(OIC) - Accepted 631-447-4018
Offers Only
Taxpayer Advocate 787-622-8940 787-622-8933
Service - English
speaking

Phone Fax
Taxpayer Advocate 787-622-8930
Service - Spanish
speaking only
U.S. Certification 215-516-2000**
Program
Reminder: Numbers marked with (**) CANNOT be accessed using IRS phones.
(3) Current International Post contact information can be found on the LMSB web-
site at http://www.lmsb.irs.gov/international/dir_treaty/eoi_overseas/posts.asp
21.8.2.1.4 (1) The Office of the Deputy Commissioner, International, LMSB, will translate
(04-10-2009) documents written in French, German, Italian, Portuguese, and Spanish into
Translation Services English for any IRS office.
(2) To have a document translated, download a Translation Request Sheet at

http://www.lmsb.irs.goc/international/dir_treaty/treaty/translate.asp. If you mail
or fax your document, send two copies of each item to be translated. Hard
copies of translations will be kept on file for six months, and electronic copies
will be kept for one year.
Note: If the document is more than 10 pages, submit requests in 10 page incre-
ments.
#
#
21.8.2.1.5 (1) Based on Rev. Rul. 2002-23, treat a document mailed from a foreign country,
(11-19-2009) with a timely official postmark of the foreign country, as timely filed.
Timeliness
Determinations (2) This rule applies to all documents required or permitted to be filed with the
Service, including returns, payments made with returns, claims, or requests for
filing extensions.
(3) If the last day for filing falls on a Saturday, Sunday or a legal holiday, then a
document with an official postmark of the foreign country dated on the next
succeeding day that is not a Saturday, Sunday, or legal holiday is treated as
timely filed under IRC § 7503. The term legal holiday is defined under Rev.
Rul. 2002-23 and IRC § 7503 as a legal holiday in the District of Columbia in
the United States, or a statewide legal holiday in the state where the federal
tax return, claim for refund or other document is required to be filed or sent.
The term does not include legal holidays in foreign countries, unless such
holidays are also legal holidays in the District of Columbia or applicable state,
as described above. See Rev. Rul. 2002–23 for additional requirements when
foreign mail is received later than such mail is ordinarily received.
(4) The postmark determination for documents sent from a foreign country also
applies to designated international private delivery services (PDS). The list of
PDS’s, both international and domestic, are only updated if a new delivery
service is added to the current list.

(5) The current types of delivery services through designated PDS’s per Notice
2004-83 are:
• DHL Express (DHL): DHL Same Day Service

• Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard
Overnight, FedEx 2 Day, FedEx International Priority, and FedEx Interna-
tional First
• United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver,
UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus,
and UPS Worldwide Express
(6) Currently, only Fed Ex International Priority, Fed Ex International First, UPS
Worldwide Express Plus, and UPS Worldwide Express are authorized as des-
ignated PDS’s for documents sent to the IRS from a foreign country.
21.8.2.1.5.1 (1) Under Treas. Reg. § 1.6081-5, certain U.S. taxpayers abroad may qualify for
(10-01-2007) an automatic extension of time to file and pay tax.
Calculation of Failure to
File and Failure to Pay (2) The Service uses June 15 on overseas calendar year taxpayers as the due
Penalties on Overseas date from which to calculate both the failure to pay and failure to file penalties
Taxpayers ( IRC § 6651(a)(1) and IRC § 6651(a)(2)), for taxpayers who qualify for an
automatic two-month extension under Treas. Reg. § 1.6081-5, but file and pay
late.
(3) Failure to File - Transaction Code (TC) 166/160
a. If an overseas return is not filed timely by the extended due date, a

penalty of 5% per month (not to exceed 25%) is calculated on the amount
of unpaid tax.
b. The penalty starts from the prescribed extended due date for filing the
return.
c. For U.S. citizens or residents whose tax homes and abodes, in a real and
substantial sense, are located outside the United States and Puerto Rico,
the due date for a calendar year return is June 15.
d. If the taxpayer meets the extension requirements, a statement to this
effect must be attached to the original return. If the statement was not
provided and a penalty notice was issued, the information the taxpayer
provides with the notice dispute must be considered before abating.
e. If the return is not filed by the extended due date, the penalty calculation
starts the following day. For calendar year taxpayers, the penalty starts on
June 16.
(4) Failure to Pay - TC 276/270
a. If the tax from an overseas return is not paid on or before the date pre-
scribed for payment (determined with regard to extension), a penalty of
1/2% per month is assessed, not to exceed 25%.
b. The extension of time for payment of tax, under IRC § 6161(a) can be for
a reasonable period of time, not to exceed six months.
c. For taxpayers overseas, Treas. Reg. § 1.6081-5 (a)(5) provides an
automatic extension of time for payment for U.S. citizens abroad who
submit a proper statement attached to their original return.
d. If the taxpayer meets the extension requirements, a statement to this
effect must be attached to the original return. If the statement was not
provided and a penalty notice was issued, the information the taxpayer
provides with the notice dispute must be considered before abating.
21.8.2.1.5.1 Internal Revenue Manual Cat. No. 49814S (10-01-2010)
e. If a taxpayer complies with the requirements mentioned above, the failure

to pay penalty only arises if payment is made after the extended due date.
Example: For a calendar year return, June 15.
Note: Military personnel with Air/Army Post Office (APO) or Fleet Post Office (FPO)
addresses are granted the automatic two month extension. Calculate
penalties after June 15 for calendar year returns.
21.8.2.1.6 (1) The following publications are used for International issues. They can be used
(01-11-2008) as technical reference material or provided to taxpayers when necessary.
Related Publications These publications are available for reference on SERP and on the internet at
http://www.irs.gov.
• Publication 15, (Circular E), Employer’s Tax Guide

• Publication 51, (Circular A), Agricultural Employer’s Tax Guide
• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
• Publication 80, (Circular SS), Federal Tax Guide for Employers in the U.S.
Virgin Islands, Guam, American Samoa, and the Commonwealth of the
Northern Mariana Islands.
• Publication 179, Circular PR, Guia Contributiva Federal Para Patronos Pu-
ertorriquenos (Federal Tax Guide for Employers in Puerto Rico)
• Publication 514, Foreign Tax Credit for Individuals ( Form 1116 issues)
• Publication 515, Withholding of Tax on Nonresident Aliens and Foreign
Entities
• Publication 516, U.S. Government Civilian Employees Stationed Abroad
• Publication 519, U.S. Tax Guide for Aliens
• Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and
Trusts
• Publication 541, Partnerships
• Publication 542, Corporations
• Publication 597, Information on the United States-Canada Income Tax
Treaty
• Publication 570, Tax Guide for Individuals with Income from U.S. Posses-
sions
• Publication 850 series - A series of publications that provide glossaries of
words and phrases in various languages for translation of federal tax termi-
nology
• Publication 901, U.S. Tax Treaties
(2) In addition to these publications, some general information publications are

also printed in Spanish for the convenience of taxpayers. On SERP, they are
located under Forms/Letters/Pubs, then Spanish Tax Products. The letters “SP”
follow the publication number.
Example: Publication 1SP, Publication 17SP , Publication 579SP, and Publication

596SP.
21.8.2.1.7 (1) IRC § 6103 establishes the taxpayer’s (T/P’s) right to privacy of tax informa-
(10-01-2008) tion. You must be sure that you provide correct information to the correct T/P
General Disclosure or authorized representative. Check the Integrated Data Retrieval System
Guidelines (IDRS) Command Code (CC) CFINK for the Power of Attorney (POA).

(2) IRC § 7213, IRC § 7213A, and IRC § 7431 provide criminal and civil penalties
to ensure that taxpayers’ returns and return information remain confidential.
(3) For more information on General Disclosure Guidelines, refer to IRM 21.1.3.2.
For a full discussion of disclosure, refer to IRM 11.3.1 through IRM 11.3.40,
Disclosure of Official Information.
(4) For information on the use of FAX and Signature Stamps, refer to IRM
21.3.4.14.5.
(5) When contacting taxpayers, follow procedures in IRM 21.1.3.2.3, Required

Taxpayer Authentication , for purposes of identification and to prevent unautho-
rized disclosures of tax information. Also, use caution when leaving information
on answering machines or voice mails. (See IRM 11.3.2.6.1, Leaving Informa-
tion on Answering Machines/Voice Mail). For information concerning
unauthorized disclosures, see IRM 11.3.1.6, Reporting Unauthorized Accesses
or Disclosures.
21.8.2.1.8 (1) Refer taxpayers to the Taxpayer Advocate Service (TAS) (see IRM Part 13,
(10-01-2009) Taxpayer Advocate Service) when the contact meets TAS criteria (see IRM
Referrals to the 13.1.7, TAS Case Criteria) and you can’t resolve the taxpayer’s issue the same
Taxpayer Advocate day. The definition of “same day” is within 24 hours. “Same day” cases include
Service (TAS) cases you can completely resolve in 24 hours, as well as cases in which you
have taken steps within 24 hours to begin resolving the taxpayer’s issue. Do
not refer these cases to TAS, unless they meet TAS criteria and the
taxpayer asks to be transferred to TAS. Refer to IRM 13.1.7.4, Same-Day
Resolution by Operations. When referring cases to TAS, use Form 911,
Request for Taxpayer Advocate Service Assistance (And Application for
Taxpayer Assistance order), and forward to TAS in accordance with your local
procedures. Preparation instructions for the Form 911 are available on the
Form and in IRM 21.1.3.18, Taxpayer Advocate Service (TAS) Guidelines.
(2) The National Taxpayer Advocate has reached agreements with the Commis-
sioners of the Wage & Investment (W&I) Division, Small Business & Self-
Employed Division (SB/SE), Tax Exempt & Government Entities (TEGE)
Division, Criminal Investigation (CI), Appeals, and Large & Mid-Size Business
(LMSB) Division, that outline procedures and responsibilities for the processing
of TAS casework when either the statutory or delegated authority to complete
case transactions rests outside of TAS. These agreements are known as
Service Level Agreements (SLA’s). The SLA’s are located on the Intranet at
http://tas.web.irs.gov.
(3) When referring cases to TAS, keep in mind that TAS employees do not have
the delegated authority to make international adjustments. For more informa-
tion about TAS’s delegated authorities, see IRM 13.1.4, Taxpayer Advocate
Case Procedures - TAS Authorities.
(4) For taxpayers who prefer to contact TAS directly, provide the toll-free number
1-877-777-4778. International callers who cannot dial toll-free may call 787-
622-8940 (English assistance) and 787-622-8930 (Spanish assistance).
Publication 1456, Taxpayer Advocate Services - Your Voice at the IRS,
contains addresses and phone contact information for each Taxpayer Advocate
office.

21.8.2.1.9 (1) Follow procedures in IRM 21.5.3.4.7.2.1, Examination Technical Assistance

(10-01-2010) Request, regarding technical questions or assistance requests needed from
Technical Issues Examination when a technical or tax law issue is unclear and does not meet
CAT A criteria as specified in this IRM. See IRM 21.8.2.1.13, Examination
Criteria.
(2) Refer all technical issues to campus management that cannot be resolved
using the IRMs and publications referenced in this IRM. See IRM 21.8.2.1 and
IRM 21.8.2.1.6 If management is unable to make a determination, use local
assistance procedures that involve coordinating the resolution through the
Planning & Analysis Section.
(3) When necessary, the analyst from the Planning & Analysis Section reviews
and forwards any international adjustment problems requiring the attention of
the Headquarters International Analyst, who currently has a Post of Duty
(POD) at the Philadelphia IRS Campus.
(4) Follow the steps in IRM 21.1.2, Reference Materials Overview, as the BMF
International Adjustments IRM is now on SERP.
21.8.2.1.10 (1) Rev. Proc. 2006-54 updated and revised the procedures that allow a U.S.
(02-13-2009) citizen or resident to request a determination by the U.S. Competent Authority
Competent Authority on issues arising under a tax treaty between the United States and a foreign
Claims country. For procedures for requesting assistance from the U.S. Competent
Authority under the provisions of a tax coordination agreement between the
United States and a U.S. Possession, refer to Rev. Proc. 2006-23 and the sub-
section titled “Double Taxation” in this IRM. See IRM 21.8.2.3.1
(2) Usually, an adjustment to tax is requested when the foreign tax administration
creates a double taxation issue.
(3) The IRS Deputy Commissioner (International), Large and Midsize Business
(LMSB) is the U.S. Competent Authority charged with administering the
provision of tax treaties, interpreting and applying the treaties, and reaching
mutual agreement in specific cases.
(4) Written requests for, or any inquiries regarding competent authority assistance,
are sent to:
Deputy Commissioner (International), LMSB
Attn: Office of Tax Treaty
1111 Constitution Ave, NW
Routing: MA3-322A
Washington, DC 20224
(5) Direct any questions regarding competent authority claims to the Office of Tax
Treaty at the above address.
(6) Nonresident aliens need to contact the competent authority within their foreign
government with their inquiries.

21.8.2.1.11 (1) When adjusting BMF international tax accounts using CC REQ54, or transfer-
(10-01-2007) ring credits using Command Codes (CC) ADD24/ADD34/ADD48, input a filing
General Adjustment location code (FLC) of 66 or 98 according to the primary location code shown
Procedures For on TXMOD or ENMOD. Input FLC 66 for primary location code 78 and FLC 98
International Accounts for primary location code 60.
Exception: An FLC 66 or 98 may be input on any BMF international tax adjust-

ment or credit transfer for audit trail purposes, regardless of the
location code shown on TXMOD or ENMOD.
(2) When preparing a Form 13596, Reprocessing Returns, to reinput a document

with an FLC 98 or 66 DLN, line out the stamped DLN and request a new DLN.
21.8.2.1.12 (1) The IRS is involved in a significant number of taxpayer contacts to perfect
(10-01-2007) returns during the filing process, to resolve issues identified in post-filing, and
Use of Fax and to secure delinquent returns.
Signature Stamps for
Taxpayer Submissions Note: When contacting taxpayers, follow procedures in IRM 21.1.3.2.3, Required
Taxpayer Authentication, for purposes of identification and to prevent unau-
thorized disclosures of tax information. Also, use caution when leaving
information on answering machines or voice mails. (See IRM 11.3.2.6.1,
Leaving Information on Answering Machines/Voice Mail).
(2) Based on requests from practitioners and other stakeholders, the Service
developed guidance on the acceptance of faxes and signature stamps that
was approved for Servicewide adoption.
(3) Refer to IRM 21.3.4.14.5, Use of FAX for Taxpayer Submissions, for current
procedures for the acceptance of fax and signature stamps.
21.8.2.1.13 (1) The Domestic Examination Criteria are divided into two groups, Category A
(10-01-2009) and Category B. For Domestic claims, refer to criteria contained in Exhibit
Examination Criteria 21.5.3-2.
(2) Category A criteria are issues that have highest examination potential and
must be routed to Examination Classification prior to resolution of the taxpay-
er’s issue. All tax decrease cases with an open TC 420 (“ -L” freeze) are CAT
“A” criteria.
(3) Refer to IRM 21.5.3.4.12 for Category B criteria.
(4) International Examination criteria are generally CAT “A” only.
(5) Only send case(s) meeting CAT “A” criteria or technical inquiries to Examina-
tion. Criteria used for international claims referral to Examination is found in
the list below.
(6) Forward the following types of international claims and issues to Examination
for classification:
#
#
#
Form 1120 with international characteristics
#

• Amended Form 1041 changing income from taxable to non-taxable that

result in the original tax liability being reduced to zero and the tax decrease
#
• All Form 706-NA Claims
• Form 1042 claims for tax decrease filed after the due date of the return
• Form 926, per IRM 4.19.11.1.19, Form 926, Return by a U.S. Transferrer of
Property to a Foreign Corporation
• Amended, corrected, and superseding Form 1065 is Cat A if any of the
conditions in IRM 21.7.4.4.2.9, Duplicate Filing Conditions on Form 1065
exist.
Note: If the taxpayer cites an IRC, Regulation, Tax Treaty, etc., research the
reference, attempt to secure an explanation, unless the claim meets other
Examination Criteria. This information may be available on-line through
Lexis-Nexis at http://www.lexisnexis.com/clients/irshome/ or on Westlaw at
https://web2.westlaw.com/signon/default.wl?bhcp=1 .
(7) When a claim is sent to Examination Classification, procedures consistent with

IRM 4.19.11, Examination Classification of Work, must be followed. This IRM
requirement is that the sender must ensure that pages 1 and 2 of Form 1120X
are complete, including verification of all needed schedules and forms required
for making a determination, before referring to Examination. If the classifier
determines that an additional schedule(s) is necessary, the case file will be
returned to the sender to secure the necessary information (e.g., Form 1116 or
Form 1118 is be required to verify a foreign tax credit).
(8) Normal research required when routing cases to Exam Classification:

CLASSIFICATION PACKAGE
Form Doc(s) Required IDRS Research
Form 1042 • Form 1042 original (or Form 1042 Filer
T/P copy) & amended ENMOD, TXMOD,
returns BMFOLI, BRTVU, &
• Form 1042-S (voided AMDIS
original (or T/P copy) & Recipient
amended 1042-S ENMOD/ INOLE, NAMEI/
forms) NAMES, TXMOD,
• TC 29X adjustment RTVUE/BRTVU, &
documents BMFOL / IMFOL
Form 1120- • Form 1120-FSC Form 1120-FSC
FSC original (or T/P copy) & TXMOD, BMFOLI, AMDIS
amended returns or & ENMOD
Form 1120X with ex- Parent Corporation
planation Form 1120
• TC 29X or TC 30X ad- TXMOD, BRTVU,
justment document BMFOL, AMDIS &
ENMOD
Form • Form 1120 original (or Form 1120-F
1120-F T/P copy) & amended TXMOD, BMFOLI,
or Form 1120X BRTVU, AMDIS &
• TC 29X or TC 30X ad- ENMOD
justment documents
Form 1041 • Form 1041 or Form Form 1041 or Form
& Form 1040NR original (or 1040NR
1040NRFi- T/P copy) & amended TXMOD, BMFOL,
duciary • TC 29X or TC 30X ad- BRTVU, AMDIS &
(Estate / justment documents ENMOD
Trust)
Form 1065 • Form 1065 original (or Form 1065
T/P copy) & amended TXMOD, BMFOLI,
• TC 29X or TC 30X ad- BRTVU, AMDIS &
justment documents ENMOD
K-1’s
TXMOD, BMFOLI,
BRTVU, AMDIS &
ENMOD
Form • Form 706-NA original Form 706-NA
706-NA (or T/P copy) & TXMOD, BMFOL,
amended BRTVU, AMDIS &
• TC 290X or TC 30X ENMOD
adjustment document
Note: Prior to sending for Classification, an IDRS control must be placed on the
account under a designated profile number, e.g. 05XXX33333. IRM
21.5.3.4.7, Processing Claims and Amended Returns With Examination In-
volvement, lists the control follow-up time frame.

(9) If the case contains CAT “A” criteria, and the amended return or claim shows
an additional tax, assess the tax with TC 290 prior to sending to Examination.
Use the appropriate blocking series, hold code, and priority code.
(10) Make sure that the classification sheet contains complete and accurate infor-
mation (including Building and Drop Points).
(11) Category A claims involving multiple tax periods must be worked by the same
Customer Service Representative (CSR). Send these claims to classification as
one package. Do not send them as separate claims.
(12) When the case is returned from Examination, follow the steps in the table
below.

TO PROCESS THE CLAIM

If Examination Classifier: CSR Should:
Rejects the claim • Resolve the reason for the rejection,
e.g. additional documentation or
IDRS research.
• Initiate telephone call to taxpayer, or
• Correspond with taxpayer using
Letter 916C,input TC 290.00 Blocking
Series 18 or 00 if the original return
is in hand.
Accepts the claim Input necessary transactions, TC 291/
290, Blocking Series 15 or 00 and
reverse the TC 470.
Disallows the claim in part • Input necessary transactions, TC
291/290, Blocking Series 18, or 00 if
the original return is attached
• Send Letter 106C. Include the
complete and exact disallowance ex-
planation provided by the classifier.
Use an open paragraph, if necessary,
and include the taxpayer’s appeal
rights.
Disallows the claim in full • Input necessary transactions, TC 290
.00, Blocking Series 98, or 99 if the
original return is attached
• Send Letter 105C. Include the
complete and exact disallowance ex-
planation provided by the classifier.
Use an open paragraph if necessary
and include the taxpayer’s appeal
rights, even for statutory disallow-
ances.
Selects the claim • Send Letter 86C explaining that the
claim has been selected for further
review by the Examination Depart-
ment and that they will be contacted
by their office once a determination
has been made.
• Input TC 971, Action Code 013, using
the TC 976 date or the received date
of the claim (if no TC 976 is present
on the account).
(13) If a copy of the disallowance letter is returned for association, attach the copy
to the original return.
Note: Copies of disallowance letters on CIS cases that are forwarded to the Cen-
tralized Print Site will not be returned for association. These letters will be

available on CTRL-D if they are needed at a future date. See IRM

21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.
21.8.2.1.13.1 (1) Protective Claims are formal claims or amended returns for credit or refund
(10-01-2007) normally based on expected changes in:
Protective Claims
• A current IRC Section
• A current regulation
• Pending legislation, or
• A current litigation
(2) These claims are filed to protect the claimant’s right to recover an Internal
Revenue Tax before the expiration of the statute of limitations. For this reason,
they are all considered to meet CAT “A” criteria. See IRM 21.5.3.4.7.3.2, Pro-
cessing Protective Claims, for additional information.
(3) All Protective Claims must be sent to Examination Classification as Category

A. All processable Protective Claims are selected by Examination Classifica-
tion.
(4) Protective Claims must be processable before sending to Examination Classifi-

cation. Screen all protective claims for:
• Statute timeliness
• Completeness, and
• Signature(s)
(5) If the claim is not processable, call or correspond with taxpayer for missing
information. If no reply is received, follow normal adjustment procedures for
rejecting the claim.
21.8.2.1.14 (1) A period of limitation is a time period established by law to review, analyze,
(10-01-2007) and resolve taxpayer and/or IRS related issues.
Period of Limitation
(2) The Internal Revenue Code (IRC) states that the Internal Revenue Service
(IRS) will assess, refund/credit, and collect taxes within specific time limits.
These limits are known as the Period of Limitations. When they expire, we
cannot assess additional tax, allow a claim for refund by the taxpayer, or take
collection action. The determination of Statute expiration dates differs for As-
sessment, Refund, and Collection.
(3) The Statute function reviews amended returns which reflect an increase in tax,
and documents that unpost or are rejected for statute imminent or expired
periods.
(4) Statute imminent cases are those cases requiring either an original assess-
ment or a subsequent assessment and the Assessment Statute Expiration
Date (ASED) is within 90 days, or expired.
(5) The following are categories that meet the criteria for possible statute imminent
cases:
• Statute period original returns for input through processing

• Additional assessments on cases that have an ASED within 90 days
• Additional assessments on cases with an expired ASED

• Statute period returns to be re-input with a received date more than 2 1/2
years old
21.8.2.1.14.1 (1) Once it is determined that an assessment of tax is necessary, take the
(10-01-2007) following action when a claim is filed indicating a tax increase and the statute
Statute Year Claims for assessing will expire within 90 days:
1. Prepare Form 10959, Statute Control Transmittal, and hand-carry the case
with current research, i.e. BMFOL print, to the Statute coordinator on a
Form 3210 Document Transmittal.
2. When routing these cases to the Statute function, leave the control base
open to the originator and update the activity to “statute ”.
3. The control base can be closed only after receiving notification from the
statute function that they will keep the case.
4. When the case is returned stamped “CLEARED BY STATUTES”, it can be
input or adjusted following normal adjustment procedures found in IRM
21.5.3, General Claims Procedures .
(2) Once it is determined that a timely claim to decrease tax has been filed (check
the postmark date), the case is resolved by Accounts Management, even if the
statute is imminent or expired. Follow normal adjustment procedures.
(3) Allow the claim if it was received before the Refund Statute Expiration Date
(RSED), additional information was requested to process the claim, and the
#
#
(4) If a claim for tax decrease is not timely, deny the claim sending a formal disal-
lowance letter (Letter 105C), stating that the statute for refund has expired.
Input TC 290 .00 with Blocking Series 98 (complete claim disallowance without
original return) or 99 (complete claim disallowance with original return). Provide
appeal rights to the taxpayer.
a. Do not use expired credits to offset liabilities for other tax periods.
b. In general, amounts are refundable if they were paid within three years
plus the period of any extension of time to file the tax return, or the filing
of the refund claim.
Note: This means all advance payments expire for refund 3 years after the return
due date or extended due date, whichever is later. For more information
regarding advance payments, see IRM 25.6.1.7, Credits and Payments.
c. Alternatively, payments received after the return filing date are refundable
for 2 years from the payment received date.
d. Credits transferred to a balance due module are refundable for 2 years
from the corresponding date of the cycle in which the transfer occurred.
Refer to IRM 25.6.1.10, Claims, Abatements and Refunds, for additional
information.
21.8.2.1.15 (1) Unpostables are transactions which cannot post to the Master File. A transac-
(10-01-2007) tion that fails to post to an account at the Enterprise Computing Center at
Unpostables Martinsburg (ECC-MTB) is returned to the campus (SC) for corrective action.
(2) There are two types of unpostables:
• Returns
• Transactions
(3) The Customer Service Representative:
a. Is responsible for preventing unpostable conditions when transferring

payments and making changes to taxpayer’s accounts, and
b. Should have a thorough understanding of the reason for unpostable condi-
tions, and
c. Is responsible for resolving unpostable conditions created by adjustment
actions. See IRM 21.5.5.4.2, Resolving Unpostables.
(4) To resolve an unpostable, analyze each case, perform research and decide the
proper corrective action. The unpostable condition shows on IDRS just below
the transactions with an indicator before the transaction code such as: DU,
NU, Unnn, CU, DN, DJ, RJ or DC. See Document 6209 for explanations of
these codes.
Note: CU (corrected unpostable) indicates a corrected transaction and no further

action is needed.
(5) Knowledge of the following information contained in Document 6209 is

necessary to analyze and correct the unpostable:
• Transaction Codes (TC)

• 971 Action Codes (AC)
• Item Adjustment Codes
• Credit Reference Numbers
• Reason Codes (RC)
• Priority Codes (PC)
• Freeze Codes (FC)
• Hold Codes (HC)
• Math Error Notice Codes
(6) Use Command Codes UPTIN, UPDIS, UPRES, and UPCASZ to research/re-
solve unpostable conditions per IRM 21.5.5.3.2, Researching Unpostables on
IDRS. There is also useful information in IRM 3.14.1.6.3.3, Preventing Un-
postable Transactions.
21.8.2.1.16 (1) The telephone excise tax refund is a one-time credit that eligible taxpayers can
(10-01-2007) request on their 2006 federal income tax returns. The refund is a credit that
Telephone Excise Tax gives back long-distance federal excise taxes paid by individuals and busi-
Refund (TETR) for nesses in previous years.
Businesses
(2) For additional information on TETR and a list of BMF forms on which the credit
can be claimed, refer to IRM 21.7.4.4.23, Telephone Excise Tax Refund
(TETR).
21.8.2.2 (1) IRC § 3402(a) requires employers to withhold taxes from wages as they are
(10-01-2007) earned at the “source ”. However, if certain conditions are met, an employer
Form 673, Statement for may discontinue the withholding of income tax from the wages of an employee
Claiming Exemption who is a citizen or resident alien employed abroad.
from Withholding on
Foreign Earned Income (2) IRC § 3401(a)(8)(A) exempts certain compensation paid from wages, and
Eligible for the allows employees to file a signed statement including a declaration under
Exclusions Provided by penalties of perjury, along with a current Form W-4, declaring that they meet or
§ 911 will meet the qualifications of IRC § 911(d)(1) (qualified individual) for the
taxable year. As a result, they are exempt from tax on the first $91,500 of
earned income for tax year 2010 ($91,400 for 2009).
(3) The Form W-4 must specify either:
a. Exempt status, and the taxable year for which the Form W-4 is effective,
or
b. The number of withholding allowances allowed, based on exemptions, de-
ductions (including the IRC § 911 deduction), and credits.
(4) The Internal Revenue Service provides Form 673 , Statement for Claiming
Exemption from Withholding on Foreign Earned Income Eligible for the Exclu-
sions Provided by § 911. A statement can be accepted in lieu of Form 673 if
the taxpayer indicates to their employer that they will meet either the bona fide
residence test or the physical presence test and indicates their estimated
housing cost exclusion. (See Publication 54, Tax Guide for U.S. Citizens and
Resident Aliens Abroad, for bona fide and physical presence requirements).
(5) Employers are required to withhold income tax from any wages the employee
earns in the U.S. and any income exceeding the IRC § 911 limitations.
(6) For questions involving the Form W-4 penalty program, contact the Campus
Collection Branch.
(7) Form 673 can only be used by a U.S. Citizen.
Note: Form 673 is not filed with the IRS. The U.S. employer receives the
completed Form 673 from the employee. Send loose Form 673 documents
that are received to the employer.
21.8.2.3 (1) The following are the principal United States possessions that have indepen-
(11-07-2008) dent tax administrations:
United States
Possessions • Commonwealth of Puerto Rico (PR)
• U.S. Virgin Islands (USVI)
• Guam
• American Samoa (AS)
• Commonwealth of the Northern Mariana Islands (CNMI)
(2) Individuals born in a U.S. possession are generally U.S. citizens, except in the
case of American Samoa, where such individuals are U.S. nationals who are
treated the same as U.S. citizens for purposes of many income tax provisions
of the Internal Revenue Code. Individuals residing in a U.S. possession may
also be treated as U.S. residents if they are lawfully admitted for permanent
residence (that is, if they have a ″green card″) or if they are substantially
present in the United States, which generally does not include their time in the
possession. For tax purposes, U.S. residents are taxed the same as U.S.
citizens.
(3) Individuals deriving income from one or more of the above U.S. possessions
may be required to file a possession income tax return, a U.S. income tax
return, or both, depending on their residency status and the particular filing
rules applicable to the relevant possession.
21.8.2.3 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

21.8.2.3.1 (1) Procedures to settle cases of inconsistent tax treatment by the United States
(11-07-2008) and a U.S. possession are provided in tax coordination agreements between
Double Taxation the United States and the following U.S. possessions:
• Puerto Rico (PR)

• U.S. Virgin Islands (USVI)
• Guam
• American Samoa (AS)
• Commonwealth of the Northern Mariana Islands (CNMI)
(2) Refer written requests for the assistance provided under the mutual agreement
procedures to:
Deputy Commissioner (International), LMSB
Attn: Office of Tax Treaty
1111 Constitution Ave, NW
Routing: MA3-322A
(3) Requests for assistance must contain the necessary information outlined in
Rev. Proc. 2006-23 and Publication 570, under the heading “Double Taxation.”
Taxpayers may be referred to the following offices for special information
regarding each U.S. Possession:
• PUERTO RICO
Negociado de Asistencia
Contributiva y Legislacion
Departamento de Hacienda
P.O. Box 565
San Juan, Puerto Rico 00902–6265
• U.S. VIRGIN ISLANDS

Virgin Islands Bureau of Internal Revenue
9601 Estate Thomas
Charlotte Amalie
St. Thomas, U.S. Virgin Islands 00802
• GUAM
Department of Revenue and Taxation
Government of Guam
P.O. Box 23607
GMF, GU 96921
• AMERICAN SAMOA
Tax Division
Government of American Samoa
PagoPago, American Samoa 96799
• COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS

Division of Revenue and Taxation
Central Office
P.O. Box 5234
CHRB Saipan, MP 96950

21.8.2.3.2 (1) Residency rules - IRC § 937(a) generally provides that, except as provided in
(10-01-2009) regulations, the term “bona fide resident” of a possession means an individual
Residence and Source who:
Rules Concerning U.S.
Possessions 1. Is present for at least 183 days during the taxable year in the relevant
possession,
2. Does not have a tax home outside of the possession, and
3. Does not have a closer connection to the United States, or a foreign
country, than to the possession.
Note: See Treas. Reg. 1.937-1 for further details and exceptions to these tests.
(2) Source rules - In general, IRC § 937(b)(1) and the regulations provide that the
principles for determining whether income is U.S. source, are generally appli-
cable for determining whether income is possession source. The principles for
determining whether income is effectively connected with the conduct of a U.S.
trade or business are generally applicable for purposes of determining whether
income is effectively connected to a possession trade or business. In addition,
the “U.S. Income Rule” of IRC § 937(b)(2) provides that:
• Income from U.S. sources is not considered income that is possession

sourced or effectively connected with the conduct of a possession trade or
business, and
• Income that is effectively connected with the conduct of a U.S. trade or
business is not treated as possession sourced income or effectively
connected with the conduct of a trade or business in a possession.
(3) The regulations provide special source rules for certain items of income,
including:
a. Gain from the sale of goods manufactured in a possession

b. Gain from dispositions of property owned prior to, and sold or exchanged
within 10 years after, becoming a bona fide resident
c. Dividends and interest from closely held possessions corporations, and
d. Other specific types of income such as that derived from space and ocean
activities, and international communications. For additional information
concerning possession source and effectively connected income rules,
refer to Publication 570, Treas. Reg. § 1.937-2, and Treas. Reg. 1.937-3.
21.8.2.3.3 (1) Puerto Rico is a self-governing commonwealth in association with the United
(11-07-2008) States. The major differences between Puerto Rico and the 50 states are its
Puerto Rico local taxation system and the exemption from U.S. income tax provided in IRC
§ 933 for Puerto Rico source income.
(2) Puerto Rico’s tax system is patterned after the U.S. tax system, but there are
variations in law and tax rates.
(3) Employers in Puerto Rico are liable for social security and Medicare taxes (col-
lectively Federal Insurance Contributions Act (FICA) taxes). They must file
Form 941-PR or Form 944-PR with the IRS. They are also required to file
Form 940-PR with the IRS to report unemployment taxes (FUTA tax).
(4) Employers with both domestic and possession employees can file one Form
941 or Form 944 to include all wages.

21.8.2.3.4 (1) This section provides specific tax information as it relates to the following U.S.
(11-07-2008) possessions: U.S. Virgin Islands, Guam, American Samoa, and the Common-
U.S. Virgin Islands, wealth of the Northern Mariana Islands.
Guam, American Samoa
& The Commonwealth of Caution: The British Virgin Islands fall within the jurisdiction of the United Kingdom
the Northern Mariana and are in no way connected with the U.S. or its political subdivisions or
Islands territories. Any returns or inquiries received with addresses from the
British Virgin Islands are handled as international cases.
(2) Each possession has its own separate and independent tax system and they
have income tax laws and rates that are substantially the same as or are a
“mirror” of the Internal Revenue Code (USVI, Guam and CNMI), or are
generally similar to provisions of the Internal Revenue Code (American
Samoa).
(3) Employers who have resident employees in the above specified possessions
must file Form 941-SS or Form 944-SS with the IRS to report FICA taxes on
wages earned by their employees. They also must file Form 940 with the IRS
to report FUTA tax.
(4) As with Puerto Rico, employers with both domestic and possession employees
can file one Form 941 or 944 to include all wages.
21.8.2.3.5 (1) Penalty and interest charged to a CNMI employer on Form 941-SS or Form
(10-03-2007) 944-SS must be computed according to tax regulations as applicable to the
Penalty and Interest - CNMI.
CNMI
(2) Form 941-SS is due by the last day of the month following the quarter for
which wages were earned. The Form 944-SS is generally due January 31
following the year for which wages were earned.
(3) When a return posts to the incorrect tax period, follow the procedures in IRM
21.7.9.4.1, Resolving TRNS 193’s and Amended/Corrected/Supplemental
Returns.
(4) General procedures for processing penalty and interest cases are outlined in
IRM 20.1, Penalty, and IRM 20.2, Interest.
21.8.2.3.6 (1) Information on Employment tax may be found in the following publications:
(10-15-2007)
Employment Tax • Publication 15, Circular E, Employer’s Tax Guide and Publication 15-A, Em-
Information ployer’s Supplemental Tax Guide
• Publication 51, Circular A, Agricultural Employer’s Tax Guide for the types
of agricultural work subject to social security and Medicare taxes
• Publication 179 (Spanish), Guia Contributiva Federal para Patronos Puer-
torriquenos (Circular PR - Federal Tax Guide for P.R. Employers)
• Publication 80, Circular SS, Federal Tax Guide for Employers in the U.S.
Virgin Islands, Guam, American Samoa, and the Commonwealth of the
Northern Mariana Islands

21.8.2.3.7 (1) Employers filing Form 941-SS, Form 941-PR, Form 944-SS, Form 944-PR,
(10-01-2010) Schedule H (PR), and Form 943-PR generally also file the following forms with
Wage Documents for the corresponding U.S. Possession:
Possession Employees
• Form W-2 AS (American Samoa)
• Form W-2 GU (Guam)
• Form W-2 VI (Virgin Islands)
• Form W-2 CM (Commonwealth of the Northern Mariana Islands)
• Form W-2 PR (Puerto Rico)
• Form 499R-2 (Puerto Rico)
(2) Beginning in 1991, separate reporting of withheld FICA tax is required. The
wage bases for the two parts of the tax (social security and Medicare) are
different.
(3) The employers are also required to file with the Social Security Administration
a copy of the appropriate Form W-2 for each of their employees along with
Forms:
• Form W-3 SS, or

• Form W-3 (PR)
(4) When there is a centralized payroll with U.S. residents and possession
residents working for the employer, the Form 941-SS , Form 941-PR, Form
944-SS and Form 944-PR are not filed.
a. The employer includes the FICA payments from possession employees on

Form 941 or Form 944 along with U.S. resident employees.
b. The employer prepares the appropriate Form W-2 for each employee
based upon the government to which the withheld income taxes were
paid.
c. Each type of Form W-2 must be accompanied by the Form W-3, Form
W-3 SS, or Form W-3 (PR), as appropriate, when transmitting the data to
SSA.
(5) If taxpayers inquire about this process, refer them to:
• Publication 80
• Publication 179
• Form W-2 AS
• Form W-2 GU
• Form W-2 VI
• Form W-2 CM
• Form W-2 PR / Form 499R-2
(6) If an employer has an employee who changes residence between posses-

sions, or between a possession and the United States during the year, a
separate Form W-2 must be prepared for each jurisdiction of the employee’s
residency.
(7) If an employer inquires about FICA tax reporting, tell them to keep a record of
the combined wages and stop withholding the social security tax when total
wages equal the maximum taxable wage figure for the employee for the year
in question (there is no ceiling on Medicare tax wages).
Note: Refer taxpayers to Notice 194, FICA Tax Rate Table. Below is a quick
reference.

FICA Tax Rate Table

Tax Year Gross Wage Maximum Social Gross
Limitation Amount Security Tax Wage
for Social Security Withheld Limitation
Tax Withheld Amount for
Medicare
2010 $106,800 $6,622 unlimited
2009 $106,800 $6,622 unlimited
2008 $102,000 $6,324 unlimited
2007 $97,500 $6,045 unlimited
2006 $94,200 $5,840 unlimited
(8) Both the employee and employer rates for the social security tax and Medicare
tax are 6.2% and 1.45%, respectively, for all tax years on the chart.
21.8.2.3.8 (1) Form 940-PR, Planilla Para La Declaracion Anual Del Patrono - La Contribu-
(03-13-2009) cion Federal Para El Desempleo (Federal Unemployment Tax Act - FUTA), is
BMF Employment an annual return filed by employers in Puerto Rico to report unemployment
Returns - Form 940-PR, taxes.
Form 941-PR, Form
941-SS, Schedule H-PR, (2) Form 941-PR, Planilla Para La Declaracion Trimestral Del Patrono - La Con-
Form 943-PR, Form tribucion Federal Al Seguro Social Y Al Seguro Medicare, is a quarterly tax
944-PR, and Form return filed by employers to report FICA taxes expected. The return is filed by
944-SS employers whose principal place of business is in Puerto Rico.
(3) Form 941-SS, Employers Quarterly Federal Tax Return, is a quarterly tax
return filed by employers in the U.S. Virgin Islands, Guam, American Samoa
and the Commonwealth of the Northern Mariana Islands to report FICA taxes
expected.
(4) Form Anexo H-PR (Schedule H-PR), Contribuciones Sobre el empleo De

Empleados Domesticos, is an annual return filed by churches or estates to
report and pay employer and employee FICA/FUTA taxes for household
employees. This form replaced Form 942 after 1994. Schedule H-PR is also
filed by individuals as an attachment to Form 1040 or 1040-PR using their
Social Security Number (SSN) to report wages paid to their household
employees. It can also be filed as a “stand- alone” document.
(5) Form 943-PR, Planilla Para La Declaracion Anual De La Contribucion Del

Patrono de Empleados Agricolas, is an annual return filed by employers in
Puerto Rico to report FICA taxes for agricultural employees.
(6) Form 944-PR, Planilla Para La Declaracion Federal Anual Del Patrono, is an
annual tax return filed by employers to report FICA taxes whose expected
annual liability is $1,000 or less. The return is filed by employers whose
principal place of business is in Puerto Rico.
(7) Form 944-SS, Employers Annual Federal Tax Return, is an annual tax return
for employers in the U.S. Virgin Islands, Guam, American Samoa and the

Commonwealth of the Northern Mariana Islands to report FICA tax whose
expected annual liability for social security and Medicare taxes is $1,000 or
less.
21.8.2.3.8.1 (1) Adjustments required on these forms are made using normal BMF procedures
(10-01-2010) found in IRM 21.7.2.4, Employment Tax Returns Procedures.
Adjusting the Tax on
Form 941-PR, Form (2) The Master File Tax Code (MFT) for Form 941-PR and Form 941-SS is 01.
943-PR, Form 941-SS,
(3) The MFT for Form 943-PR is 11.
Form 944-PR, and Form
944-SS (4) The MFT for Form 944-PR and Form 944-SS is 14.
(5) The due dates are as follows:
Form Due Date

Form 941-PR April 30, July 31, October 31,
and, January 31
Form 941-SS April 30, July 31, October 31,
and, January 31
Form 943-PR, Form 944-PR, and January 31
Form 944-SS
(6) Blocking Series 00 is used with the original return; 15 without the original
return.
(7) Item Adjustment Codes (see IRM 21.7.2.4.1, Reference Numbers (Employment
Taxes)).
• 003 - Federal income tax withheld (for returns processed prior to 2005).
See note below.
• 004 - Taxable social security wages
• 005 - Taxable social security tips
• 007 - Social security / Medicare tax (for returns processed prior to 2005)
• 072 - Tips deemed to be wages (IRC § 3121(q))
• 073 - Medicare wages and tips
• 104 - Special additions to federal income tax ( IRC § 3509)
• 105 - Special additions to social security and Medicare tax ( IRC § 3509)
• 106 - Current quarter fractions of cents (941 and 944)
• 107 - Current quarters sick pay (944)
• 108 - Current quarters adjustments for tips and group life insurance (n/a for
944)
• 109 - Current years income tax withholding adjustments (941 and 944)
• 110 - Prior quarters social security and Medicare tax (941 and 944)
• 111 - Total income tax withheld
• 112 - Total social security and Medicare tax
• 113 - Total adjustments
• 115 - Used to adjust exempt wages/tips paid to qualified employees this
quarter (line 6c Form 941).
• 116 - Used to adjust tax from exempt wages/tips paid to qualified
employees this quarter (line 6d Form 941).

• 117 - Used to adjust exempt wages/tips paid to qualified employees March

19 - 31 (line 12d Form 941).
• 184 - Total adjustments to withholding (for returns processed prior to 2005)
• 185 - Adjustment to social security / Medicare tax (for returns processed
prior to 2005)
Note: Codes 104 through 113 are valid only for Form 941 returns processed in
2005 and subsequent (cycle 200501). The TC 290 or 291, line 10 of Form
941-PR, must equal reference number 007 (and 003 if applicable) for 941’s
posted prior to cycle 200512. For returns posted after cycle 200501, the TC
290 or 291, line 8 of Form 941-PR must equal reference numbers 112 and
113.
Note: Form 941-PR, Form 941-SS, Form 943-PR, Form 944-PR, and Form 944-SS
do not have line number 003/111 (Income Tax Withheld). They pay their
income tax withholding to their government, unless they have an employee
in the United States.
(8) CP 175/185 notices, which were generated for unexplained adjustments to

withholding, tips, or FICA, are no longer issued beginning in January, 2009.
(9) When agricultural employers file Form 941-PR, but should file Form 943-PR,
refer to IRM 21.7.2.4.13.2, Incorrect Type of Return Filed - Form 941 and 943.
(10) Prior to tax year 2009, employers could file Form 944 series returns, instead of
Form 941 series returns, only if the IRS notified them in writing. Beginning with
tax year 2009, in order to file Form 944 series returns, taxpayers will be identi-
fied during EIN assignment or will contact the Service directly to inquire about
the Form 944 program. Refer to IRM 21.7.2.4.14, Form 944, Employer’s
Annual Federal Tax Return, for instructions on adjusting accounts where Form
944 filers file Form 941. Beginning in calendar year 2010, the Form 944
program is voluntary.
(11) When adjusting a tax account using REQ54, or transferring credits using
ADD24/ADD34/ADD48, input a filing location code (FLC) of 66 or 98 according
to the primary location code shown on TXMOD or ENMOD. Input FLC 66 for
primary location code 78 and FLC 98 for primary location code 60.

(12) Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March
18, 2010, a new tax benefit is available to employers who hire certain previ-
ously unemployed workers (“qualified employees”) in their trade or business.
The act provides employers with an exemption from the employer’s 6.2 percent
share of social security tax on wages paid to qualified employees, effective for
wages paid from March 19, 2010, through December 31, 2010. See IRM
21.7.2.5.12, HIRE — Payroll Tax Exemption.
(13) Premium assistance for The Consolidated Omnibus Budget Reconciliation Act
(COBRA) benefits can be claimed on Form 941-PR and Form 941-SS for
2009. The forms contain new lines 12A for COBRA premium assistance
payments and 12B for the number of individuals provided COBRA assistance.
Additional information on COBRA and procedures for adjusting COBRA
amounts can be found in IRM 21.7.2.5.10, Premium Assistance for COBRA
Benefits.
Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2.3.8.1
21.8.2.3.8.2 (1) Form 941-X(PR), Adjusted Employer’s QUARTERLY Federal Tax Return or
(10-01-2009) Claim for Refund (Puerto Rico version), is filed to correct income tax withhold-
Form 941-X(PR) and ing and/or FICA tax information previously reported on Form 941-PR.
Form 941-X(SS)
(2) Form 941-X(SS), Employer’s QUARTERLY Federal Tax Return - American
Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the
U.S. Virgin Islands, is filed to correct income tax withholding and/or FICA tax
information previously reported on Form 941-SS.
(3) Refer to the following IRM sections for instructions for processing Form 941-
X(PR) and Form 941-X(SS):
• Form941-x Tax Decreases - Adjusted Employment Tax Return, see IRM

21.7.2.5.3.1, Form 941-X Tax Decreases - Adjusted Employment Tax
Return
• Form941-x Tax Decrease - Claim for Refund, see IRM 21.7.2.5.3.2, Form
941-X Tax Decrease - Claim
• Form941-x Tax Increases - Adjusted Employment Tax Return, see IRM
21.7.2.5.3.3, Form 941-X Tax Increases - Adjusted Employment Tax Return
(4) Prior to January 1, 2009, Form 941c or Form 941cPR was filed to correct with-
holding of FICA information previously reported on Form 941-PR, Form 941-
SS, Form 943-PR, or Form 945.
21.8.2.3.8.3 (1) Employers and third-party payers who have employees that are residents of
(10-01-2007) possessions must withhold from these employees and pay employer FICA
Sick Pay/SINOT taxes on most sick pay.
(2) Employers that make their own sick pay (SINOT) payments report the payment
subject to FICA tax on Form 941-SS/941-PR or Form 944-SS/944-PR.
(3) The third party is responsible for informing the employer of the amount of
benefits paid and what portion is taxable.
(4) Employers reduce the tax liability by subtracting the sick pay (SINOT) paid
portion in the Tax Adjustments section.
(5) Third party payer of sick pay (SINOT) must withhold and deposit the employ-
ee’s portion of social security and Medicare taxes on their 941-SS/941-PR or
Form 944-SS/944-PR returns.
(6) If the employer sends a computer printout and payment, assess the additional
tax. See IRM 21.7.2, Employment and Railroad Tax Returns, for instructions on
how to adjust the taxpayer’s account.
21.8.2.3.8.4 (1) The MFT for Form 940-PR and Form 940-EZ is 10.
(10-15-2007)
Adjusting the Tax on Note: Form 940-EZ is obsolete as of 1-1-2007.
Form 940-PR (FUTA)
(2) The return is filed once a year with the tax period ending on December 31.
The return is due on January 31st.
(3) The Blocking Series are 00 with original return; 15 without original return; 50
when the state certifies wages/contributions; 51 when the state certifies no
record of wages/contributions.

Note: When adjusting an account that contains a previous FUTA adjustment, and
resolution is based on the state certification data, a specific Blocking Series
must be used. Refer to IRM 4.19.5.4.7.4, Special Adjustment Blocking
Series.
(4) Item references are:
• TPR (state code) followed by a dollar amount for tax increase or decrease
• WPR (state code) followed by a dollar amount for wage increase or
decease
Note: The total of the item reference code amounts for tax must equal the TC 290
or 291 tax adjustment. If no increase or decrease to tax or wages is made,
item reference codes are not needed.
(5) Only the first $7,000 paid to each employee is subject to FUTA tax.
(6) For unexplained or questionable exempt amounts from Part 1, line 2, refer to
IRM 21.7.3.4.10, Unexplained or Questionable Exempt Amounts (FUTA) -
Computer Paragraph (CP) 174/874.
Note: Beginning January 1, 2007, CP 174/874 no longer generates. Code and Edit
no longer enters Computer Condition Code (CCC) “C” on Form 940 or Form
940-PR that have an unexplained or questionable amount. The revised Form
940 and Form 940-PR have a check-box to explain exempt payments on line
4 in Part II.
(7) Some organizations, such as religious, charitable, and educational organiza-

tions, are exempt from FUTA taxes. If an organization claims to be exempt
from FUTA taxes, refer to IRM 21.7.7, Exempt Organizations and Tax Exempt
Bonds. Exempt organizations can be identified on the Entity module by Em-
ployment Code (EC) “W”.
(8) The FUTA certification program is the method IRS uses to verify with the
states that the credit claimed on the Form 940-PR/940-EZ and or Schedule H
was actually paid into the states’ unemployment funds. Puerto Rico and the
U.S. Virgin Islands participate in this program. On recertification cases:
If.... Then....
The 940-PR account has an addi- 1. Recompute tax based on the
tional TC 290 assessment (with recertification figures. See (9)
Blocking Series 50 or 51) and the below.
state certification is provided 2. Input the adjustment with
Blocking Series 50.
3. Adjust TC 180 if applicable.
The taxpayer is not aware of the 1. Use 3064SP or 380C letter to
FUTA assessment or disagrees or explain the adjustment to the
does not understand the addi- taxpayer and request that they
tional assessment obtain a recertification from the
possession. See note below.
2. Input STAUP for eight cycles.
3. Do not adjust account at this
time.

(9) The Department of Labor in PR can be contacted at 787-754-5270 or 787-754-
5272. The Department of Labor in the U.S. Virgin Islands can be contacted at
340-776-3700 or by writing to:
Employment Security Agency
P.O. Box 789
St. Croix, U.S. Virgin Islands
(10) Complete Form 940 adjustment procedures are found in IRM 21.7.3.4, Unem-
ployment Taxes Procedures. Form 940-PR is adjusted in the same manner.
21.8.2.3.9 (1) The Form 944 was developed to reduce burden for small business taxpayers.
(10-01-2010) It became available beginning with calendar year 2006 along with Form 944-
Form 944-PR/944-SS - PR, for employers in Puerto Rico and Form 944-SS, for employers in the U.S.
Employer’s Annual Virgin Islands, Guam, American Samoa, and the Commonwealth of the
Federal Tax Return Northern Mariana Islands.
(2) In 2006, the Form 944 program was a new filing requirement for all Form 941
series taxpayers to whom one of the following apply:
• The taxpayer would have had to report $1,000 or less in total tax liability on
their Form 941 accounts during the periods beginning July 1st and ending
the following June 30th (this is referred to as the eligibility extract period),
or
• The taxpayer applied for a new EIN, who has never filed previously, would
qualify to file Form 944 if they believed their total liability would not exceed
$1,000.
Note: Employers in U.S. possessions who pay $6,536 or less in wages subject to
social security and Medicare taxes will pay $1,000 or less in employment
taxes.
(3) For tax years 2006 through 2008, Form 944 filers were identified using a
Master File extract. Beginning in 2009, taxpayers will self-identify during EIN
assignment or by contacting the Service about the Form 944 program, since
the extract will no longer be run. Beginning in calendar year 2010, the 944
program is voluntary.
(4) MFT 14 was established Form 944-PR and Form 944-SS.
21.8.2.3.10 (1) Form 945 is used to report federal income tax withheld or backup withholding.
(10-01-2008) All non-payroll items, namely pensions, annuities, IRAs, military retirement,
Form 945 - Annual gambling winnings, back-up withholding (BUWH), and Indian Gaming Profits,
Return of Withheld are reported on Form 945. As a general rule, all income tax and BUWH
Federal Income Tax reported on Form 1099 or Form W-2G must be reported on Form 945.
(2) Some taxpayers file Form 945 when a Form 1042 should have been filed.
However, a Form 1042-S is provided to the recipient instead of a Form 1099.
(3) Form 945 is subject to Federal Tax Deposit requirements. The periodic liabili-
ties are reported on Form 945A. Form 945 tax deposit requirements are
separate from Form 941-PR/SS - they cannot be combined. Taxpayers follow
either semi-weekly or monthly deposit schedules. See Publication 15, Circular
E, for Federal Tax Deposit Requirements.
(4) The threshold for making deposits is currently $2,500.

(5) The return is filed annually with tax period ending on December 31 and the
return is due on January 31st, following the close of the calendar year.
(6) The MFT for Form 945 is 16.
(7) The taxpayer is required to file only for a calendar year in which withholding
tax must be reported on Form 945.
(8) Blocking Series 00 is used with an original return; 15 without the original
return.
(9) Item reference numbers are:
• 003 - Federal Income Tax Withheld

• 008 - Backup Withholding
• 184 - Adjustments to correct administrative errors
Note: Adjustments on Form 945 can only be made if they are the result of an ad-
ministrative error.
21.8.2.4 (1) On January 1, 1995, the Social Security Domestic Employment Reform Act
(10-01-2010) (SSDERA) of 1994 was enacted. As a result, domestic service employment
Household Employment taxes are now collected with income tax rather than employment taxes.
Taxes - BMF Procedures
(2) Domestic employees under the age of 18 are excluded from coverage
beginning in 1995, if being a “Domestic Employee” is not their principal occu-
pation. This provision is effective regardless of the amount of wages paid to
the employee under 18.
Note: A “student” is considered an occupation.
(3) A domestic employee receiving less than $1,700 from an employer for tax year
2010 is not subject to Household Employment taxes. The thresholds for prior
years are as follows:
a. $1,700 for 2009

b. $1,600 for 2008
c. $1,500 for 2006 and 2007
d. $1,400 for 2003 through 2005
e. $1,300 for 2001 and 2002
(4) Wages paid after December 31, 1994 are reported on the employer’s Schedule
H/H-PR attached to Form 1040, Form 1040A, Form-NR, Form-PR, Form 1040-
SS, or Form 1041. Employers not liable for a Form 1040/A/NR/PR/SS must file
a “stand-alone” Schedule H/H-PR.
Note: On a “stand-alone” Schedule H/H-PR, Submission Processing prepares a

dummy Form 1040/A/NR/PR/SS with a Return Processing Code of “Y” or
Form 1041 for BMF accounts.
(5) Employers claiming the additional tax with their individual taxes report the tax
for 2010 on Line 59 on the Form 1040, Line 58 on the Form 1040NR, or Line
4 on the Form 1040-PR/SS. Employers claim the additional tax on Form 1041
using line 23.
a. This additional tax is included in the TC 150 amount.

b. Use the appropriate Blocking Series and RC 050 for IMF to adjust employ-
ment taxes from Schedule H/H-PR.
(6) SSDERA requires the Schedule H/H-PR be filed for a calendar year. Fiscal
year filers must report wages paid on a calendar year basis.
21.8.2.4.1 (1) Schedule H/H–PR has four parts:

(10-01-2007)
Schedule H/H–PR - BMF • Part I is social security, Medicare, and Federal Income Taxes (Contribu-
Procedures ciones al Seguro Social y al Medicare).
• Part II is Federal Unemployment (FUTA) Tax (Contribucion Federal para el
Desempleo (FUTA).
• Part III Total Household Employment Taxes (Total de Contribuciones sobre
el Empleo de Empleados Domesticos).
• Part IV is Address and Signature (Direccion y Firma) Part IV is completed
ONLY if the employer is not required to file a tax return or is filing a Form
1041.
(2) Schedule H/H-PR may be filed by a Trust or Church etc., either by itself or with
Form 1041.
(3) Use the following Item Adjustment Code list to determine the appropriate
reference numbers to use to adjust Part I, social security, Medicare, and
Federal income taxes:
• 003 - Federal Income Tax Withheld

• 004 - Taxable Social Security Wages
• 007 - Adjusted total of SSA/Medicare tax
• 073 - Medicare Wages
(4) FUTA State Codes currently valid with MFT 10 must be input for adjusting the
primary taxpayer information. The FUTA State Code is a three character code
made up of T or W, followed by a two character state code. See a list of state
abbreviations in Exhibit 3.11.3-9, State Codes and Zip Codes Perfection Chart.
(5) The three character State Code is input systemically and converted to the ap-
plicable reference number.
(6) FUTA taxes are due on wages paid to domestic employees if the employer
paid total cash wages of $1,000 or more (for all household employees) in any
quarter in the current or preceding calendar year.
State Code Chart

State Code Input Computer Generated Reference
Reference Number
TPR 997 Taxes
WPR 998 Wages
Note: After “T” or “W”, the appropriate two digit state abbreviation is used.
Example: The taxpayer reports $1,300 FUTA tax paid to Puerto Rico. The tax
examiner inputs State Code TPR for $1,300 and the computer generates
a TC 997 for $1,300.
(7) For adjustments involving Form 1041 with Schedule H, refer to IRM
21.7.4.4.1.10, Form 1041 Claims and Requests for Adjustments.
21.8.2.4.2 (1) When processing a loose Schedule H/H-PR, use the procedures in this IRM in
(10-01-2007) conjunction with the procedures outlined in IRM 21 listed below. See IRM
Loose Schedule H/H-PR 21.8.2.4, Household Employment Taxes - BMF Procedures .
If ... Then ...

The Taxpayer Identification Follow the procedures in IRM
Number (TIN) is a SSN 21.6.4.4.8.10 , Schedule H,
Household Employment Taxes,
Received Without Form 1040,
U.S. Individual Income Tax
Return.
The TIN is an Employer Identifi- Follow the procedures in IRM
cation Number (EIN) 21.7.4.4.1.11 , Social Security
Domestic Employment Reform
Act (SSDERA) of 1994 and BMF
Schedules H.
The Schedule H does not have a Research for a TIN using NAMEE
TIN or NAMEB for an EIN, NAMES or
NAMEI for an SSN.
21.8.2.4.3 (1) The interest-free provisions for adjustments on employment taxes are in effect
(10-01-2010) for errors discovered on the Schedule H/H-PR. The provisions were revised
Interest-Free and apply to errors discovered on or after January 1, 2009. See Treas. Reg.
Adjustments §§ 31.6205-1, 31.6413(a)-1, and 31.6413(a)-2. Additional information can also
be found in TD 9405 and Publication 926.
a. The interest-free provisions may apply to adjusted returns and original

returns in certain cases of worker mis-classification. The adjustment to
Schedule H is made by filing a Form 1040X with a corrected Schedule H
(together being an adjusted return), or just an amended Schedule H if the
employer has no Form 1040 filing requirement.
b. Taxes imposed under the Federal Unemployment Tax Act FUTA (Part II,
Schedule H) are not subject to the interest-free provision. As a result,
when adjusting Schedule H taxes, it is sometimes necessary to use both
TC 298 (for interest free income and FICA adjustments, Part I, Schedule
H) and TC 290 for the FUTA portion.
c. Underpayment adjustments to income tax withholding, social security and
Medicare taxes may be made interest-free if reported by the due date of
the return for the return period the error is ascertained.
d. Generally, adjustments to income tax withholding errors may only be made
for quarters during the same calendar year. Adjustments to amounts
reported as income tax withheld in a prior calendar year may only be
made to correct an administrative error. An administrative error occurs if
the amount entered on Schedule H/H-PR as income tax withheld is not
the amount the employer actually withheld.

Note: Income taxes are only required to be withheld from wages for domestic em-
ployment if the employer and employee agree to the withholding.
(2) For Schedule H/H-PR, the due date of the period the error is ascertained is the
due date of the income tax return for the period the taxpayer discovered the
error.
a. An error is ascertained when the employer has sufficient knowledge of the

error to be able to correct it.
b. For underpayment errors discovered on or after January 1, 2009, the new
provisions require that the underpayment be paid at the time the adjusted
return is filed or interest will begin to accrue. The interest computation
#
#
#
#
#
#
#
#
#
#
#
#
#
#
#
#
#
#
#
#
c. Ascertained dates are not needed for tax decreases.

d. A statement (could be an amended Schedule H) must be attached to the
return on which the adjustment is reported explaining the correction and
designating the return period in which the error was ascertained and the
return period to which the error relates.
e. Use the following chart to assist in determining when to use a TC 298.

TC 298 Usage Chart

If... Then...
An ascertained date is provided Assess the increase using TC
and the amended Schedule 298 with an interest computation
H/H-PR is filed by the due date of date.
the return for the return period, in
which the error was ascertained
The ascertained date is not Contact the taxpayer by
provided telephone to obtain the informa-
tion.
Note: Do not correspond for the
ascertained date unless
corresponding for other
information.
The ascertained date is not Assess the increase using a TC
provided and is unable to be 290.
secured
Note: When contacting taxpayers, follow procedures in IRM 21.1.3.2.3, Required

Taxpayer Authentication , for purposes of identification and to prevent unau-
Leaving Information on Answering Machines/Voice Mail)
(3) Interest-free adjustments provisions.
If... Then...
The adjusted Schedule H is filed No interest is due.
and the tax paid by the due date
of the return for the return period
in which the error was ascer-
tained and the underpayment is
paid at the same time
For increases in tax liability, the Interested is computed from the
amended Schedule H is filed by #
the due date of the return for the #
return period in which the error #
was ascertained, but the tax is #
not paid at the same time #
#
21.8.2.5 (1) Deposit requirements for the PR series returns are the same as for their
(10-01-2007) domestic counterparts.
Deposit Requirements
(2) Form 941-PR deposit requirements are the same as for Form 941 and are
shown in IRM 20.1.4. 8, Employment Tax Form 941, Form 943, Form 944,
Form 945, and CT-1.

(3) Form 940-PR deposit requirements are different from the Form 941 require-
ments. The unemployment tax deposit requirements are:
• If the tax liability is $500 or less and it is the end of the first, second, or
third quarter, the tax is carried over to the next quarter.
• If the fourth quarter tax liability is $500 or less, the tax is due by the due
date of Form 940-PR or 940-PR/EZ, which is January 31, or it and can be
mailed in with the return.
• If the tax liability is over $500, and it is the end of any quarter, then the tax
must be deposited by the last day of the following month.
(4) When to deposit FUTA Taxes:
Quarter Ending Due Date

Jan.-Feb.-Mar. March 31 April 30
Apr.-May-June June 30 July 31
July-Aug.-Sep. September 30 October 31
Oct.-Nov.-Dec. December 31 January 31
(5) Form 943-PR annual return deposit requirements: In general, when the
employer and employee portions of social security, Medicare and withholding
taxes are $2,500 or more, the taxpayers must periodically deposit their em-
ployment taxes using their required monthly or semiweekly deposit schedule.
When the total tax amount is less than $2,500, the tax is considered de
minimis, and can be remitted with a timely filed return.
• Beginning in 2001, the threshold for the deposit requirement was increased
from $1,000 to $2,500.
• Circular A, Agricultural employers Tax Guide, Section 7 has more informa-
tion on the deposit rules.
(6) Form 945 annual return withholding tax deposits must be made separately
from FICA and Medicare taxes. The 941 and 945 tax liabilities cannot be
combined when making deposits. The $2,500 deposit threshold requirement
also applies to Form 945.
21.8.2.5.1 (1) Taxpayers who file Form 941-PR, Form 943-PR, or Form 945 are required to
(10-01-2010) pay the tax on these returns by making Federal Tax Deposit (FTD) payments if
FTD Payment System the liability equals or exceeds a designated threshold amount during the tax
period for which the return is filed. See Publication 15 for information on the
FTD payment system. The table below lists the applicable thresholds.

FTD Liability Thresholds

Form Tax Period Ending $ Threshold
941 200103 and subse- 2,500 (See Note
quent below table.)
941 199809 – 200012 1,000
941 199806 and prior 500
943 200112 and subse- 2,500
quent
943 199912 and 200012 1,000
943 199812 and prior 500
945 200112 and subse- 2,500
quent
945 199912 and 200012 1,000
945 199812 and prior 500
Note: For tax periods beginning January 1, 2010 and subsequent, if your Form 941
total tax liability is $2,500 or less for the current quarter or the preceding
quarter is less than $2,500 and the taxpayer did not incur a $100,000 next-
day deposit obligation during the current quarter, the tax due can be paid
when the return is filed.
(2) These deposits are paid to an authorized financial institution accompanied by

an FTD coupon (Form 8109) or via the Electronic Federal Tax Payment
System (EFTPS).
(3) Foreign taxpayers may mail their Form 8109 and payment in U.S. dollars
made payable to the Financial Agent to the address below:
Caution: These deposits should be processed as TC 650 payments. FTD

avoidance penalties may be charged if the deposits post as TC 670
payments. Beginning January 1, 2011, taxpayers must use the Elec-
tronic Federal Tax Payment System (EFTPS) to deposit taxes.
Form(s) 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be
used after December 31, 2010.
Financial Agent
Federal Tax Deposit Processing
P.O. Box 970030
St. Louis, MO 63197
(4) When a taxpayer makes a timely deposit to an authorized depository by

coupon or electronic request, the bank transmits the deposit to the Treasury
Financial Agent (TFA). If the TFA delays transmitting the deposit to the
Treasury, the employer’s account may be charged an FTD penalty for a late
deposit. Do not initiate a credit transfer to change the date of the deposit. See
IRM 20.1.4. 24.1, Treasury Financial Agent Mishandling, for case resolution
instructions.
(5) Penalties are imposed if deposits are:

• Late
• Insufficient amounts
• Made directly to IRS
• Not made by EFTPS, if so required
(See IRM 20.1.4, Failure to Deposit Penalties, for more information.)
(6) If return is reprocessed to a different year and no penalty should be assessed,

“J”code the re-input document. Returns processed with Computer Condition
Code (CCC) “J” are excluded from FTD penalty processing. CCC “J” is used in
limited situations and only when authorized by the Office of Servicewide
Penalties.
(7) The FTD penalty must be considered anytime there is an adjustment to tax
whether an increase or decrease. See IRM 20.1.4.23, Manual Adjustments, for
complete instructions.
(8) Research IDRS to determine if a CP 194 or CP 207 was previously generated,

whenever tax or periodic liability information is being adjusted. See IRM
20.1.4.14.6, Schedule Indicator Codes (SIC).
(9) The taxpayer may create a duplicate filing condition by filing a separate return
with each FTD. Resolve these “A” freeze conditions using CP 193 procedures
in IRM 21.7.9, BMF Duplicate Filing Conditions . Notify Taxpayers to make
deposits using Form 8109 coupons or through EFTPS.
(10) For more information on deposits and FTD penalties, see:
• Circular E
• Circular A
• IRM 20.1.4, Failure to Deposit Penalty
21.8.2.5.2 (1) Beginning in 1998, taxpayers were required to use the Electronic Federal Tax
(10-01-2007) Payment System (EFTPS) if their “aggregate deposits” for the second
Electronic Federal Tax preceding calendar year exceeded $200,000.
Payment System
(EFTPS) Example: In 2010, the taxpayer is required to use EFTPS if his or her aggregate
deposits in 2008 exceeded $200,000.
(2) When determining if a taxpayer’s aggregate deposits exceed the EFTPS

$200,000 threshold, combine the tax liabilities of all the tax returns filed within
a designated previous year. See IRM 21.7.1.4.8.1, Electronic Federal Tax
Payment System (EFTPS).
(3) A taxpayer who exceeds the threshold in one year is not permitted to resume
making paper coupon deposits if aggregate deposits fall below $200,000 in a
subsequent year. The taxpayer must continue to use the EFTPS to make elec-
tronic deposits for all subsequent years. See IRM 21.7.1.4.8.1.1, EFTPS
Enrollment.
(4) Thresholds are determined by the amount of deposits made during the
calendar year, not on the dates the liability for those deposits were incurred.
(5) Refer to IRM 21.7.1.4.8.1.3, EFTPS Deposit Requirements.

21.8.2.5.3 (1) Taxpayers that are required to make electronic deposits are subject to the
(10-01-2007) same FTD penalties as other depositors, including a 10% penalty for avoiding
Deposit Penalties and the required deposit method. (See IRM 20.1.4.2.5 , Electronic Funds Transfer
Penalty Relief (EFT) and IRM 20.1.4.7.1, Time Sensitive Four Tier Penalty System .)
(2) Various forms of penalty relief have been granted for taxpayers, including rea-
sonable cause. See IRM 20.1, Penalty Handbook, for information on penalty
relief and the periods to which it applies.
21.8.2.6 (1) Excess FICA claims (not Foreign Student Visa Claims) are IMF Criteria.
(10-01-2007)
Excess FICA (2) Route case received in the BMF inventory to Philadelphia Accounts Manage-
ment - IMF International Department.
21.8.2.7 (1) A visa is assigned to an individual by the United States Citizenship and Immi-
(10-01-2009) gration Services (USCIS) based on the individual’s U.S. immigrant or non-
VISA Holders - General immigrant status. Visas are assigned to non-immigrant aliens who are admitted
temporarily to the U.S. for specific reasons and periods of time.
(2) The USCIS Web site at http://www.uscis.gov contains specific information on

the various visas available.
(3) The method of taxation of a visa holder depends primarily upon whether the
individual is defined as a resident or nonresident. If the visa holder is deter-
mined to be a nonresident alien, he or she is taxed on all United States source
income and on all income that is effectively connected with the conduct of a
trade or business in the United States (see IRM 21.8.1.11.11). Non-effectively
connected foreign source income is not taxed (see IRM 21.8.1.11.12).
Resident aliens are taxed the same as citizens.
(4) The following are types and definitions of visas most frequently recognized by
IRS:
• H-1 VISA: “H-1” visas are for temporary workers in a specialty occupation
(profession).
• TN VISA: “TN” visas are trade visas for Canadian and Mexican profession-
als entering under the North American Free Trade Agreement (NAFTA).
• F VISA: The “F” visa is issued to alien students accepted as registered
students by an educational institution or language learning program
approved by the Attorney General.
• J VISA: The “J” visa is issued to an alien entering for the purpose of
teaching, instructing, lecturing, studying, observing, conducting research,
consulting, demonstrating special skills, or receiving training. These indi-
viduals are commonly referred to as “exchange visitors”. An alien
temporarily present in the United States on a J Visa is admitted for an
initial period of two years.
• M VISA: The “M” visa is issued to an alien accepted as a registered
student by an established vocational or other recognized nonacademic in-
stitution (other than in a language training programs) approved by the
Attorney General.
• Q VISA: The “Q” visa is issued to an alien participating (for a period not to
exceed 15 months) in an international cultural exchange program approved
by the Attorney General for the purpose of providing practical training, em-
ployment, and the sharing of history, culture, and traditions of the country of
the alien’s nationality.

(5) There are special rules for “F”, “J”, “M”, and “Q” visa holders.
a. Subject to certain limitations, “F”, “J”, “M”, and “Q” visa holders are treated
as exempt individuals for purposes of the substantial presence test. The
result of this is that they are frequently determined to be non-resident
aliens without regard to the number of days spent in the United States.
b. “F”, “J”, “M”, and “Q” visa holders are treated as engaged in a trade or
business in the United States even if they are nonresident aliens. They are
able to exclude pay received from a foreign employer from U.S. gross
income.
c. These types of visa holders, together with certain scholarship and fellow-
ship holders, are afforded a lower rate of withholding.
d. These four types of visa holders are exempt from social security and
Medicare taxes (FICA) on wages as long as the visa holder is classified a
nonresident alien and the services are performed to carry out the purpose
for which the visa holder was admitted to the United States. Restrictions
on the type of work and the number of hours worked apply according to
the type of visa held.
e. One important limitation applies to teachers or trainees who are tempo-
rarily present in the United States under “J” or “Q” visas. After two years,
such individuals generally are classified as resident aliens under the sub-
stantial presence test.
(6) The following is a list of immigration forms and descriptions:
Form Description Citizenship Field Permanent Resident Alien

AR-3 and AR-3a Alien Registration Legal alien allowed to Y
Receipt Card. work
Evidence of lawful
admission for
permanent residence.
DSP-150 B-1/B-2 Visa and
Border Crossing Card.
Note: Form DFP-150
replaces Form
I-186 and Form
I-586.
DS-2019 Certificate of Eligibility
for Exchange Visitor
(J-1) Status. Evidence
the alien is an
exchange visitor. Must
also show an I-94 with
J-1 alien classification.
I-20 Certificate of Eligibility
for Nonimmigrant
Student Status. Must
also show an I-94
showing either F-1 or
M-1 alien classifica-
tion.


I-94 or I-94A Arrival/Departure
Record. Evidence the
alien is a non-
immigrant. There are
different versions of
the form.
I-94W Non-immigrant Visa
Waiver Arrival/
Departure Form.
Evidence that the
alien is a visitor from a
visa waiver country.
I-95 or I-95A Crewman’s Landing Legal alien not N
Permit. Issued to allowed to work
foreign crewman.
I-184 Alien Crewman Legal alien not N
Landing Permit and allowed to work
Identification Card.
Issued to foreign
crewmen.
I-185 Nonresident Alien Legal alien not N
Canadian Border allowed to work
Crossing Card. Issued
to Canadian citizens.
I-194 Notice of Approval of
Advance Permission
to Enter the United
States as a Nonimmi-
grant.
I-508 Waiver of Rights, This Form was revised in 2005 to include an “IRS
Privileges, Exemptions COPY”. Route all IRS COPIES received to:
and Immunities IRS
International Programs-SBSE
1111 Constitution Ave-NE 4423
#
I-551 Alien Registration Legal alien allowed to Y
Receipt Card (Green work
Card). Evidence of
lawful admission for
permanent residence.
I-551 STAMP Temporary I-551. Legal alien allowed to Y
Evidence of lawful work
admission for
permanent residence
until the I-551 card is
received.


I-688 Temporary Resident Legal alien allowed to N
Identification Card. work
Issued to legalization
applicants.
I-688A Employment Authori- Legal alien allowed to N
zation Card. Evidence work
of work authorization.
I-688 EXT Extended Temporary Legal alien allowed to N
Resident Card. work
Evidence of lawful
admission for
permanent residence
until the I-551 card is
received.
I-766 Employment Authori- Legal alien allowed to N
zation Document. work
Evidence of work au-
thorization.
I-797 Notice of Action. Legal alien N
Accept only for Family
Unity program aliens.
Note: Forms that begin with “I” (such as Form I-551) come from the United States
Citizenship and Immigration Services (See the USCIS Web site at
http://www.uscis.gov). Forms that begin with “DS” (such as DS-2019) come
from the U. S. Department of State (See the State Department Web site at
http://state.gov ).
(7) The following table lists the various types of visas with a description of each:
VISA Types and Descriptions

Visa Symbol Class (Description) Section of the Law
A-1 Ambassador, public 101(a)(15)(A)(i)
minister, career
diplomat or consular
officer, and immediate
family
A-2 Other foreign govern- 101(a)(15)(A)(ii)
ment official or
employee, and
immediate family
A-3 Attendant, servant or 101(a)(15)(A)(iii)
personal employee of
principal A-1 or A-2,
and immediate family


B-1 Temporary visitor for 101(a)(15)(B)
business
B-2 Temporary visitor for 101(a)(15)(B)
pleasure
C-1 Alien in transit 101(a)(15)(C)
directly through U.S.
C-1D Combined transit and 101(a)(15)(C)&(D)
crewman visa
C-2 Alien in transit to 101(a)(15)(C)
United Nations Head-
quarters district under
Section 11.(3), (4), or
(5) of the Headquar-
ters Agreement
C-3 Foreign government 212(d)(8)
official, immediate
family attendant,
servant or personal
employee, in transit
C-4 Transit without Visa, 212(d)(3) & 212(d)(5)
see TWOV
D-1 Crew member 101(a)(15)(D)
departing on same
vessel of arrival
D-2 Crew member 101(a)(15)(D)
departing by means
other than vessel of
arrival
E-1 Treaty trader spouse 101(a)(15)(E)(i)
and children
E-2 Treaty investor, 101(a)(15)(E)(ii)
spouse and children
E-3 Australian Specialty 101(a)(15)(E)(iii)
Occupation Workers
F-1 Academic student 101(a)(15)(F)(i)
F-2 Spouse or child of 101(a)(15)(F)(ii)
F-1


G-1 Principal resident rep- 101(a)(15)(G)(i)
resentative of
recognized foreign
member government
to international orga-
nization, staff and
immediate family
G-2 Other representative 101(a)(15)(G)(ii)
of recognized foreign
member government
to international orga-
nization and
immediate family
G-3 Representative of 101(a)(15)(G)(iii)
non-recognized or
nonmember govern-
ment to international
organization, and
immediate family
G-4 International organi- 101(a)(15)(G)(iv)
zation officer or
employee, and
immediate family
G-5 Attendant, servant, or 101(a)(15)(G)(v)
personal employee of
G-1, through G-4 and
immediate family
H-1B Specialty Occupa- 101(a)(15)(H)(i)(b)
tions, Department of
Defense (DOD)
workers, fashion
models
H-1B1 Free traded nonimmi- 101(a)(15)(H)(i)(b)(1)
grant professional
from Chile or
Singapore
H-1C Nurses going to work 101(a)(15)(H)(i)(c)
up to three years in
health professional
shortage areas
H-2A Temporary Agricul- 101(a)(15)(H)(ii)(a)
tural Worker
H-2B Temporary worker: 101(a)(15)(H)(ii)(b)
skilled and unskilled


H-3 Trainee 101(a)(15)(H)(iii)
H-4 Spouse or child of an 101(a)(15)(H)(iv)
alien classified H-1,
H-2, or H-3
I Foreign media Repre- 101(a)(15)(I)
sentatives
J-1 Exchange visitor 101(a)(15)(J)(i)
J-2 Spouse or child J-1 101(a)(15)(J)(ii)
K-1 Fiance(e) 101(a)(15)(K)
K-2 Minor child of K-1 101(a)(15)(K)
K-3 Spouse of a U.S. 101(a)(15)(K)(ii)
Citizen (LIFE Act)
K-4 Child of K-3 (LIFE 101(a)(15)(K)(iii)
Act)
L-1A Executive, manage- 101(a)(15)(L)
rial
L-1B Specialized 101(a)(15)(L)
knowledge
L-2 Spouse or child L-1 101(a)(15)(L)
M-1 Vocational student or 101(a)(15)(M)(i)
other nonacademic
student
M-2 Spouse or child of 101(a)(15)(M)(ii)
M-1
M-3 Canadian or Mexican 104(a)(15)(M)(iii)
national commuter
students –vocational/
non academic
institutions
N-8 Parent of an alien 101(a)(15)(N)(i)
classified SK-3
“Special Immigrant ”
N-9 Child of N-8 or of an 101(a)(15)(N)(ii)
SK-1, SK-2 or SK-4 through (iv)
“Special immigrant ”


NATO-1 Principal Permanent Art. 12, 5 U.S.T.
Representative of 1094, Art. 20, 5,
Member State to U.S.T. 1098
NATO and resident
members of official
staff or immediate
family
NATO-2 Other representatives Art. 13, 5 U.S.T.
of member State; De- 1094, Art. 1, 4 U.S.T.
pendents of members 1794, Art. 3, 4 U.S.T.
of a force entering in 1796
accordance with the
provisions of the
NATO Status-of-
Forces agreement;
Members of such a
Force if issued visas
NATO-3 Official clerical staff Art. 14, 5 U.S.T. 1096
accompanying a rep-
resentative of
member state NATO
NATO-4 Official of NATO other Art. 18, 5 U.S.T. 1096
than those qualified
as NATO-1 and
immediate family
NATO-5 Expert other than Art. 21, 5 U.S.T. 1100
NATO officials
qualified under
NATO-4, employed
on behalf of NATO


NATO-6 Member of a civilian Art. 1, 4 U.S.T. 1794,
component who is Art. 3, 5 U.S.T. 877
either accompanying
a Force entering in
accordance with the
provisions of the
NATO Status-of-
Forces agreement;
attached to an Allied
headquarters under
the protocol on the
Status of International
Military headquarters
set up pursuant to
the North Atlantic
Treaty; and their de-
pendents
NATO-7 Servant, or other Arts. 12-20, 5 U.S.T.
personal employee of 1094-1098
NATO-1 through
NATO-6 classes or
immediate family
O-1 Extraordinary ability 101(a)(15(O)(i)
in sciences, arts,
education, business
or athletics
O-2 Alien’s (support) ac- 101(a)(15(O)(ii)
companying O-1
O-3 Spouse/child of O-1 101(a)(15(O)(iii)
or O-2
P-1 Entertainment groups 101(a)(15)(P)(i)
P-2 Artist and entertain- 101(a)(15(P)(ii)
ers in reciprocal
Exchange programs
P-3 Artists and entertain- 101(a)(15(P)(iii)
ers in culturally
unique programs
P-4 Spouse or child of 101(a)(15(P)(iv)
P-1, 2, or 3
Q-1 International cultural 101(a)(15(Q)(i)
exchange visitors


Q-2 Irish Peace Process 101(a)(15(Q)(ii)(I)
Cultural and Training
Program (Walsh
Visas)
Q-3 Spouse or child Q-2 101(a)(15(Q)(ii)(II)
R-1 Religious workers 101(a)(15)(R)
R-2 Spouse/child of R-1 101(a)(15)(R)
S-5 Informant of criminal 101(a)(15)(S)(i)
organization informa-
tion
S-6 Informant of terrorism 101(a)(15)(S)(ii)
information
T-1 Victim of a severe 101(a)(15)(T)(i)
form of trafficking in
persons
T-2 Spouse of a victim of 101(a)(15)(T)(ii)
severe form of traf-
ficking in persons
T-3 Child of victim of a 101(a)(15)(T)(ii)
ficking in persons
T-4 Parent of a victim of 101(a)(15)(T)(ii)
ficking in persons (If
victim is under 21
years of age)
TN Trade visas for 214(e)(2)
Canadians and
Mexicans
TD Spouse or child ac- 214(e)(2)
companying TN
TWOV Passenger 212(d)(3)&(5)
TWOV Crew 212(d)(3)&(5)
U-1 Victim of Certain 101(a)(15)(U)
Criminal Activity
U-2 Spouse of U-1 101(a)(15)(U)
U-3 Child of U-1 101(a)(15)(U)
U-4 Parent of U-1, if U-1 101(a)(15)(U)
is under the age of
21


V-1 Spouse of an LPR 101(a)(15)(V)
who is the principal
beneficiary of a
family-based petition
(Form I-130) which
was filed prior to
December 21, 2000,
and has been
pending for at least
three years
V-2 Child of an LPR who 101(a)(15)(V)
is the principal ben-
eficiary of a family-
based visa petition
(Form I-130) that was
filed prior to
December 21, 2000,
and has been
pending for at least
three years
V-3 The derivative child 101(a)(15)(V)
of a V-1 or V-2
TPS Temporary Protected INA Section 244
Status
21.8.2.7.1 (1) Per IRC § 3121(b)(19), certain nonresident alien individuals temporarily
(01-06-2009) present in the United States are exempt from FICA tax for services performed
Foreign as specified in § 101(a)(15)(F), (J), (M), and (Q) of the Immigration and Nation-
Student/Nonresident ality Act.
Visitors - Exemption
from FICA Tax (2) The following documentation substantiates the exemption from FICA tax for the
individual holding an F, J, M or Q visa:
• A copy of the Visa

• Immigration and Naturalization Form I-94 (Arrival - Departure Record), or
other documentation showing the dates of arrival and departure.
Note: Overseas filers will no longer have the Form I-94 since the USCIS keeps
this document when the student/visitor leaves the United States.
(3) In addition to (2) above:
• F-1 students need Form I-20 (Certificate of Eligibility for Non-Immigrant

(F-1) Students Status), or
• J-1 visa holders need Form IAP-66/DS-2019 (Certificate of Eligibility for
Exchange Visitor (J-1) Status). Form DS-2019 replaced IAP-66 as of
August 31, 2002.

Note: Form I-766 or I-688B (Employment Authorization Document) is needed only
if the student is engaged in optional practical training (OPT) which is part of
a curriculum such as work study or an internship. Copies of pay statements
showing the amount of FICA tax erroneously withheld are also needed to
verify claims involving students employed in OPT and those in M-1 status
who have completed a course of study and are employed for practical
training for up to 6 months.
• Copies of pay statements in cases involving visa status changes from

exempt type to substantiate the amount of FICA withheld prior to the
change in visa status.
(4) Regulations interpreting the elements of the student FICA exception became
effective on April 1, 2005. Under the new regulations, the employer qualifies as
a “school, college or university” if:
• Its “primary function” is the presentation of formal education

• It maintains a regular faculty and curriculum, and
• It has a regularly enrolled student body attending classes where the entity
regularly conducts educational activities.
Note: This “primary function test” was added to prevent hospitals, museums, and
other non-school entities from benefiting from the Student FICA Exception.
(5) Under the regulations, to be considered a “student,” an employee must be:
• Enrolled in credit courses leading to an education credential and regularly

attending classes at the employing school, college or university or affiliated
organization, and
• Pursuing a course of study required for an educational credential or
necessary for an examination or certification required in the field of study.
Note: Refer to Rev. Proc. 2005-11 for rules regarding the safe harbor for students
carrying a half-time workload.
(6) Foreign agricultural workers temporarily admitted to the United States on H-2A
visas are always exempt from U.S. social security and Medicare taxes,
whether they are resident aliens or nonresident aliens. Allow claims from H-2A
visa holders requesting refunds of erroneously withheld FICA tax provided they
submit the information listed below. Process claim using procedures in Pro-
cessing Employee Claims. See IRM 21.8.2.7.3.
• W-2(s) showing the tax withheld

• A copy of the visa showing the immigration status H-2A.
Note: Correspond with taxpayer for missing information using normal case
suspense procedures.
21.8.2.7.1.1 (1) Optional Practical Training (OPT) and Curricular Practical Training (CPT) are
(10-01-2007) two different types of work permits that are available to students in F-1 or M-1
Optional Practical status.
Training
(2) Optional Practical Training (OPT) is only available by application to USCIS and
it is shown only on the student’s F-1/ M-1 Employment Authorization Card (I-
766/I-688B). The Employment Authorization card specifically states on the front

that it is for “Student: Optional Practical Training ”. The permit allows employ-
ment either on or off the campus of the university that issued the student’s
Form I-20.
a. F-1 or M-1 students often transfer to H-1 status before their OPT authori-
zation ends. It is possible for someone who is currently in H-1 status to be
eligible for a FICA refund provided the FICA was withheld from wages he
or she earned while the OPT was in effect. He or she must meet the re-
strictions of IRC § 3121(b)(19).
Note: Form I-797 is an approval notice used by USCIS to notify an applicant of the
approval of any change in status. It is also used as a receipt notice when an
application is received and is pending at USCIS.
b. Students with H-1 status, who previously had been F-1, Q or M-1 visa
holders, can obtain a refund of FICA withheld up to the date their status
was changed to H-1, if their Employment Authorization Card (EAD) dates
are current.
(3) Curricular Practical Training (CPT) is available to the F-1/ M-1 students only
from the academic institution’s Designated School Official (DSO).
a. The work permit is reflected only on the back of the student’s Form I-20
and is employer-specific.
b. The student will not have an EAD for this kind of work authorization.
Note: J-1 students are not required to apply to USCIS for an Employment Authori-
zation Card (I-766/ I-688B). The work permit is issued by the Responsible
Officer of the Exchange Visitor Program and it should be reflected on the
student’s Form IAP-66/ DS-2019.
21.8.2.7.2 (1) When an inquiry is received regarding a refund of erroneously withheld FICA
(10-02-2008) tax, verify that the claim is valid, i.e.:
Validating
Exemption/Qualification • Form 1040NR filed within the statutory period
• Visa is exempt from FICA tax
• Employee has provided a statement from the employer indicating the
amount of the reimbursement the employer provided (if any) and the
amount of the credit or refund the employer claimed, or was authorized by
the employee to claim
(2) When a claim is filed, but research shows that there is no account on record
and that no tax return was filed, do not process the claim. Correspond using
Letter 916C, or Letter 513C to request the filing of Form 1040NR/NR-EZ. One
of the following statements can be used:

Use the statement that is applicable

Because our records do not indicate a Form 1040NR being filed on
your behalf, we are unable to process your claim. The Form 1040NR
is an essential part of the erroneous withheld FICA process and
therefore necessary to process your claim. If your Form 1040NR has
been filed since submitting this claim, please resubmit this claim with
the indication “1040NR ”. If you have not filed, complete and submit a
Form 1040NR with a copy of this claim we are returning to you, and
this letter. Please indicate “1040NR filed” on your 843 claim.
or
Because we do not have a record of receiving an income tax return
for this tax period, we are unable to process your claim at this time.
Please resubmit your claim six weeks after the return is filed.
(3) When the employee filed a tax form other than the Form 1040NR, reject the
claim as follows:
1. Input TC 290 .00 with Blocking Series 18.

2. Issue Letter 916C with the following statement:
Because our records indicate that you filed a Form 1040, U.S.
Individual Income Tax return, we are unable to process your
claim. The filing of the Form 1040 indicates that you are a
resident of the United States for tax purposes. As a resident of
the United States, you are not exempt from FICA Tax.
or
Because our records indicate that you filed a tax form other than the
Form 1040NR, we are unable to process your claim. The Form
1040NR is an essential part of the erroneously withheld FICA tax
process because it identifies you as a Nonresident Alien. Because
you did not file the Form 1040NR declaring your Nonresident Alien
status, you are not exempt from FICA Tax.
Exception: Do not disallow claims from F-1 or J-1 Visa holders who elect under
IRC § 6013(g) or IRC § 6013(h) to file a joint return with their spouse
as a resident alien. These claimants continue to be exempt from FICA
under IRC § 3121(b)(19) or IRC § 3121(b)(10).
(4) A teacher, researcher or trainee in the United States with a J or Q visa is not
automatically exempt from FICA tax:
a. If the teacher, researcher or trainee has visited the U.S. during any two of
the six preceding calendar years as either a student, teacher, researcher
or trainee, then he/she is no longer an “exempt individual” for the current
year for purposes of the substantial presence test. Therefore, he or she
must begin counting days from his/her very first day of arrival in the United
States.
b. After 2 years, a nonstudent under a J-1 visa status who was exempt from
social security and Medicare taxes during his first two calendar years in
the United States is considered a U.S. resident for tax purposes, and
therefore is liable for FICA tax. The claim is not valid and must be disal-
lowed.
Note: Document I-94, Arrival/Departure Record, contains the entry and departure
dates to determine if they have exceeded the qualification period.
c. If it is determined that the claim is not valid, input TC 290 .00 with
Blocking Series 98 or 99 to disallow the claim and issue Letter 105C with
the following fill-in:
We have disallowed your claim because in accordance with Internal

Revenue Code §7701(b) you meet the substantial presence test and
are considered a resident alien. Therefore, you do not qualify for
exemption from FICA tax on wages.
d. If the VISA status changes from an exempt F-1, J-1, M-1, or Q Visa type,
the holder is then liable for social security and Medicare taxes (in accor-
dance with IRC § 7701(b)) from the day the status is changed. For
example, a change to H1 visa type.
Note: T/P must provide documentation of exempt earnings up to the date the visa
status changed. A copy of a pay statement with cumulative tax information is
sufficient to support the claim for the exempt portion of the earnings.
e. Dual Status filings may occur when residency status changes. Use care to
properly adjust accounts when both a Form 1040 and a Form 1040NR are
filed.
(5) A student in the United States with an F or M visa is not automatically exempt
from FICA tax.
a. Generally, a student is not exempt from FICA if he or she was exempt as

a student, teacher, researcher or trainee for more than any part of five
calendar years.
Note: Check for Form 1040NR filing. Disallow if Form 1040NR was filed for more
than 5 consecutive years.
b. A student who has been exempt more than five years must be subject to
the substantial presence test.
c. If this individual meets the substantial presence test for the calendar year,
he/she is considered a U.S. resident for tax purposes and therefore liable
for FICA tax. The claim is not valid and must be disallowed. Input TC 290
.00 with Blocking Series 98 or 99 to disallow the claim and issue Letter
105C with the following fill-in:
We have disallowed your claim because in accordance with Internal

Revenue Code §7701(b) you meet the substantial presence test and
are considered a resident alien. Therefore you do not qualify for
exemption from FICA tax on wages.

(6) A student qualifies for exemption from FICA tax provided he or she can show
evidence that he or she does not intend to reside permanently in the United
States. Evidence may consist of, but is not limited to:
a. Maintaining a tax home in a foreign country during the year

b. Maintaining more significant contact (closer connection) with the foreign
country, where the student has a tax home, than with the U.S.
c. Being present in the U.S. for less than 183 days during the year (usually
occurs in the final year of education or training)
Note: These requirements are further explained in Publication 519.
(7) A claim received after the statute for refund has expired (i.e. a claim that was
not timely filed) is not valid and must be disallowed. Check postmark date to
determine timeliness. See IRM 21.8.2.1.5
a. Send a 105C letter and state that the claim was not timely filed (include
appeal rights).
b. Input a TC 290 .00 with Blocking Series 98/99 on the requester’s tax
account to file the claim.
(8) A claim received with a J-2, F-2, H-1, or TN visa is not a valid claim and must
be disallowed.
a. Input a TC 290 .00 with Blocking Series 98/99 on the requester’s tax
account.
b. Send 105C letter with the following fill-in:
“We have disallowed your claim because, in accordance with Title 26,
§3121(b), your entry visa does not qualify you for exemption from FICA
tax on wages. ”
(9) A teacher, researcher, or trainee may qualify for exemption from FICA tax
provided he or she is a resident of a country with which we have a Totalization
Agreement - Bilateral Social Security Agreement, and provides a copy of the
statement from the foreign country or the U.S. Social Security Administration
exempting the individual’s pay from U.S. social security tax but not foreign
social security tax. See IRM 21.8.2.8, Totalization Agreement - Bilateral Social
Security Agreements, for additional information.
21.8.2.7.3 (1) All adjustments are done on the employer’s Form 941 ( Form 943 for H-2A
(11-07-2008) claims) account and the resulting credit is transferred to the employee’s
Processing Employee account for refunding.
Claims
(2) If an incomplete claim for FICA tax is received:
a. Send Letter 513C to the claimant requesting that the employee seek reim-
bursement from the employer. Return the Form 843 claim to the requester.
“X” out the IRS received date on the Form 843 prior to mailing.
b. When sending a 513C to the employee, also send a Letter 512C to the
employer advising the employer to reimburse the employee for any erro-
neously withheld FICA taxes and to take an adjustment to the currently
filed Form 941/943 (or file Form941-x). Beginning January 2009, the
employer must file a Form941-x/943-x to correct the errors since the Form
941c is obsolete (except for 200812 tax periods). Employers will no longer
file Form 941c for corrections to employment issues.

Note: These two letters are issued at the same time and reference each other in
their content.
(3) Refer to IRM 21.5.3, General Claims Procedures, for information on claim pro-
cessing.
(4) A complete claim contains the following substantiation:
• Completed and signed Form 843 claim for each employer. If the claim is for
more than one employer, but otherwise complete with all required docu-
mentation, process the claim.
• Form W-2 (If not provided, attempt to verify the withholding amount using
command code IRPTR, attach a print and accept). If the visa status
changed, a copy of the pay stub is needed to verify the FICA amount
claimed.
• A copy of the entry and current visa.
• Form I-94, Arrival/Departure Record, or other documentation showing the
dates of arrival and departure.
Note: Overseas filers no longer have the Form I-94 since the USCIS keeps this
document when the student/visitor leaves the United States.
• Form I-20 (for F-1/M-1 visa(s) only) or IAP-66/DS-2019 (for J-1 visa only)
• Form 8316 or signed claim/statement verifying that unsuccessful attempts
have been made to obtain a refund from the employer. Statements in lieu
of the Form 8316 must include all the information requested on the Form
8316.
Note: Form I-766 or I-688B (Employment Authorization Document) is issued by

USCIS and is needed only if the student is engaged in optional practical
training. See IRM 21.8.2.7.1.1.
(5) If the employee has filed the appropriate tax return (Form 1040NR) and
submitted the proper documentation, do the following:
a. Verify the employer has filed the final quarter Form 941 for the tax year
corresponding to the claim.
b. If the employer’s return for the final quarter is not located or the account is
in balance due status, adjust the preceding quarter, which must be within
the same tax year;
Example: If the final quarter for the tax year ending 200812 is not located, adjust
200809, then 200806 or 200803 in that order.
c. If the employer’s full paid Form 941 account can’t be located, research
ENMOD and/or Corporate Files on Line (CFOL) to check for the possible
usage of another EIN due to a takeover, merger, etc.
d. If, after all available research has been exhausted, you are still unable to
determine the filing of a return, or a full paid module, or the employer is in
a balance due status for all quarters of the tax year in which the claim was
filed, reject the claim and include the following statement:

Because our records do not indicate any payments being remitted to

the Internal Revenue Service on your behalf for the particular tax
period in question, we cannot allow the refund. You should contact
your employer either for the refund or to have him supply us with in-
formation substantiating that the payments corresponding to the taxes
in question were paid.
Note: If the balance due on the employee’s account (Form 941) is because of a
penalty, the FICA claim may still be processed. (Take steps to avoid
creating an unpostable.)
21.8.2.7.3.1 (1) When the employee has filed the appropriate tax return (Form 1040NR) and
(11-07-2008) submitted the proper documentation, and you have located the employer’s
Adjusting Employee Form 941/943:
Visa Claims (Employer’s
Account - BMF) • Input a TC 291 with appropriate Item Adjustment Codes to abate the
student’s portion of the FICA/Medicare wages and tax on the employer’s
account.
Caution: Pay special attention if a TC 606 is present in the employer’s account.

This transaction reverses when the TC 291 posts. This will cause the
credit transfer part of the process to unpost if TC 606 is not addressed.
See IRM 21.5.8.4.1, IDRS Guidelines for Credit Transfers, for additional
information.
• Use Hold Code 4 and Blocking Series 15.

• Use Priority Code 8, if applicable, to avoid Unpostable Code (UPC) 328 RC
2.
• FLC 98
• Category “IETP”
• Source Document (SD) employee portion of FICA (Attach Form 843 to the
adjustment).
• Acknowledge all transactions that may be restricting the account. Do not
overlay the CORR DATE field.
• Transfer credit from the employer’s account to the employee’s account. See
(2) below.
• Inform the employer of the adjustment action using Letter 288C.
• It is imperative to send the employer a 288C letter. Combined Annual
Wage Reporting (CAWR) will assess additional tax on the employer’s
account if the employer does not file an amended Form 941, (Form
941-X beginning in 2009), W-2, and W-3 to correct the wages.
Note: The Letter 288C open paragraph fill-in must contain the following statement:
Because, when we sent you a 512C letter, you did not reimburse the
social security tax withheld from your foreign employee:
(name, SSN of employee) , we have
refunded the amount of $x,xxx.xx to this employee. Please adjust
your account accordingly on the attached941-x/943-x for your portion
of the tax. A W-2C also needs to be filed.

• If the employer was not sent the 512C letter, use it in lieu of the 288C. See
IRM 21.8.2.7.3 (2).
• The letter 512C open paragraph fill-in must contain the following statement:
Because you did not reimburse the social security tax withheld from
your foreign employee (name and SSN of employee), we have
refunded the amount of $x,xxx.xx to this employee. Please adjust
your account accordingly on the attached941-x/943-x. A W-2C also
needs to be filed.
(2) When transferring the erroneously withheld FICA credit from the employer’s
account to the employee’s account, input the following on IDRS using CC
ADD24:
• Input TC 820 (for the amount of the TC 291) to the employer’s account
(Form 941). Use the due date of the Form 941/943, the delinquent received
date of the Form 941 / Form 943, or the payment date (whichever is later)
as the transaction date, and enter a two cycle Posting Delay Code. If there
will be credit remaining on the account after the credit transfer posts, input
TC 570 on this transfer and a TC 571 with a Posting Delay Code 4. If the
employer account has a balance due in the account being adjusted, do not
use a TC 820. Instead, input a TC 652/672 to avoid an unpostable
situation. Apply 650/670 credits beginning with most current paid date.
Caution: When the module balance is less than the erroneously withheld FICA
credit, follow standard adjustment procedures, which may require
adjusting or moving a credit from a prior quarter.
• Input TC 700 to the employee’s account with a secondary TC 570 if a

manual refund is being issued (when withholding is required on the
interest). Use the due date or the delinquent received date (whichever is
later) of the Form 1040NR as the transaction date.
Note: When changing a credit date, an override code “2” is needed on both the
debit and credit parts of the transfer to bypass the debit/credit date consis-
tency check.
21.8.2.7.3.2 (1) Determine if the employee is entitled to interest using either his or her return
(10-01-2010) due date or any other applicable date. Interest is allowed on:
Adjusting Employee
Visa Claims (Employee’s • Prior and current year returns/claims worked after the 45-day interest free
Account - IMF) period.
Note: To determine interest “to” and “from” calculation dates, refer to IRM 20.2.4,
Overpayment Interest.
a. If entitled, the interest must be manually computed using Command Code

COMPA or ACT/DMI InterestNet (Decision Modeling Inc.). See IRM
20.2.6.4, Interest Computation Tools.
b. If the employee is not entitled to interest, skip the interest withholding pro-
cedures. Follow local procedures to allow computer generated refund.
(2) When the employee is entitled to interest, determine the correct tax rate and
amount of tax to be withheld from interest, if applicable, per IRC § 1441. A
manual refund must be prepared if withholding tax from interest. Refer to
related tax treaty amounts in Publication 901 and Publication 515.
#
#
(3) Procedures for tax withheld from refund interest on the employee account
(IMF):
a. Prepare four-part Form 5205.

b. Prepare five-part Form 1042-S, Foreign Person’s U.S. Source Income
Subject to Withholding.
c. Input a TC 290 .00 with a TC 770 for the amount of tax withheld from
refund interest using Blocking Series 18, Source Code 1, Reason Code
099, file location code 98, Hold Code 4 and a 2 cycle posting delay (use 6
cycle posting delay if Form 1040NR was sent to be processed), SD
(attach a copy of the Form 843 claim), part 4 of Form 5205, and Copy E
of Form 1042-S.
d. Prepare Form 3809 with a TC 820 to debit the employee’s account and a
TC 700 to credit the 4610 Account (NMF) for the amount of tax being
withheld from refund interest. Use the current received date on the TC 700
transaction.
(4) Prepare the manual refund, Form 5792, for processing to the employee’s
account. Prior to preparation of the manual refund, check for any outstanding
balances due under the employee’s TIN or Individual Taxpayer Identification
Number (ITIN). Offset to pay open balances prior to determining the overpaid
amount.
• The overpayment amount is the amount of the employer’s tax decrease

(transferred to employee’s account as a TC 700).
• The TC 770 amount, when applicable, is the net interest amount (result
after the withholding is deducted).
• The TC 840 is the total of these two amounts.
(5) Submit the manual refund document (with the interest calculations), and all
other forms and research along with the claim, to the manager for review.
(6) Once the manager has given approval, forward Form 5205, Form 843 Claim,
Form 1042-S (copies A thru D), Form 5792 (manual refund document), entire
Form 3809, and the interest computation sheet to Accounting.
(7) Examples of these completed forms can be found in related training materials.
21.8.2.7.4 (1) When the employer files a Form 941 or a Form 843 claim with a Form 941-x,
(10-01-2008) requesting a refund for the entire (employee and employer) amount of errone-
Claims from the ously withheld FICA, the employer must provide all the required substantiation
Employer documentation. See IRM 21.8.2.7.1, Validating Exemption/Qualification.
(2) When requesting receipt of the employee’s portion of erroneously withheld

FICA, the employer must provide a signed statement from the employee au-
thorizing the employer to receive his/her portion, or Form 941-x with the
appropriate Part II certification box checked and signed.

(3) When the required documentation is not attached or when the employee has
not been reimbursed, and there is no indication that the employee intends for
the employer to receive his/her portion of the erroneously withheld FICA tax:
• Input TC 291 for employer’s portion ONLY with appropriate Item Adjustment
Codes and Blocking Series 18.
• If the module has previously been adjusted for the student’s portion of the
social security/Medicare, use Priority Code 8 (to prevent unpostable: UPC
328 RC 2).
• Issue a Letter 106C, partial disallowance letter.
(4) When there is a signed statement from the employee that the employer has
given reimbursement, input the following:
• Input TC 291 with item reference 004, 007, and 073 for returns processed
before 12/31/04. Use item reference 112, 004 and 073 for returns
processed after 1/1/2005.
• Use Blocking Series 15.
• Input TC 291 for the full amount (employer and employee portion) of erro-
neously withheld FICA taxes.
• Notate the employee’s TIN and return DLN on all of the documents.
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21.8.2.8 (1) The United States has entered into Bilateral Social Security Agreements with
(10-01-2007) several foreign countries in order to eliminate dual coverage and dual contribu-
Totalization Agreements- tions to the social security system for the same work.
Bilateral Social Security
Agreements (2) The Bilateral Social Security Agreement generally ensures that social security
taxes (including Self Employment (SE) tax) are paid to only one country. See
IRM 21.8.2.8.3, Claims of Exemption from FICA Tax by Reason of Bilateral
Social Security Agreement , for a list of countries.

21.8.2.8.1 (1) In order for an individual or for the individual’s employer to substantiate the
(10-01-2010) individual’s exemption from FICA under the terms of a Bilateral Social Security
Substantiation of Agreement, the individual or his or her employer must secure an Exemption
Exempt Status Statement (a certificate of coverage) from either the country in which the indi-
vidual is employed or the individual’s country of residence.
(2) Some of the countries with which the U.S. has agreements do not issue certifi-
cates of coverage. In those cases, the employee or the employer must request
a statement from the following address:
Social Security Administration
Office of International Operations
P.O. Box 17741
Baltimore, MD 21235-7742
(3) For the employee or the employer to establish that the employee’s income is
subject to only U.S. social security tax, the U.S. employer can obtain more
information or get a determination by:
• Writing to the address in paragraph (2) above

• Calling 1-800-772-1213, 410-965-0144 or 410-965-3549
• Faxing to 410-966-6029, or
• Accessing the SSA Web site at http://www.ssa.gov/international
(4) Correspondence for exemption statements must include:
• The employee’s name

• The employee’s U.S. and foreign social security numbers
• The employee’s date and place of birth
• The employee’s citizenship
• The employee’s place and date of hiring
• The employer’s name and address in the United States and in the foreign
country
• The beginning date and the expected ending date of the employee’s em-
ployment in the foreign country
(5) The Exemption Statement must be maintained by the employer as it estab-

lishes that the employee’s pay is exempt from taxation in the foreign country.
21.8.2.8.2 (1) Use the following charts to determine the taxpayer’s (U.S. citizen or resident
(10-01-2007) alien) social security tax obligation when working in a foreign country:
Social Security Tax
Obligation
Social Security Tax Obligation Chart
If ... Then ...
Sent abroad by a U.S. employer The taxpayer pays U.S. social
for less than 5 years security tax only.
Sent abroad by a U.S. employer The taxpayer pays foreign social
for more than 5 years security tax.

Social Security Tax Obligation Chart

If ... Then ...
Working for a foreign employer The taxpayer pays the foreign
social security tax only, unless
the foreign employer is an affiliate
of a U.S. employer that has
entered into the contract
coverage under Title II of the
Social Security Act with the U.S.
Treasury Department.
Working for the U.S. government Taxpayer pays U.S. social
security tax only.
Self-employed Taxpayer pays based on
residency.
Note: IRC § 3121(l) addresses foreign employers affiliated with U.S. companies, in
which case the employee pays only U.S. social security tax for 5 years.
(2) Use the following charts to determine the taxpayer’s (foreign persons, including
resident aliens for income tax purposes) social security tax obligation when
working in the United States:
Foreign Person Social Security Tax Obligation Chart

If ... Then ...
Sent by a foreign employer for Taxpayer pays foreign social
less than 5 years in the United security tax only.
States
Sent by a foreign employer for Taxpayer pays U.S. social
more than 5 years in the United security tax only.
States
21.8.2.8.3 (1) Claims of erroneously withheld FICA tax must include:

(10-01-2009)
Claims of Exemption • Form 843, Claim for Refund and Request for Abatement
from FICA Tax by • Copy of Form W-2 (to prove the amount of social security and Medicare
Reason of Bilateral taxes withheld)
Social Security • Social Security Tax Exemption Statement
Agreement • A signed statement from the employee, or from the employer, or Form
8316, Information Regarding Request for Refund of Social Security Tax Er-
roneously Withheld on Wages Received by a Nonresident Alien on an F, J,
or M Type, whichever is applicable
• A copy of Form I-94 (or other documentation showing the dates of arrival
and departure)
Note: Copy of Visa or Form I-94 is needed only if not a U.S. citizen.

(2) The signed statement included in the claim must state that unsuccessful
attempts have been made to secure refund of the erroneously withheld FICA
tax from the employer. A Form 8316 may be used for this purpose.
(3) The claim is only valid when it involves one of the countries with which the
U.S. has a Bilateral Social Security (Totalization) Agreement. The following is a
list of those countries:
• Australia
• Austria
• Belgium
• Canada
• Chile
• Czech Republic
• Denmark
• Finland
• France
• Germany
• Greece
• Ireland
• Italy
• Japan
• Luxembourg
• Netherlands
• Norway
• Poland
• Portugal
• South Korea
• Spain
• Sweden
• Switzerland
• The United Kingdom
21.8.2.8.4 (1) All bilateral agreement claim adjustments are input on the employer’s Form
(10-01-2007) 941 and the resulting credit is transferred to the employee’s account for
Processing Bilateral refunding. See IRM 21.5.3, General Claims Procedures.
Agreement Claims
(2) If the employee has filed the appropriate tax return and submitted the proper
documentation, process as follows:
a. Verify that the employer has filed the final quarter Form 941 for the tax
year corresponding to the claim.
b. If the employer’s return for the final quarter is not located, or the account
is in balance due status, adjust the preceding quarter, which must be
within the same tax year.
Example: If the final quarter for the tax year ending 200912 is not located, adjust
200909, then 200906, then 200903 in that order.
c. If the employer’s full paid Form 941 account cannot be located, research
CC ENMOD and/or CFOL to check for the possible usage of another EIN
due to a takeover, merger, etc.

d. If, after all research available has been exhausted, and it cannot be deter-
mined that a return has been filed, that a full paid module exists, or the
employer is in balance due status for all quarters of the tax year in which
the claim was filed, reject the claim and include the following statement:
Because our records do not indicate any payments being submitted

to the Internal Revenue Service on your behalf for the tax period in
question, we cannot allow the refund. You should contact your
employer either for the refund, or to have him/her supply us with in-
formation substantiating that the payments corresponding to the taxes
in question were paid.
Exception: If the balance due on the employer’s account (Form 941) is because of
a penalty, the claim may still be processed. Take steps to avoid
creating unpostable transactions.
21.8.2.9 (1) Every foreign corporation must file a Form 1120-F , U.S. Income Tax Return of
(10-01-2007) a Foreign Corporation, or Form 1120-FSC, U.S. Income Tax Return of a
Foreign 1120 Series Foreign Sales Corporation, if the corporation:
Returns
• Is engaged in a trade or business in the United States any time during the
taxable year
• Has income from United States sources that is not effectively connected
with the conduct of a trade or business within the United States if tax
liability is not fully satisfied by withholding of tax at source (See IRM
21.8.1.11.12.)
• Has income that is, or is treated as if, effectively connected with the
conduct of a trade or business within the U.S. (See IRM 21.8.1.11.11.)
• Has overpaid U.S. income tax and is requesting a refund
(2) Refer to Form 1120-F instructions for others who must file.
(3) Refer to IRM 21.7.4, Income Taxes/Information Returns, for general adjustment
procedures.
21.8.2.9.1 (1) Form 1120-F is used to report a foreign corporation’s U.S. income, gains,
(10-01-2007) losses, deductions, and credits, to figure its income tax liability, and to claim
Form 1120-F, Income Tax any refunds due.
Return of a Foreign
Corporation (2) A foreign corporation can be engaged in a trade or business in the United
States, with or without having an office or other fixed place of business in the
United States.
a. If the foreign corporation does not have a U.S. office or other fixed place
of business, then it is only taxed on its effectively connected income from
U.S. sources.
b. If it has an office or other fixed place of business in the United States,
then it is taxed on effectively connected U.S. and foreign source income.
21.8.2.9.2 (1) A foreign corporation’s filing requirements depend on whether it has an office
(11-19-2009) or place of business in the United States.
Form 1120-F Filing
Requirements
(2) For a foreign corporation that does not maintain an office or place of business
in the United States, the Form 1120-F return is due the 15th day of the 6th
month after the end of its tax year, unless an extension is filed. See IRM
21.8.2.1.5, Timeliness Determinations.
a. To request an extension of time to file, a foreign corporation files Form

7004, Application for Automatic Extension of Time to File Certain Business
Income Tax, Information, and Other Returns, on or before the return due
date.
b. A foreign corporation is considered a taxpayer abroad within the meaning
of IRC § 6081(a) and therefore may request an extension beyond six
months. (See IRM 3.11.16, Corporate Income Tax Returns, for guidance.)
(3) A foreign corporation that maintains an office or place of business in the United
States must either file Form 1120-F by the 15th day of the 3rd month after the
end of its tax year, or get an extension of time to file. To get an extension, the
corporation may either:
a. File Form 7004, Application for Automatic Extension of Time to File Certain
Business Income Tax, Information, and Other Returns, by the return due
date to request a 6-month extension.
b. Get a 3-month extension by attaching the statement described in Tres.
Reg. §1.6081-5 to Form 1120-F . If additional time is needed beyond the
3-month extension, then a Form 7004 must be filed before the end of the
3-month extension to obtain up to an additional 3 months to file.
(4) Extensions do not extend the time for payment of the tax. Tax must be paid by
the due date of the return, without extensions.
21.8.2.9.3 (1) A foreign corporation’s requirement for payment of tax depends upon whether
(10-01-2010) or not the corporation’s estimated tax is $500 dollars or more.
Payment of Tax Due -
Form 1120-F a. A foreign corporation that expects its tax liability to be $500 or more must
make estimated tax payments. The payments are due by the 15th day of
the 4th, 6th, 9th, and 12th months of the tax year.
b. A foreign corporation that expects its tax liability to be less than $500 does
not have to make estimated tax payments. The payment of tax is due at
the time the return is due.
(2) A foreign corporation’s method of paying its tax liability depends on whether or
not the corporation has an office or place of business in the United States.
a. A foreign corporation that does not maintain an office or place of

business in the United States must pay all of its United States tax liability
(including any estimated tax payments) directly to the Internal Revenue
Service. If the foreign corporation files Form 1120-F electronically it may
pay the tax by electronic funds withdrawal.
b. A foreign corporation that maintains an office or place of business in the
United States may file Form 1120-F electronically and pay the tax by elec-
tronic funds withdrawal. If the foreign corporation does not elect to do so,
or if it does not file electronically, the foreign corporation must make all of
its United States tax liability payments (including any estimated tax
payments) to a qualified depository or the Federal Reserve Bank with a
Form 8109, or use the Electronic Federal Tax Payment System (EFTPS)
to make deposits.

Note: Beginning January 1, 2011, taxpayers must use the Electronic Federal
Tax Payment System (EFTPS) to deposit taxes. Form(s) 8109 and
8109-B, Federal Tax Deposit Coupon, cannot be used after December
31, 2010.
(3) Branch profits tax assessed under IRC § 884 is not includible in total tax when
determining the required annual payment of estimated tax. If an estimated
penalty was assessed, re-compute the penalty by using the sum of Section I,
Line 11, Schedule J, line 9, to compute the required annual payment. Use the
Statutory Exception - Penalty Reason Code 044.
Exception: If the amount on line 4 of Schedule J in Section II is zero, abate the

entire penalty. For additional information, see IRM 20.1.3.3.1.1.4.
(4) All deposits posted to the Master File are used to verify the taxpayer’s Form
2220 computations. Use the TC 660 amounts and dates when verifying the
estimated tax liabilities. The taxpayer receives a notice if the amount of credits
claimed on the return is more than the credits posted to Master File.
21.8.2.9.4 (1) EFTPS is the preferred method by which Foreign corporations can make
(10-01-2010) deposits.
Deposits Made by
Foreign Corporations (2) Foreign corporations can also make deposits using Form 8109, Federal Tax
Deposit Coupon Book, but they must show the amount of deposit in U.S.
dollars made payable to the Financial Agent, and mail the Form 8109 to:
Financial Agent
P.O. Box 970030
St. Louis, MO 63197
U.S.A.
21.8.2.9.5 (1) Form 1120-F filers that have effectively connected income:
(10-01-2007)
Computing Tax on Form a. Are engaged in a trade or business in the United States and are taxed at
1120-F regular corporate rates
b. Complete Section II of the Form to compute tax
Note: 1120-F Returns with effectively connected income are processed with
Document Code 67 (60367-XXX-XXXXX-X or 78367-XXX-XXXXX-X).
(2) Form 1120-F filers that do not have effectively connected income:
a. Are not allowed deductions against this income

b. Are taxed at a flat 30%, or lower treaty rate, on this type of income
c. Complete Section I of the form to compute tax
Note: 1120-F Returns without effectively connected income are processed with
Document Code 66 (60366-XXX-XXXXX-X or 78366-XXX-XXXXX-X).
21.8.2.9.6 (1) When adjusting BMF international tax accounts using CC REQ54, or transfer-
(10-01-2007) ring credits using CC ADD24/ADD34/ADD48, input a filing location code (FLC)
Tax Adjustments - Form of 66 or 98 according to the primary location code shown on TXMOD or
1120-F and Form ENMOD. Input FLC 66 for primary location code 78 and FLC 98 for primary
1120-FSC location code 60.

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1120-FSC must be sent to Examination for classification.
(3) Refundable credits are not automatically audit criteria.
(4) Refer to IRM 21.7.4, Income Taxes/Information Returns, for general proce-
dures for processing.
21.8.2.9.6.1 (1) Refundable credits are claimed on Form 1120-F, lines 5a through 5i. The
(10-01-2008) following types of credits are claimed on line 5i:
Refundable Credits -
Form 1120-F & 1120-FSC • Foreign Investment in Real Property Tax Act (FIRPTA) credit on Form
8288-A
• Partnership credits on Form 8805
• Withholding at source on Form 1042-S
• U.S. income tax withheld
(2) To claim line 5i credits, the withholding statement must be attached (Form
8288-A, Form 8805, and/or Form 1042-S, or a statement from the withholding
agent in support of the amount actually withheld). The statement or document
from a withholding agent which is submitted in lieu of a Form 1042-S must
include:
• Name and address of the withholding agent

• The agent’s U.S. TIN
• Name in which the tax withheld was reported
• Country code and income code tax rate
• Gross income and tax withheld
(3) Before allowing the credit, verify the following:
• Form 8288-A for all dollar amounts (must be on the Form 13698, Interna-
tional Credit Verification Slip)
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further research. The taxpayer must submit the Form 8805 to receive the
credit.
• Form 1042-S for all dollar amounts
• Form 1042-S, research EIN of withholding agent to ensure Form 1042 has
been filed to report at least the amount of the credit claimed
• Form 1099, verify amount shown in withholding box
Note: These refundable credits can be allowed without prior Examination Classifi-
cation.
(4) Refundable Credits are claimed on Form 1120-FSC lines 2a through 2g. The
types of credits claimed on line 2g are:
• Withholding at source on Form 1042-S

• U.S. income tax paid

(5) To claim line 2g credits, the withholding statement must be attached. Before
allowing the credit, verify the following:
• Form 1042-S: Research EIN of withholding agent to ensure Form 1042 has
been filed to report at least the amount of the credit claimed
• Form 1099: Verify amount shown in the withholding box
Note: These refundable credits can be allowed without prior Examination Classifi-
cation.
21.8.2.9.7 (1) Penalties and interest are often assessed because a foreign corporation with
(10-01-2007) no U.S. office filed timely, i.e., June 15th if a calendar year taxpayer, and was
Adjusting Penalty and erroneously classified as a foreign corporation with a U.S. office with a due
Interest date of the 15th day of the 3rd month after its year end, i.e., March 15th if a
calendar year taxpayer. Verify whether the foreign corporation has a U.S. office
by its answer to question D(3) on Form 1120-F.
(2) Follow normal procedures to adjust penalties and interest (see IRM 20.1,
PENALTY HANDBOOK).
(3) If failure to pay and failure to file penalties were assessed on overseas
taxpayers, See IRM 21.8.2.1.5, Timeliness Determinations.
21.8.2.9.8 (1) A corporation must have elected to be treated as a Foreign Sales Corporation
(10-01-2007) (FSC), or small FSC, by filing Form 8279 prior to October 1, 2000, and the
Form 1120-FSC, U.S. election must still be in effect.
Income Tax Return of a
Foreign Sales (2) Form 1120-FSC is used to report income, gains, losses, deductions, and
Corporation credits of an FSC. It is also used to figure the FSC’s income tax liability.
(3) The FSC may be organized under the laws of certain qualifying foreign
countries or possessions of the United States, excluding Puerto Rico.
(4) Foreign corporations that elected FSC status may not claim the benefits of any
U.S. tax treaty.
(5) An FSC that is a member of a controlled group must check the box on line 1
of Schedule J of the 1120-FSC and attach Schedule O of Form 1120. If
Schedule J is not complete, or if the controlled group box is not checked, a
math error results and the tax is increased to the 35% tax rate. The taxpayer
must provide a corrected apportionment plan in order to allow the reduced tax
rate.
21.8.2.9.9 (1) The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 effected the
(10-01-2009) following changes:
FSC Repeal and
Extraterritorial Income • Generally repealed the FSC rules
Exclusion • Provided taxpayers with an exclusion, which is figured on Form 8873, Ex-
traterritorial Income Exclusion
• Provided transition rules for existing FSC’s
(2) In general, the extraterritorial income exclusion applies to taxpayers with

respect to transactions entered into after September 30, 2000. However, the
exclusion does not apply, but the FSC provision does apply to any transaction
in the ordinary course of trade or business involving a FSC that occurs:

• Before January 1, 2002, or
• After December 31, 2001, pursuant to a binding contract that is in effect on
September 30, 2000 and thereafter, and is between the FSC (or a person
related to the FSC) and a person other than a related person in a taxable
year that begins before May 10, 2007
Note: More information on binding contracts is contained in the instruction booklets

for Form 1120-FSC and Form 8873.
(3) Taxpayers may elect to apply the extraterritorial income (ETI) exclusion rules
instead of the FSC rules for transactions entered into during the transition
period stated in (2) above. The election is:
• Made by checking the box on line 2 of Form 8873

• Made on a transaction by transaction basis
• Effective for the tax year for which it is made, and for all subsequent tax
years
• Not applicable for transactions entered into before October 1, 2000
• Revocable only with the consent of the IRS
Note: The American Jobs Creation Act of 2004 repealed the ETI Exclusion
Provision generally for transactions after 2004 subject to the transition rule.
(4) If an FSC has no foreign trade income for any 5 consecutive tax years
beginning after December 31, 2001, the FSC is no longer treated as an FSC
for any tax year beginning after that 5 year period.
(5) Form 1120-FSC is processed at the Ogden IRS Campus. However, a corpora-
tion that makes an election to be treated as a domestic corporation under IRC
§ 943(e)(1) must file Form 1120 or 1120-A at the campus address listed in the
Form 1120 instruction booklet under the “Where to File” section.
Note: IRC § 943(e)(1) was repealed for tax years beginning after 5/17/2006.
21.8.2.9.10 (1) An FSC must pay the tax due in full no later than the 15th day of the 3rd
(10-01-2010) month after the end of its tax year.
Payment of Tax Due -
Form 1120-FSC (2) The method for payment of the tax due depends upon whether the FSC
maintains an office or place of business in the United States.
a. FSC’s that do not maintain an office or place of business in the U.S. must
pay the tax due directly to the IRS.
b. FSC’s that maintain an office or place of business in the United States
must pay the tax due using the depository methods as explained in IRM
21.7.1.4.8, Federal Tax Deposits (FTDs).
Note: Beginning January 1, 2011, taxpayers must use the Electronic Federal Tax
Payment System (EFTPS) to deposit taxes. Form(s) 8109 and 8109-B,
Federal Tax Deposit Coupon, cannot be used after December 31, 2010.
21.8.2.9.11 (1) An FSC with a tax liability of at least $500 that fails to make estimated tax
(10-01-2007) payments when due may be subject to an underestimation penalty for the
Underpayment of period of underpayment. To avoid the estimated tax penalty, the FSC must
Estimated Tax - Form make estimated tax payments totaling the smaller of its current tax liability or
1120-FSC its prior year tax.

(2) Form 2220, Underpayment of Estimated Tax by Corporations, is used to

determine whether the FSC owes the penalty and to compute the amount of
the penalty.
(3) Generally, an FSC does not have to file the Form 2220 since the IRS can
figure the amount of any penalty and bill the FSC for it. However, the FSC
must complete and attach Form 2220 even if the FSC does not owe the
penalty, if:
a. The annualized income or adjusted seasonal installment method is used,

or
b. The FSC is a “Large Corp.” computing its first required installment based
on the prior year’s tax.
(4) When the Form 2220 is attached to the Form 1120-FSC, the taxpayer must
check the box on line 3 in the Tax and Payments section on page 1 of Form
1120-FSC and enter the amount of any penalty on that line.
21.8.2.9.12 (1) If a corporation had income tax withheld from any payments (i.e., interest,
(10-01-2007) dividends) it received because it failed to give the payer its correct EIN:
Claims for Refund of
Backup Withholding on a. The corporation may claim a credit on Form 1120-F/1120-FSC for the total
Form 1120-F or Form amount withheld.
1120-FSC b. This type of withholding is called “backup withholding.”
(2) The amount withheld is shown in the right-hand column on Form 1120-F
between lines 4 and 5i, and included in the total for line 5i, and on Form 1120-
FSC between lines 1 and 2h, and included in the total for line 2h. The amount
should be labeled “backup withholding.”
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(4) Follow the instructions for Processing Claims with Missing Schedules in IRM
21.5.3, General Claims Procedures, when the form cannot be verified
(5) When allowing a claim:
a. Input TC 290.00 with Credit Reference Number 766 and the amount of
backup withholding requested.
b. Use Credit Reference Number 767 to decrease backup withholding.
21.8.2.9.12.1 (1) The General Agreement on Tariffs and Trade (GATT), is effective on refunds
(10-01-2010) issued on or after January 1, 1995. The refunds affected by GATT are issued
General Agreement on from Form 1120 , Form(s) 990-C, and 990-T with a significant Form 990-T
Tariffs and Trade (GATT) indicator. In addition, the 941 series, 940, and 720 refunds fall under GATT
when the entity has corporate filing requirements. See IRM 20.2.4.9, Special
Credit Interest Rules for Corporations.
Note: Beginning in tax year 2006, Form 990-C was replaced with Form 1120-C.
(2) Any overpayment amount greater than $10,000 will have credit interest paid on
it at a rate lower than the normal corporate credit interest rate. (See IRM
20.2.4.9.1, GATT Credit Interest Computations on Overpayments.)

(3) If the total overpayment plus the amount currently being processed for refund
is less than or equal to the $10,000 threshold amount, process the refund
using normal corporate credit interest rates.
Note: Add all refunds (TC 84X), credit elects (TC 83X), and offsets (TC 82X)
posted on that module, excluding any interest given on prior refunds and
offsets to determine if the threshold has been met.
(4) If there is no prior overpayment, or an overpayment of less than $10,000 on

the module, use Command Code (CC) COMPAC to compute credit interest on
the amount of the overpayment up to $10,000.
Note: The amount in excess of $10,000 is subject to the lower GATT rate. Use CC
COMPAG to calculate.
(5) If the total previous overpayment on the module was over $10,000, use only
CC COMPAG when calculating interest on the additional overpayment.
(6) The “45-day interest-free period” must be considered when issuing a manual
refund. This doesn’t mean that the refund is issued without interest. If the
refund is issued within 45 days of the received date of the claim, interest is
paid from the credit availability date to the IRS received date of the claim. IRM
20.2.4.7.5, 45-day rule
Note: This differs from the “interest free” refunds generated as a result of a
carryback adjustment.
(7) If the “45-day interest-free period” has expired, the interest is computed from
the credit availability date to one day after IDRS input when using Form 5792,
Request for IDRS Generated Refund (IGR) .
Note: If using Form 3753, Manual Refund Posting Voucher, and the “45-day
interest-free” period has expired, compute interest to 3 work days from IDRS
case closure and route to Accounting. Additional information for preparing
manual refunds can be found in IRM 21.4.4.4.1, Preparation of Form 5792,
IDRS Generated Refund.
(8) If there is a “Large Corp” or “CEP” indicator on the tax module, contact the
designated large corporation unit before issuing the refund. See IRM
21.7.1.4.11.4, Campus Contacts for Large Corp Cases.
21.8.2.9.13 (1) Initiators must carefully review the account. You must ensure that there are
(10-01-2010) no prior, duplicate, manual, or generated refunds issued at any other
Refunds on Form campuses or call sites. Review the taxpayer accounts to make sure that the
1120-F/FSC That Include prepaid credits the taxpayer is claiming are available for refund and were not
Interest used as an offset against any outstanding balances before you include them
as part of the Manual Refund.
(2) When the Service issues a refund to a nonresident alien taxpayer that includes
interest, the Service is required to withhold tax on the interest with the
following exceptions:
a. The Service is not required to withhold tax on the interest if the amount of
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b. If the tax rate for that country is (“0”) per the Internal Revenue Code and
the income tax treaties. See Publication 515 for more information.

(3) When processing an adjustment that results in a refund including interest, the
interest must be manually computed. Use command code COMPAC when
computing interest with computation dates up to and including 12-31-1994. For
additional interest computation tools, see IRM 20.2.6.4, Interest Computation
Tools.
(4) Effective January 1, 1995, the General Agreement on Tariffs and Trade (GATT)
established a lower credit interest rate for large corporate overpayments (CC
COMPAG). The GATT rate is one and one half points below the normal
corporate credit interest rate for overpayments exceeding $10,000 for all
business taxpayers with a corporate filing requirement (Form 990-C; Form
990-T with a significant Form 990-T Corp. indicator; and any Form 1120
series).
(5) Interest on overpayments for non-corporate BMF taxpayers is not subject to

the GATT rate (See IRM 20.2.4.9.1, GATT Credit Interest Computations on
Overpayments ).
(6) Effective January 1, 1999, debit and credit interest rates were equalized for all
returns except for “corporations ” (Restructuring and Reform Act of 1998
(RRA ’98), Section 3302). A corporate overpayment interest rate is established
for returns deemed to be from corporations. (See IRM 20.2.4.9, Special Credit
Interest Rules for Corporations.)
(7) Determine the correct tax rate and amount of tax to be withheld from the
interest per IRC § 1441 and IRC § 1442 . If the tax treaty withholding rate is
0%, no withholding is required on interest. Treaty rates are found in Publication
515.
(8) Prepare four-part Form 5205.
(9) Prepare Form 1042-S.
(10) Prepare Form 3809 when transferring tax withheld on interest to 4610 account.
Note: Do not prepare a Form 3809 for transferring interest to the 4610 account
when withholding tax on interest is less than $1.00.
(11) Prepare the manual refund document, Form 5792 (for refunds over 10 million
dollars use Form 3753). Additional information on preparing manual refunds
can be found in IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated
Refund.
a. The overpayment amount is the amount of the tax decrease and/or the
credit available for refund.
b. The TC 770 amount is the net interest (after the withholding is computed).
Use the appropriate credit interest date on the adjustment.
c. The TC 840 is the total of the overpayment and the TC 770 amounts.
Note: Line numbers for manual refunds are listed in Exhibit 2.4.20-12, Description
of Line Item Numbers.
(12) Input the adjustment to IDRS and use CC RFUNDR to issue the manual
refund.

a. On the same ADJ54 document, input TC 29X for the amount of the tax
decrease and/or refundable credit.
b. Input TC 770 for the amount of tax withheld from the interest.
c. Use Blocking Series 18 and FLC 98.
d. Input a two cycle Posting Delay Code and a Hold Code 4.
e. Attach Part 4 of Form 5205 and Copy E of Form 1042-S with the TC 29X
adjustment.
(13) Submit the refund document and related forms, along with the case itself, to
the manager for review.
(14) Forward Form 5205, Form 1042-S, the refund document, Form 3809, and a
print of COMPAC or COMPAD (interest computation) to Accounting. Attach
screen prints of TXMODA and RFUNDR.
Note: The initiator must monitor the account until the TC 840 posts on Master File.
The managers and employees must take responsibility for erroneous refunds
when caused by the failure to monitor IDRS. More information is available in
IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated Refund.
21.8.2.10 (1) This section contains information and instructions for handling the foreign tax
(10-01-2007) credit under IRC §901, 902 & 960, and 903.
Foreign Tax Credit
(Form 1116 and Form (2) Foreign tax credit is a non-refundable credit for income, war profits, and
1118) excess profits taxes (referred to as income taxes) accrued or deemed paid, or
accrued paid, to a foreign country. The term “foreign country ”, for purposes of
claiming a foreign tax credit, includes U.S. possessions.
(3) Publication 514, Foreign Tax Credit for Individuals, as well as Form 1116,
Foreign Tax Credit (Individual, Estate, or Trust), and Form 1118, Foreign Tax
Credit - Corporations instructions contain detailed information on this credit and
may be helpful when resolving issues involving individuals, estates, trusts,
partnerships, or corporations and their shareholders.
21.8.2.10.1 (1) An individual, estate, or trust can claim the foreign tax credit by filing Form
(10-01-2007) 1116.
Who May Claim the
Foreign Tax Credit (2) A foreign corporation engaged in a U.S. trade or business during the tax year
can take a credit for foreign income taxes paid, accrued, or deemed paid to
any foreign country or U.S. possession with respect to income effectively
connected with the conduct of a trade or business in the United States.
(3) A corporation that elects the benefits of the foreign tax credit must complete
and attach Form 1118 to its income tax return. Additional information can be
found in the Form 1118 Instructions.
(4) An individual, estate, or trust that elects the benefits of the foreign tax credit
must complete and attach Form 1116 to the income tax return. Form 1116 is
not required if there is a minimal amount of foreign tax credit claimed.
Note: Form 1116 and Form 1118 have been revised for tax years 2008 and later.

21.8.2.10.2 (1) Eligible taxpayers may claim a foreign tax credit for foreign income taxes paid
(10-01-2007) or accrued (or taxes paid or accrued in lieu of those taxes) or deemed paid or
Claiming the Credit for accrued during the tax year to any:
Foreign Taxes
• Foreign country
• U.S. possession, or
• Political subdivision (e.g., city, state, or province) of the foreign country or
U.S. possession
Note: For purposes of this credit, U.S. possessions include the U.S. Virgin Islands,
Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands,
and American Samoa with respect to individuals with income from U.S. pos-
sessions. See Publication 570.
(2) Important: When foreign income tax is taken as a credit:
a. It is a nonrefundable credit, and

b. It cannot be claimed as a deduction.
(3) Taxpayers excluding income from the possessions cannot take the foreign tax
credit for taxes paid on excluded income. Credit for taxes paid to the Virgin
Islands are figured on Form 8689, not Form 1116. Corporations electing the
possession tax credit cannot claim a foreign tax credit for certain taxes paid to
Puerto Rico or the Virgin Islands. Such corporations can show the possession
gross income and definitely allocable deductions for foreign branches on Form
1118, Schedule F.
Note: See IRM 21.8.2.10.6 for additional limitations.
(4) The credit for foreign income taxes is allowed using TC 291.
21.8.2.10.3 (1) Each tax year, an election can be made on Form 1116 or Form 1118 to take
(10-01-2007) the amount of any qualified foreign income taxes paid or accrued as a foreign
Election - Foreign Tax tax credit against U.S. income tax.
Credit
(2) IRC § 901(a) allows an individual, corporation, estate, or trust to change their
election to claim a deduction or credit at any time during the period within 10
years from the due date for filing the return for the tax year for which the
change is requested. This is referenced in IRC § 6511(d)(3) or IRC § 6511(c) if
the period is extended by agreement.
21.8.2.10.4 (1) A credit may not be claimed for the following foreign taxes:
(10-01-2007)
Foreign Taxes for Which • Taxes paid to a foreign country that are not legally owed, including amounts
a Credit May Not Be eligible for refund by the foreign country
Claimed • Taxes imposed by and paid to certain foreign countries. See IRM
21.8.2.10.6, Computation - Foreign Tax Credit, for a listing of these
countries. They have repeatedly provided support for acts of international
terrorism, or are countries with which the United States does not have dip-
lomatic relations, or are countries whose governments the United States
does not recognize
• Payment of foreign tax that is returned to the taxpayer, a related person, or
a party to the transaction generating the tax, in the form of a subsidy

• Tax withheld from dividends and (after November 21, 2004) other income
from property, if certain minimum holding periods are not met, or if the
taxpayer is obligated to make related payments with respect to substantially
similar or related property
21.8.2.10.5 (1) There is a ten-year period of limitation allowed for filing a claim for refund of
(10-01-2007) U.S. tax when a taxpayer was required to pay, or had accrued, a larger foreign
Statute of Limitation - tax than originally claimed as a credit.
Foreign Tax Credit
(2) The same limitation period applies to:
• A claim for refund or credit based on the correction of math errors in

figuring qualified foreign taxes
• The discovery of qualified foreign taxes not originally reported on the return
• Any other change to the size of the credit, including one caused by a cor-
rection to the foreign tax credit limitation, or a decision by the taxpayer to
claim a credit for the taxes rather than a deduction, or a deduction rather
than a credit
(3) The 10 years are counted from the due date of the return for the year in which
the foreign taxes were paid or accrued.
Note: Do not confuse this limitation period for claiming a refund with the five year
or ten year carryover and two year or one year carryback periods (see IRM
21.8.2.10.7, Carryback and Carryover-Foreign tax credit). Refer cases
involving foreign tax credit carryovers to Examination Classification. Only
#
. See IRM 21.5.9, Carrybacks, for additional carryback information.
21.8.2.10.6 (1) The Tax Reform Act of 1986 and the American Jobs Creation Act of 2004
(10-10-2010) revised IRC § 904(a) on the limitation of the foreign tax credit. After 1986 and
Computation - Foreign before 2007, the foreign tax credit is calculated separately for the following cat-
Tax Credit egories of income, then added together:
• Passive income (e.g. dividends, interest, royalties, rents, annuities, gain

from the sale of property that produces investment income or non-income
producing investment property, and gains from foreign currency or com-
modities transactions)
• High withholding tax interest (withholding of 5% or more)
• Financial services income
• Shipping income
• Dividends from a Domestic International Sales Corporation (DISC) or
former DISC
• Distributions from an FSC, or former FSC, from earnings and profits attrib-
utable to foreign trade income
• In the case of a corporation, dividends from a non-controlled IRC § 902
corporation paid in tax years beginning before January 1, 2003, that are
derived from earnings and profits accumulated in taxable years beginning
before January 1, 2003
• Lump-sum distributions from pension plans
• IRC § 901(j) income
• Income re-sourced by treaty, and
• General limitation income (all other income)

Note: For 2007 and later years, the foreign tax credit limitation is no longer calcu-
lated separately for high withholding tax interest, financial services income,
shipping income, dividends from a DISC or former DISC, or distributions
from a FSC or former FSC. These types of income may be classified as
passive category income or general category income depending on the facts.
Refer to the Form 1118 instruction booklet for more information on the limita-
tion of foreign tax credit. The American Jobs Creation Act of 2004, H.R.
4520, retroactively repealed the separate limitation for dividends from non-
controlled §902 corporations for taxable years beginning in 2003. The Gulf
Opportunity Zone Act of 2005 allows taxpayers to elect to defer the effective
date of this repeal from 2003 to 2005.
(2) A separate Form 1118, for corporate filers, and Form 1116, for estates, trusts,
and individuals, is used for each category of income.
(3) If the individual, estate or trust paid taxes to more than 3 countries or posses-
sions with the same type of income, then additional Form 1116 returns must be
used. For corporate filers, if taxes are paid to more than six countries or pos-
sessions with the same type of income, then additional Form 1118 returns
must be used.
Caution: The taxpayer cannot combine the same type of income for different
countries and/or possessions by writing “various” where the name of the
country is to be listed.
(4) The credit on each type of income cannot exceed the proportionate amount of
U.S. tax paid on that type of income. This is called the foreign tax credit limita-
tion. Therefore, the foreign tax credit is limited to the lower of the foreign tax
credit limitation or the foreign tax paid or accrued.
(5) For each type of income, the taxpayer totals all the taxes paid on that category
of foreign source taxable income and compares it to the total U.S. tax liability
multiplied by the fraction equal to the amount of that type of foreign source
taxable income over worldwide taxable income.
(6) The second limitation is the “reduction” or “scale down” of foreign tax due to
excluded or exempt income. When income is excludable or exempt from tax
(e.g., IRC § 911(a), IRC § 931(a) for income from sources within Guam,
American Samoa, and Northern Mariana Islands derived by a bona fide
resident of American Samoa, and IRC § 933(a) for income from sources in
Puerto Rico), the amount of foreign income taxes that may be claimed as a
credit (or deduction) must also be reduced or “scaled down” to account for the
income on which no U.S. tax is going to be paid. See Form 1116, Part III, line
12, “Reduction of Taxes”, and Form 1118, Schedule G.
(7) The amount of foreign income taxes allocable to excludable income is deter-
mined by multiplying the foreign tax paid or accrued by a fraction of the
excluded foreign earned income (minus apportioned deductible expenses)
divided by the total foreign earned income (minus allocatable deductible
expenses).

Excluded foreign earned income

(minus apportioned deductible
expenses)
(Foreign tax paid or accrued) X
Total foreign earned income
(minus allocatable deductible
expenses).
(8) When income other than earned income is taxed by the foreign government,
and it is not separately taxed, the denominator is the foreign source income
less allocable deductible expenses.
Note: Applies to Form 1116 for individuals, estates, and trusts.
(9) For tax years beginning before 2005, IRC § 59(a)(2) limits application of the
foreign tax credit (FTC) to 90% of the alternative minimum tax computation on
Form 6251, Part II, line 31 for individuals and Form 1041 Schedule I, Page 3
for estates and trusts. For tax years beginning after 2004, this limitation does
not apply.
Note: No tax treaties limiting double taxation override this provision. The Technical
and Miscellaneous Revenue Act, §1012(a)(2) specifically states that IRC §
59(a) overrides earlier tax treaties.
If ... Then ...

A claim is received requesting an Disallow the claim.
increase to the FTC in excess of
the Tax Computation
(10) U.S. citizens may be able to claim an additional credit for part of the tax
imposed by treaty partners on U.S. source income when that citizen resides in
the treaty country. This credit is calculated using the worksheet contained in
Publication 514. It is separate from, and in addition to, the foreign tax credit,
for foreign taxes paid and accrued on foreign source income. This special
credit is provided by the treaties of the following countries:
• Australia
• Austria
• Bangladesh
• Belgium
• Bulgaria
• Canada
• Denmark
• Finland
• France
• Germany
• Iceland
• Ireland
• Israel
• Japan
• Luxembourg
• Mexico
• The Netherlands
• New Zealand
• Portugal
• Slovenia
• South Africa
• Sweden
• Switzerland
• The United Kingdom
(11) The additional foreign tax credit cannot be calculated on Form 1116 for U.S.
citizens residing in the following countries:
• Australia
• New Zealand
If ... Then ...

A statement is attached to the Process the claim as if it had
return claiming a foreign tax been calculated on Form 1116.
credit from the countries above
(12) IRC § 901(j) denies the foreign tax credit for taxes paid to certain countries
due to non-recognition of the foreign government (in most instances), the
severance or lack of diplomatic relations, or the classification of the foreign
country as one supporting terrorism.
(13) The foreign tax credit is not currently available for taxes paid to the following
countries:
• Cuba
• Iran
• Iraq (before June 27, 2004)
• Libya (before December 9, 2004)
• North Korea
• Sudan
• Syria
21.8.2.10.7 (1) If, due to a limitation, a taxpayer could not claim the credit for the full amount
(10-01-2007) of qualified foreign income taxes paid or accrued, or deemed paid or accrued,
Carryback and in the tax year in a separate category, IRC § 904(c) was amended to allow a
Carryover - Foreign Tax one-year (rather than two-year) foreign tax credit carryback for excess foreign
Credit income taxes paid or accrued in tax years beginning after October 22, 2004
and then a ten-year (rather than five-year) carryover of the remaining excess
foreign income taxes carried to tax years ending after October 22, 2004. This
amendment was a result of the American Jobs Creation Act of 2004 (H.R.
4520).
a. The excess foreign income taxes for that separate category is treated as
paid or accrued in the applicable years to the extent of any excess limita-
tion (the amount by which the limitation exceeds the amount of qualified
taxes originally claimed) in those years.
b. The excess foreign income taxes must be applied to the first eligible
preceding year and then subsequent years. This is regardless of the
relative benefits in various years.
(2) There are special restrictions which apply to carrybacks and carryovers.
a. The carryback or carryover of excess foreign income taxes can be claimed

only as a credit, not as a foreign tax deduction.
b. In a carryback or carryover year in which foreign income taxes were used
as a deduction, no credits are allowed for the foreign income taxes carried
to that year, but the available excess foreign income taxes must be
reduced by the amount that would have been allowed if the taxpayer had
elected the credit.
(3) Excess foreign taxes that are being carried back to the preceding tax year may
be claimed by filing an amended tax return, either Form 1040X or Form 1120X,
with a revised Form 1116 or Form 1118, respectively. See IRM 21.5.9 further
explains processing carryback/carryover claims and IRM 21.5.9.5.44,
Carryback of Foreign Tax Credit (FTC), for specific instructions and restrictions.
(4) Form 1139 and Form 1045 CAN NOT be used to carryback foreign tax credits.
If ... Then ...

An unused foreign tax is carried The statute of limitation on IRS
back assessment and collection of any
tax resulting from the carryback
for that year does not close until
one year after the statute closes
on the year in which the
carryback originated.
21.8.2.11 (1) The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 was
(10-01-2010) amended by the Deficit Reduction Act of 1984. This amendment added IRC §
Form 8288, U.S. 1445 to Chapter 3, Subchapter A, of the Internal Revenue Code of 1954.
Withholding Tax Return
for Disposition by (2) §1445 requires the deduction and withholding of tax by the transferee on
Foreign Persons of U.S. amounts realized on dispositions of certain U.S. real property interests by a
Real Property Interests, foreign seller.
and 8288-A, Statement
(3) Form 8288 is filed by the withholding agent (transferee) to report the tax
of Withholding on
withheld at source.
Dispositions by Foreign
Persons of U.S. Real (4) This form was processed on a separate system like Non-Master File (NMF)
Property Interests prior to processing year 2006.
(5) Beginning in 2006, Form 8288 was processed to the Business Master File
under MFT 17 at the Philadelphia Submission Processing Campus. The DLN
of the returns posted as DO 98, Tax Class 1, Doc Code 40 (98140–ddd-xxxxx-
x). In 2007 and subsequent years, the Form 8288 is processed at the Ogden
Submission Processing Campus and assigned the DLN (60140-ddd-xxxxx-x or
78140-ddd-xxxxx-x).
Note: NMF processed Form 8288 returns are worked in CSPC under DLN 17641-
ddd-xxxxx-x when the Date of Transfer is 12/12/05 and prior.

(6) Refer inquiries concerning Form 8288 (MFT 17 Accounts) to the International
Department at the Philadelphia Accounts Management Center (PAMC).
Prepare a Form 4442 Referral and fax to 215-516-2825. Route correspon-
dence to PAMC at DP N-441.
(7) The earliest tax period in which these returns post to Master File is 200512
with the earliest received date being 01/01/2006. The tax period is derived
from the month and year of the date of transfer. Beginning in 2006, subse-
quent Form 8288 returns that attempt to post to a module that contain a TC
150 create CP 193 duplicate filing conditions. This is likely a supplemental
return for an additional property from the same withholding agent.
(8) In cases of multiple purchases of partnership interests being acquired in the

same month with the same date of transfer and property description (line 2
Form 8288), a company may file a consolidated Form 8288 with a consoli-
dated payment. They must also complete and submit sets (Copy A and Copy
B) of Form 8288-A for each foreign person or entity, and lines 2 and 3 must
match amounts listed on Form 8288, lines 5 and 7.
Exception: If there is a withholding certificate for any of the foreign persons or

entities, that information must be reported on its own Form 8288 and
submitted with the FIRPTA tax payment and the Form 8288-A (copy A
and B).
(9) CP 193 notices generated on Form 8288 accounts are processed at the Phila-
delphia Accounts Management Campus. Use the following instructions in
conjunction with IRM 21.7.9, BMF Duplicate Filing Conditions , to resolve CP
193 notices on Form 8288 (MFT 17) accounts:
a. Always input a Hold Code 4 on the CC ADJ54 adjustment.

b. Input the real property description from Line 2 of the Form 8288 in the
remarks field of the CC ADJ54 adjustment.
c. Input the Date of Transfer (DOT) on the CC ADJ54 adjustment.
Note: The year and month of the DOT input on ADJ54 MUST match the year and
month of the tax period or the adjustment will unpost. Refer to IRM
3.12.279.142, UPC 332 RC 4.
d. For a return filed for a subsequent sale within the same month, the Return
Due Date (RDD) is 20 days from the date of transfer and is not related to
the first date of transfer posted on the module.
e. A late filed Form 8288 is subject to interest, Failure to File and Failure to
Pay penalties which must be manually assessed since the computer is
unable to calculate these values. The RDD is 20 days from the date of
transfer or withholding certificate letter date, whichever is later. When a
penalty is warranted, calculate the penalty from the RDD to the payment
date.
Note: The DOT is the actual date of transfer, or the date of the withholding certifi-
cate letter, whichever is later.
f. When processing an adjustment to a Form 8288-A account, update the

National Standard Application (NSA) database as necessary to reflect the
correct information.

If ... Then ...

The Form 8288 is received after Input TC 290 for the additional
the 20th day from the DOT or tax amount. Manually compute
after the 20th day from the date and assess TC 160, TC 270 and
of the withholding certificate letter TC 340 using the return due date
(if applicable), whichever is later as the “from” date.
The Form 8288 was timely filed Input TC 290 for the additional
tax and also enter a TC 160 .00,
TC 270 .00, and TC 340 .00 to
prevent penalty and interest as-
sessments.
The taxpayer was issued a with- Input TC 290 .00 to release the
holding certificate, and the “-A” freeze. Edit the correct date
withholding certificate letter date of transfer and reinput the return
falls within a subsequent month to the correct tax period using
(the return is due within 20 days Form 13596, Reprocessing
of the DOT, or the date of the Returns. Transfer any related
withholding certificate, whichever payments using CC ADD/ADC24.
is later)
The taxpayer was issued a with- Input TC 290 for the additional
holding certificate and the return tax amount. If the return was filed
due date remains in the same tax timely, input TC 160 .00, TC 270
period to which the subsequent .00 and TC 340 .00 to prevent
return posted penalty and interest assessments.
If the return was filed late,
manually compute and assess TC
160, TC 270 and TC 340
amounts using the return due
date as the “from” date. Do not
reinput the return.
Note: If Form 8288-A is attached to Form 8288 and the 8288-A does not have a
FIRPTA Unit stamp on it saying “Copy B mailed,” route the return to the
FIRPTA Unit for processing of Form 8288-A.
Caution: Do not establish Mail Filing Requirements for Form 8288.
(10) Foreign buyers/sellers of U.S. real property are required to obtain ITIN’s in
order to request reduced tax withholding and to pay withholding tax. Research
for correct buyer/transferee TIN before re-inputting a tax return to the TIN of a
Title, Escrow, Realty Company, etc. or third party TIN.
Note: Ogden will research IDRS to see if the payment posted to the title company
EIN account. If it did, they will prepare a Form 3465 and attach a photocopy
the Form 8288, along with any pertinent attachment, and send it to the Phila-
delphia Accounts Management Campus (PAMC) BMF international units.
PAMC will locate the FIRPTA payment from the title company account and
transfer it to the actual transferee account as necessary.
(11) CP 105/125 balance due notices will generate on Form 8288 accounts
because of incorrect posting of payments or higher assessments due to
missing withholding certificates. These notice responses will be transhipped to

PAMC from the Ogden Campus. Research and transfer misapplied payments
or correspond for missing withholding certificates as necessary.
Note: Prior to January 2008, these notices were issued as CP 106/126 notices.
(12) Review penalty and interest claims received in correspondence to determine if

the penalties and interest were correctly assessed by determining the date of
transfer. If the return and/or the payment is received more than 20 days after
the date of transfer, or 20 days after the withholding certificate date, the
taxpayer is liable for the penalties and interest on penalties.
(13) If a taxpayer was issued a withholding certificate, interest and penalties may
be erroneously assessed if the date of transfer from the withholding certificate
is not edited as the date of transfer. Failure to correct the date of transfer
causes the return to post to an incorrect tax period, and interest and penalties
to be assessed erroneously. Edit and re-input of the Form 8288, with a copy of
the withholding certificate, to the correct tax period and transfer any related
payments using CC ADD/ADC 24 per duplicate filing conditions found in IRM
21.7.9, BMF Duplicate Filing Conditions.
(14) If the return posts to the correct month, but the date of transfer is incorrect,
penalties and interest may be assessed erroneously. If the return and payment
are timely filed and posted to the correct month, input a TC 271, TC 161, and
TC 341 to abate the erroneously assessed penalties and interest.
Caution: Only abate the penalties and interest if the return does not have to be
reinput to another tax period.
21.8.2.11.1 (1) Some title companies, transferees, escrow companies, Certified Public Accoun-
(10-01-2007) tants (CPAs), attorneys, and realtors may send FIRPTA payments to deposit
FIRPTA Payments activity areas without a Form 8288. The payments are received in the following
Received Without a ways and any associated correspondence is sent to Accounts Management:
Form 8288
• A check with a check stub statement identifying it as a FIRPTA payment
• A check with a statement or cover letter identifying the remittance as
FIRPTA tax
• A check, with or without a check stub attachment, attached to a Form
8288-A and/or Form 8288-B
• A check, with or without a check stub statement or cover letter, attached to
a copy of a deed and/or a copy of a HUD-1 settlement statement
• A check, with or without a check stub statement or cover letter, attached to
a copy of a withholding certificate
• A check, with or without a check stub statement or cover letter, and/or a
copy of a FIRPTA withholding tax return or withholding certificate from the
states of Hawaii, California or Colorado
(2) Return the correspondence to the taxpayer requesting that they file a Form
8288 and 8288-A using a Letter 3104C. Advise the taxpayer that these forms
must be completed by the transferee and returned to the Ogden Submission
Processing Campus for processing. Include the following open paragraph with
the 3104C letter:

We are returning your correspondence received with your FIRPTA

payment of $xxxx.xx on mm/dd/yyyy. To ensure proper application of
your payment, please complete and return the enclosed Form 8288
and Form 8288-A to the Internal Revenue Service, Ogden, UT 84201.
Reminder: Beginning in 2007, Form 8288 and 8288-A returns are processed at the
Ogden Submission Processing Campus.
21.8.2.11.2 (1) When taxpayers claim FIRPTA credits on their income tax return, they must
(10-01-2007) submit Form 8288-A, Copy B (similar to domestic withholding claims being ac-
Claims for FIRPTA companied by a Form 1099).
Credits
(2) In addition, credits claimed on Form 8288-A, Copy B, must be verified with the
FIRPTA data base prior to allowance. FIRPTA Credit verification is requested
using Form 13698, International Credit(s) Verification Slip.
Note: For further information on FIRPTA Credit verification, see IRM 3.21.25.15,
Form 8805 Credit Verification of Pre-IRMF § 1446 Credits Claimed on Form
1040NR, Form 8804, Form 990-T, Form 1120-F, and Form 1040NR
Fiduciary.
(3) The presence of a TC 971 with Action Code 650 on a tax module indicates
that a refund of the FIRPTA credit was issued from the BMF MFT 17 account
for the amount indicated. A TC 972 indicates a reversal of a TC 971.
(4) Beginning in 2006, when a Form 1040NR, 8804, or 1120-F posts to Master
File and a TC 971 Action Code 650 is present, the account is frozen from
refunding and a Master File transcript entitled PRIOR-REFD generates.
Research to determine if the FIRPTA credit claimed on the return was previ-
ously refunded as indicated by the TC 971 Action Code 650.
If ... Then ...

The Action Code 650 amount is Input an adjustment to reduce the
the same as the Credit Reference CRN 332 amount to zero since
Number (CRN) 332 amount the credit has already been
refunded.
The Action Code 650 amount is Reduce the CRN 332 amount by
included in the CRN 332 amount the Action Code 650 amount
(for example, $9,200 is part of the since this has already been
$10,500 claimed) refunded. See Caution below.
The Action Code 650 amount is No action is necessary. Input TC
not included in the CRN 332 571 to release the freeze on the
amount account.
Caution: Research the FIRPTA database or request the original return from Files,
if necessary, to determine if the FIRPTA credit being claimed on the
return is the same credit previously refunded according to the TC 971
CRN 332 transaction. For more information on Early FIRPTA Refunds,
See IRM 21.8.5.3.11.

(5) If correspondence or an amended return is received requesting credit for

withheld FIRPTA tax, it must be accompanied by a Form 8288-A, Copy B, so
the credit can be verified.
Reminder: The FIRPTA Credit Verification Slip is a Form 13698.
(6) Once credit availability is verified, allow withholding credit.
• If IMF, allow a TC 766 by inputting a Credit Reference Code 332, Reason

Code 069, and adjust tax if necessary.
• If BMF Form 1120-F, allow the credit with a TC 766 and adjust tax if
necessary.
• For Form 8804, allow credit with a Credit Reference Code 332.
Note: When issuing a manual refund from a Form 8288 account, use Line Number
65.
21.8.2.12 (1) Income that is effectively connected with the conduct of a trade or business
(10-01-2007) within the United States by a nonresident alien individual or foreign corporation
Form 1042, Annual is subject to the same income tax rates that apply to U.S. citizens, residents,
Withholding Tax Return and domestic corporations, per IRC § 871(b). (See IRM 21.8.1.11.11, Effec-
for U.S. Source Income tively Connected Income.)
of Foreign Persons
(2) Income not effectively connected with the conduct of a trade or business in the
United States is subject to a 30% tax rate (or lower treaty rate) whether or not
the taxpayer engages in a trade or business in the United States, per IRC §
871(a). (See IRM 21.8.1.11.12 , Non-Effectively Connected Income.)
(3) The Deficit Reduction Act of 1984 provides for repeal of the 30% tax on
interest received by foreign persons on certain portfolio investments.
(4) IRC § 1441(a) and IRC § 1442(a) require the withholding of income tax at the
source on certain amounts paid to nonresident alien individuals, partnerships,
and foreign corporations.
(5) See Publication 515 for a more detailed explanation of withholding require-
ments.
21.8.2.12.1 (1) A withholding agent is any entity that has custody or control of an item of
(10-01-2007) income of a foreign person subject to withholding. A withholding agent may be
Withholding an individual, a trust, an estate, partnership, corporation, government agency,
Agent/Withholding Tax association, or tax-exempt foundation, whether domestic or foreign.
(2) Withholding agents must withhold income tax at a rate of 30% on all types of
income paid to “nonresident alien recipients” from sources within the United
States, unless the nonresident is a resident of a treaty country. See Publication
515.
a. A “nonresident alien” includes any foreign individual, fiduciary, partnership,

corporation, private foundation, organization, association or charitable in-
stitution.
b. Income qualifying as a scholarship, per IRC § 117(a), requires withholding
of taxes at a rate of 14% if the nonresident alien is temporarily present in
the United States on an F, J, M, or Q Visa (a non-degree candidate).
c. Income for compensation from personal services that is effectively
connected with U.S. trade or business is exempt from withholding if the
recipient is a foreign partnership or foreign corporation. However, the
income is still taxable, subject to estimated tax, and a tax return must be
filed to report the income and pay any tax due at graduated rates.
(3) The withholding agent may withhold at a lower treaty rate if the nonresident
alien recipient is a resident of a country that has a tax treaty in effect with the
United States. In order to be eligible for the reduced withholding, the nonresi-
dent alien must prove he/she is a resident of the treaty country, for income tax
purposes.
(4) The above rules do not apply to a nonresident alien spouse of a U.S. citizen or
resident who makes an election to be treated as a resident for income tax
purposes and files a joint return and reports income from all U.S. and foreign
sources.
Note: Scholarships, grants, fellowship grants, prizes, and awards received by a

nonresident alien (person other than a U.S. person) from a foreign govern-
ment, agency, political subdivision, person or international organization (any
foreign entity) for the purpose of study within the United States, is treated as
foreign source income. This income, being foreign source income, does need
to be claimed or reported.
21.8.2.12.2 (1) Form 1042 is the annual taxable return used by withholding agents to report
(10-01-2009) tax withheld on U.S. source income paid to certain nonresident alien individu-
Form 1042 als, and corporations, etc.
(2) The Form 1042-T serves as a transmittal for Form 1042-S returns, which are
information returns used to report income paid to the foreign person. The Form
1042–T is Tax Class 5 and Document Code 01.
(3) A withholding agent must file a Form 1042 by March 15th in order to pay and
report taxes withheld. Form 1042 is a Master File annual tax return (NMF for
1984 and prior), filed only for the calendar year and cannot be filed as a fiscal
year return.
(4) Form 1042 is equivalent to the Form 945, Annual Return of Withheld Federal
Income Tax, which is a withholding tax return only.
(5) None of the money belongs to the withholding agent, except in cases of math
errors.
(6) The Form 1042 cannot be used for U.S. citizens, resident aliens, U.S. trusts,
or U.S. corporations.
Note: Special rules for Qualified Intermediaries and a withholding foreign partner-
ship or trust now exist. See IRM 21.8.2.12.10, Qualified Intermediary
Agreements (QI).
(7) Form 1042 is processed using a Tax Class of 1, a Doc Code of 25, and one of
the following File Locations Codes:
• FLC 29 - If the withholding agent is located within the U.S.

• FLC 60 - If the withholding agent is located outside of the U.S.
• FLC 78 - If the withholding agent is located in one of the U.S. Possessions,
territories, or the Commonwealth of Puerto Rico

21.8.2.12.2.1 (1) The withholding agent issues a Form 1042-S, Foreign Person’s U.S. Source
(10-01-2010) Income Subject to Withholding, which is an information return similar to a Form
Form 1042-S 1099.
(2) Form 1042-S provides the pertinent data in verifying that the withholding is
correct.
• Income Code (identifies type of income paid)

• Gross Income Paid
• Withholding Allowances (for income Codes 15 and 16)
• Net Income
• Tax Rate
• Exemption Code (identifies which type of exemption the recipient claimed)
• Federal Tax Withheld
• Amount repaid to recipient
• Country Code (identifies the country of which the recipient is a resident for
tax purposes)
(3) Form 1042-S returns can be filed on paper if there are less than 250 income
recipients for which data must be reported. If 250 or more Form 1042-S
returns are submitted, withholding agents are required to file them electroni-
cally at the Enterprise Computing Center at Martinsburg (ECC-MTB).
Note: As of July 2008, magnetic tape submissions of Form 1042-S returns are no
longer accepted.
(4) Electronic submissions of 1042-S forms are filed using the Filing Information
Returns Electronically (FIRE) System. FIRE, which is located at
http://www.fire.irs.gov, is a Web based system so it is available 24 hours a day
- 7 days a week.
(5) Taxpayers may request an extension of time to file Form 1042-S returns by
completing and filing Form 8809, Application for Extension of Time To File In-
formation Returns.
Note: The Form 8809 does not extend the time for filing Form 1042.
(6) Paper Form 1042-S returns are filed at the Ogden Submission Processing
Campus with the Form 1042-T being used as the paper transmittal form for
paper Form 1042-S returns. Form 1042-S returns filed via magnetic tape are
sent to:
Attn: 1042-S Reporting
Enterprise Computing Center at Martinsburg (IRS/ECC-MTB)
230 Murall Drive P.O. Box 1359
Kearneysville, West Virginia 25430
(7) For assistance with electronic filings or extensions of time to file, taxpayers can
contact the IRS by e-mail at mccirp@irs.gov or by phone at the following
numbers:
• 866-455-7438 (toll free)

• 304-263-8700 (toll call)
• 304-264-5602 (fax)
(8) The Form 1042 is the taxable return. It should reflect the total of all taxes
withheld and paid over to the IRS, as reflected on the Form 1042-S.
(9) The Form 1042-S is processed with FLC 60 (98 prior to 1/1/2007), Tax Class
5, and Document Code 02 for paper documents (Document Code 99 for those
records filed on magnetic tape).
(10) Form 1042 and Form 1042-S are sorted, batched, numbered and follow basic
pipeline processing.
a. During the Code and Edit function, the Form 1042-S returns are detached
from the Form 1042 and processed separately.
b. Form 1042-S returns follow basic campus processing but the records do
not post to Master File.
(11) For validation information, refer to CTW Reconciliation - Validation of Form

1042 and Form 1042-S. See IRM 21.8.2.14.
(12) The tax data extracted from Form 1042-S processing is exchanged with foreign
countries with which the United States has a tax treaty or exchange of informa-
tion agreement. Form OECD (Organization for Economic Cooperation and
Development) is used to exchange this information. See IRM 21.8.2.13.
(13) Taxpayers may request an extension of time to file Form 1042-S by filing a
completed Form 8809, Application for Automatic Extension of Time To File In-
formation Returns.
a. Form 8809 does not extend the time for payment of tax.
b. An additional 30 day extension may be requested by submitting a second
Form 8809. Generally, requests for additional time are only granted in
cases of extreme hardship or catastrophic event.
(14) To claim any over-withheld amount, the income recipient must file Form
1040NR, 1120-F, 1120-FSC, 1041, 990-T, 990-PF, or 8804, along with a copy
of the Form 1042-S, even if a return is not otherwise required to be filed. This
applies to all but a Qualified Intermediary (QI) which can claim a refund using
a credit entry that is placed on Form 1042 Line 66 and they have the proper
EIN number. See IRM 21.8.2.12.10, Qualified Intermediary Agreements (QI),
for QI regulations.
(15) For claims involving Form 1042-S tax withheld at source, refer to IRM
21.8.1.11.15, Claims for Tax Withheld at Source.
21.8.2.12.3 (1) The Form 1042 is filed by all individuals and corporations having the control,
(10-01-2007) receipt, custody, disposal, or payment of interest, dividends, rent, salaries, etc.,
Form 1042 Filing to the extent that any such items constitute gross income from sources within
Requirements the United States, of nonresident alien individuals, or foreign corporations.
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corpo-
rations, can be used as a reference.
(2) Form 1042 is due on or before March 15th of each year. Form 1042 and Form
1042-S must be filed whether or not any tax was withheld or was required to
be withheld (i.e., income was exempt from withholding). The Exemption Codes,
which are also located on the back of Form 1042-S, are:

Code Authority for Exemption

01 Income effectively connected with a U.S. trade or
business
02 Exempt under an IRC Section (income other than
portfolio interest)
03 Income is not from U.S. sources *
04 Exempt under tax treaty
05 Portfolio interest exempt under an IRC Section
06 Qualified intermediary that assumes primary withhold-
ing responsibility
07 Withhold foreign partnership or withholding foreign
trust
08 U.S. branch treated as a U.S. person
09 Qualified Intermediary represents income is exempt
* Non-U.S. source income received by a nonresident alien is not
subject to U.S. tax. Exemption Code 03 is used when entering an
amount for information reporting purposes only.
(3) Effective 12/31/2005, taxpayers may apply for an extension to file by submit-
ting a Form 7004, Application for Automatic Extension of Time To File Certain
Business Income Tax, Information, and Other Returns.
a. Approval of the extension allows additional time to file the tax return, NOT
additional time to pay the taxes.
b. Any undeposited taxes of $200 or more, due by the Return Due Date
(RDD), must still be deposited by that time. Undeposited amounts less
than $200 may be paid with the extension, but they still must be paid by
the RDD.
(4) Form 1042 returns are processed as BMF. Returns filed for Tax Year 1984 and
prior were processed as NMF.
21.8.2.12.4 (1) All withholding agents are required to deposit the tax withheld with an autho-
(10-01-2010) rized commercial bank depository. The amount of taxes withheld determines
Form 1042 Federal Tax the frequency of deposits.
Deposits
(2) Foreign withholding agents use Form 8109 to deposit their taxes and report
the amount in U.S. dollars, unless they are required to use the EFTPS System
(see IRM 21.7.1.4.8.1.1, EFTPS Enrollment). They mail the completed coupon
with a bank draft in U.S. dollars to:
Financial Agent
P.O. Box 970030
St. Louis, MO 63197

(3) Beginning January 1, 2011, taxpayers must use the Electronic Federal Tax
Payment System (EFTPS) to deposit taxes. Form(s) 8109 and 8109-B, Federal
Tax Deposit Coupon, cannot be used after December 31, 2010.
(4) The deposit must be received, not merely mailed/postmarked, by the

Financial Agent by the deposit due date. It is the withholding agent’s responsi-
bility to ensure timely receipt. They may also use a wire transfer method to
deposit Form 1042 taxes.
(5) For deposit purposes, each month is divided into four periods ending on the
7th, 15th, 22nd and last day of the month. These are referred to as the
“quarter-monthly” periods and are labeled 1 through 60 on the tax return.
(6) When the total tax for the year is at least $200, the taxpayer is required to list
his/her tax liability in the ROFT Record of Federal Tax Liability (ROFTL)
Section.
(7) Use the following chart to determine the frequency of deposits:
FTD Requirement Chart

If ... Then ...
At the end of any quarter-monthly The taxes must be deposited
period, the total amount of unde- within three banking days after
posited taxes is $2,000 or more the end of the quarter-monthly
period.
At the end of any month, the total Taxes must be deposited by the
amount of undeposited taxes is 15th day of the following month.
$200 or more but less than
$2,000
At the end of the year, the total The entire amount must be
amount of undeposited taxes is deposited (via FTD/EFTPS) or
less than $200 remitted with the Form 1042 on
its due date.
Exception: When the end of the month is December, any balances normally
carried over to the following month are due with the filing of the Form
1042, or they must be deposited by the return due date.
(8) 90% Rule/Safe Haven: The $2,000 deposit requirement listed in (4) above is
considered met if all the following statements are true:
a. At least 90% of the tax liability is deposited timely

b. Any underpayment is deposited with the first deposit that must be made
after the 15th day of the following month, if the quarter-monthly period is
in a month other than December. Any underpayment of $200 or more that
occurs during December must be deposited by January 31.
21.8.2.12.5 (1) Some taxpayers are required to make electronic deposits using the Electronic
(10-01-2007) Federal Tax Payment System (EFTPS).
Electronic Deposit
Requirements

(2) Refer to IRM 21.7.1.4.8.1.3, EFTPS Deposit Requirements, for criteria that de-
termines which taxpayers are required to use EFTPS.
(3) Taxpayers that are required to make electronic deposits, but fail to do so, may
be subject to a penalty. See IRM 21.8.2.12.6, Deposit Penalties - Form 1042.
(4) For additional information, see Treas. Reg. § 31.6302-1(h).
(5) All taxpayers must enroll to use EFTPS by completing Form 9779, EFTPS
Business Enrollment Form. Use standard order forms to place an order and
write in “Form 9779 EFTPS Business.” Taxpayers can also call the IRS Tax
Forms toll free number 1-800-829-3676, 1-800-555-8778, or use the EFTPS
Web site at http://www.eftps.gov .
(6) Based on the financial agent who services them, taxpayers can call the EFTPS
Customer Service Center number if they need additional information. For the
EFTPS Customer Service Center numbers, see IRM 21.7.1.4.8.1.1, EFTPS
Enrollment.
21.8.2.12.6 (1) Penalty processing on Form 1042 (Chapter Three Withholding (CTW)) began
(05-19-2010) in processing year 2003.
Deposit Penalties - Form
1042 (2) Taxpayers are now liable for this penalty and should have been making timely
deposits beginning in 2002.
Note: If a consent dividend has been issued, and notification is provided after the
end of the tax year and before the 15th day of the third month following the
close of the taxable year (March 15), the dividend is considered paid on the
last day of the tax year. The applicable deposit is considered timely per IRC
§ 561(a), IRC § 561(b), IRC § 563(b), or IRC § 565(c). The computer does
not recognize that deposits made under this condition meet an exception.
Manual abatement of the FTD penalty is necessary when this occurs. Use
Penalty Reason Code 044 for statutory exception on the TC 181 abatement
document. Additional information on consent dividends can be found in Publi-
cation 515.
(3) The penalty calculation rate is:
• 2% of the underpayment if 1 to 5 days late

• 5% of the underpayment if 6 to 15 days late
• 10% of the underpayment if 16 or more days late
• 10% for deposits made at an unauthorized financial institution, paid directly
to the IRS, or paid with the tax return
• 10% for amounts subject to electronic deposit requirements but not
deposited using EFTPS
Note: The penalty is increased to 15% if not paid within 10 days after the IRS
issues the first delinquency notice demanding payment. See IRM
20.1.4.14.4, 15 Percent Rate Penalty Indicator Codes (PIC) .
(4) Taxpayers can self compute the penalty (except the 15% penalty) and enter
the amount on Form 1042, Line 70. The Form instructions provide the percent-
ages to be used to calculate this penalty as listed above. Do not abate, unless
a request is subsequently made by the taxpayer. See the Caution below.

Caution: Verify that the penalty amount was not self assessed for an incorrect
lower amount. Command Code FTDPN can be used to verify the correct
penalty. If the penalty per FTDPN is higher and not within tolerance,
assess the difference.
(5) Refer inquiries concerning Form 1042 penalty adjustments to the International
Department at the Philadelphia Accounts Management Center (PAMC).
Prepare a Form 4442 Inquiry Referral and fax to 215–516–2825. Route penalty
correspondence to PAMC at DP-N441
(6) Publication 515 contains information that the taxpayer can use for additional
reference.
21.8.2.12.6.1 (1) Form 1042 returns with an entry on line 66 (posted as a TC 766) may have
(10-01-2008) resulted in the generation of a CP 276-B notice or the assessment of an FTD
Form 1042 FTD Penalty penalty. A programming change to correct this problem was implemented on
Resulting From Line 66 01-01-2009. Use the following procedures when addressing inquiries concern-
Entry ing these FTD penalties generated prior to the programming change:
1. To determine if all or a portion of the penalty is caused by the TC 766

credit application date, subtract the TC 766 amount from the December
31st amount on the liability page (first page) of FTDPN. Press enter to re-
calculate. The result will calculate the correct FTD penalty for the account.
Adjust the FTD penalty accordingly. Attach a print of the FTDCOMP page
to the case or capture the FTDPN calculation if working on CIS.
2. Send a Letter 1447C, or other appropriate letter, to explain the new
penalty amount if there is a change to the FTD penalty other than a full
abatement.
3. If the taxpayer is responding to a CP 276-B (the penalty is not assessed),
explain that the notice was issued in error and apologize for the inconve-
nience.
4. If a payment is submitted in response to a CP 276-B because the
taxpayer perceived this to be a bill, do not assess the FTD penalty. Inform
the taxpayer that this is an educational notice to explain the deposit re-
quirements and does not require a response. Also inform the taxpayer that
the payment will be released for refund or offset.
21.8.2.12.7 (1) A withholding agent must withhold income tax at the statutory rate or lower
(10-01-2009) treaty rate, unless one of the following conditions are met:
Exemptions from
Chapter III Withholding • The income is exempt by treaty.
(CTW) • The income is exempt by an IRC section.
• The income is considered foreign source.
• The income is considered “effectively connected with a U.S. trade or
business.”
• The foreign individual or entity is considered a resident of the United States
for income tax purposes.
(2) All exempt or reduced withholding must be based on the applicable alien with-
holding certificate (1078, W-8BEN, W-8ECI, W-8EXP, W-8IMY, or W-8CE) or a
statement signed under the penalties of perjury attesting to the recipient’s
country of residence for income tax purposes. See IRM 21.8.2.18, Withholding
Certificates.

(3) Effective January 1, 2001, Form W-8 series documents (listed below) replaced
the following forms:
Obsolete Form New Form W-8 Series

Replacement
W-8, Certificate of Foreign Status W-8BEN, Certificate of Foreign
Status of Beneficial Owner for
United States Tax Withholding.
See IRM 21.8.2.18.2
Form 1001, Ownership, W-8BEN, Certificate of Foreign
Exemption, or Reduced Rate Cer- Status of Beneficial Owner for
tificate United States Tax Withholding.
See IRM 21.8.2.18.2
Form 4224, Exemption From W-8ECI, Certificate of Foreign
Withholding of Tax on Income Person’s Claim for Exemption
Effectively Connected with the From Withholding on Income Ef-
Conduct of a Trade or Business fectively Connected With the
in the U.S. Conduct of a Trade or Business
in the United States. See IRM
21.8.2.18.3
Form 8709, Exemption From W-8EXP, Certificate of Foreign
Withholding on Investment Government or Other Foreign Or-
Income of Foreign Governments ganization for U.S. Tax
and International Organizations Withholding. See IRM 21.8.2.18.4
W-8IMY, Certificate of Foreign
Intermediary, Foreign Flow-
Through Entity, or Certain U.S.
Branches for U.S. Tax Withhold-
ing. This is a new form and does
not replace a prior form. See IRM
21.8.2.18.5
W-8CE, Notice of Expatriation
and Waiver of Treaty Benefits.
See IRM 21.8.2.18.6
21.8.2.12.8 (1) Form 1042 reports money withheld from nonresident alien individuals and busi-
(10-01-2008) nesses.
Amended Returns -
Form 1042 a. The withheld amounts are paid to IRS and do not belong to the withhold-
ing agent if they consist entirely of funds withheld from the nonresident
alien or entity.
b. If the tax withheld is $2,000 or more, ninety percent of the tax withheld
must be deposited within a relatively short time after the withholding
occurs. For deposit due dates, see Exhibit 20.1.4-8, Form 1042 Deposit
Requirements For All Periods, in IRM 20.1.4, Penalty Handbook - Failure
to Deposit Penalty.
c. Tax decreases are examination criteria. See IRM 21.8.2.1.13

(2) Most requests for adjustments occur when payers mistakenly withhold tax at
the wrong rate, or from recipients exempt from taxation, either under treaty
provisions or for reasons described in IRC § 1441 and IRC §1442.
(3) The same criteria is used to decide the validity of issues raised by the
taxpayer whether submitted as amended Form 1042 (the “Amended Return”
box at the top of the Form 1042 is checked), Form 843, or a correspondence
request for adjustment or abatement.
(4) When claims are received without enough information to determine if the
special procedural criteria listed below have been met, correspond with the
taxpayer. See IRM 21.8.2.12.9, Processing Claim Adjustments for Form 1042.
(5) Refunds by the IRS to the withholding agent or payer can only be done if the
conditions set forth in IRC § 1461, IRC § 1464, and IRC § 6414 are met. The
following is a list of situations where refunds of amounts claimed are accept-
able:
a. The amount was not actually withheld: Math error only in computing the
tax liability on Form 1042:
Example: Two separate divisions within the same company (payer) duplicate their
reported liability, without actually withholding the amounts twice.
b. Error was made only in the amounts deposited:
Example: The withholding agent only withheld $300 tax, but mistakenly deposited
$350. The $50 error can be refunded to the withholding agent, since the
withholding agent is the actual owner of the erroneous amount.
c. The amount was actually withheld, but discovered before the close of the
tax year. If the withholding agent/payer over withholds, or withholds on an
exempt recipient, they may treat the amount as erroneously withheld, and
refund it to the payee only if made prior to the last deposit, but before the
Form 1042 is filed, and the Form 1042-S is issued.
(6) The Form 1042-S must reflect the correct lower withholding and the deposits
for the year should be reduced accordingly. Only the correct amount of with-
holding should be reported on the Form 1042. The excess deposits will be
refunded under normal settlement procedures.
(7) If a complete package is received, but the error was discovered after the close
of the calendar year, refer to Examination. They usually recommend disallow-
ance of the claim and/or amended Form 1042 when the:
• Last deposit has been made for the tax year

• Form 1042 has been filed, and
• 1042-S forms have been issued to the recipient(s)
(8) Overpayments discovered after the return has been filed (March 15) can be
claimed only by the recipient on an Income Tax Return (Form 1040NR or
1120-F) with the credit substantiated by attaching a Form 1042-S.
(9) Follow the procedures in the following table for processing amended 1042-S
forms (submitted with or without Form 1042):

Amended Form 10402-S Decision Chart

If ... Then ...
Making adjustments for prior Reject and advise, using a Letter
years to the amount of tax 916C, that an income tax return
reported, or to amounts that were must be filed to claim the over-
actually withheld resulting in a tax withheld amount. Input TC
decrease 290.00, Blocking Series 18.
The change is for the correction Allow (Form 1042 must be
of a math error only in the liability attached). Send original/amended
reported on the original return, or 1042-S forms to Ogden Submis-
to correct errors in ownership sion Processing Campus at
Internal Revenue Service, P.O.
Box 409101, Ogden, UT 84409
Change accepted by Examination Adjust the Form 1042. Input the
adjustment (TC 29X) with
Reference Code 011.
An amended Form 1042 return is The withholding agent is liable for
received showing an underpay- the entire tax and interest from
ment or under withholding the due date. Assess the addi-
resulting in a tax increase tional tax.
Caution: If an additional
payment is not on the
account, research
IDRS for corresponding
payment that may have
posted to the current
tax period, a different
tax liability or for a TC
650 for an amount
greater than zero,
which may indicate a
misapplied payment. If
an additional payment
is located, transfer
using CC ADD/ADC 24
or ADD/ADC 34.
Note: With the large amounts of gross income now being reported, there may not
be enough space to enter the full amount for Reference Code 011 on
REQ54. Enter as much as the system allows and initiate additional TC
290.00, Hold Code 3, Reference Code 011 REQ54 adjustments until the total
of these adjustments reflect the full amount needed.
(10) Amended/corrected 1042-S forms are sometimes submitted with the amended
Form 1042. In this case, the corrected 1042-S form is regarded as a support-
ing schedule for adjustments. If the corrected 1042-S form is with the amended
Form 1042, attach copies of the 1042-S forms to the adjustment document.
Send the original corrected/amended 1042-S forms to:

Ogden Submission Processing Campus
P.O. Box 409101
Ogden, UT 84409
(11) CP 193 notices are generated for all duplicate (multiple) return conditions
processed through pipeline.
(12) Follow general guidelines in IRM 21 and specific adjustment procedures in IRM
21.7.9.4, Duplicate Filing Conditions Procedures, to resolve the “-A” freeze
unless the entity is a Qualified Intermediary (QI), in which case apply those
specific procedures contained in Qualified Intermediary Agreements (QI). See
IRM 21.8.2.12.10
21.8.2.12.9 (1) An adjustment to the Form 1042 account is made using:

(10-01-2007)
Processing Claim • MFT 12
Adjustments for Form • Blocking Series 00, if made with the original
1042 • Blocking Series 15, if made without the original
(2) An adjustment to the gross income paid (item reference number 011) can be
done at any time.
(3) However, no tax decrease adjustment can be made to the withholding tax after
the due date of the Form 1042, unless special criteria exists. See IRM
21.8.2.12.8, Amended Returns - Form 1042.
Note: Use IDRS to ensure each individual recipient’s account does not contain a
TC 766 credit for the same amount of the withholding agents amended
return decrease.
(4) When a claim for tax decrease is received, verify that the taxpayer has
submitted substantiation.
a. If the taxpayer has submitted substantiation, request the original return,

secure research on the withholding agent and each Form 1042-S
recipient, and forward the case to Examination.
b. If the taxpayer did not provide substantiation with the claim for tax
decrease, input a TC 290 .00, Blocking Series 18, and send Letter 916C
rejecting the claim stating that: “We are unable to consider your claim
because you failed to provide the specific reason for the claim for
decrease as required by IRC § 301.6402.” Also include the following open
paragraph:
Please state your reasons for making changes to the amounts

reported as being withheld on the original Form 1042-S(s). Were
taxes actually withheld from payments and all withheld taxes
deposited? Were original Form 1042-S(s) issued? Was the change in
withholding discovered after the close of the calendar year? Please
supply copies of the corrected and voided Form 1042-S(s) affected by
the amendment.
(5) When a taxpayer replies to the Letter 916C by submitting substantiation for the
Form 1042 tax decrease:

1. Request the original return and the claim we were unable to consider
(Blocking Series 18).
2. Secure research on the withholding agent and each Form 1042-S recipient
to see if they filed for a refund of the same withholding, and
3. Forward the case to Examination with all research. See IRM 21.8.2.1.13,
Examination Criteria.
21.8.2.12.10 (1) Under Treas. Reg. § 1.1441-1(e)(5), the IRS signed an agreement which
(10-01-2007) became effective on January 1, 2001 in which Qualified Intermediaries can be:
Qualified Intermediary
Agreements (QI) • Foreign financial institutions (e.g., banks, brokerage houses), other than a
U.S. branch of such institution
• Foreign branches of U.S. financial institutions or U.S. clearing organizations
(2) A foreign partnership or trust cannot become a QI. However, a foreign partner-
ship, or a foreign simple or grantor trust, can enter into a Withholding Foreign
Partnership (WP) or Withholding Foreign Trust (WT) agreement with the IRS
under Treas. Reg. § 1.1441-5(c)(2) and (e)(5)(V). See Rev. Proc. 2003-64 and
Rev. Proc. 2005-77 for agreement and application procedures. A partnership or
trust that has entered into a WP or WT agreement assumes Non-Resident
Alien (NRA) withholding responsibilities.
(3) The benefits of becoming a Qualified Intermediary include:
• Maintaining confidentiality of non U.S. customers by providing withholding

rate information to U.S. custodians on a pooled basis
• Simplified information reporting procedures
• Use of collective refund procedures so customers do not have to file refund
claims individually.
(4) Refer taxpayers, who question how or where to apply for QI status, to Rev.
Proc. 2000-12 and Rev. Proc. 2005-77, which give guidance for entering into a
QI Agreement. Applications are sent to:
LMSB:FS:QI
290 Broadway - 12th Floor
New York, NY 10007–1867
(5) There is a web site established for Qualified Intermediaries on http://www.irs-

.gov under “Businesses”, “More Topics.” Additional information can be
found in Publication 515.
Caution: Taxpayers may incorrectly use a Qualified Intermediary (QI ) Number to

file returns or make deposits or payments. The EIN’s for Qualified Inter-
#
examiners need to be aware of this when resolving payment tracers and
duplicate filing conditions. Contact with the taxpayer may be necessary to
determine the correct EINs that should have been used. Do not reinput a
return under a different EIN when the QI number is involved. Have the
taxpayer submit a signed return using the correct EIN and have it
processed. Adjust the other account accordingly, after applying guidelines
for examination criteria.

Taxpayer Authentication , for purposes of identification and to prevent unau-

Leaving Information on Answering Machines/Voice Mail.)
(6) If taxpayers question the time frame for approval of QI status, advise them that
a QI in the range mentioned above will be issued upon receipt of the SS-4 ap-
plication. Acceptance of a QI application currently takes approximately 85 days
for approval and will be issued from the New York office. If there is a question
on the QI status, ENMOD can be researched to see if the application was
rejected. Entity will be notified to update ENMOD if the number is being
revoked. See IRM 21.7.13, Assigning Employer Identification Numbers.
(7) Ann. 2000-48 and IRB 2006-35 Notice 2006-35 provide additional guidance for
financial institutions that are considering the QI regime.
(8) Withholding Foreign Trusts and Foreign Partnerships can find procedures in
Notice 2002-41.
(9) A QI agreement generally has a duration of 6 years and is based in part on a

Treasury Department Certification that the country has effective rules and/or
procedures for providing tax information to the U.S. Treasury and the IRS
regarding know-your-customer (KYC) rules as a vital component of adequate
self-regulation. The IRS generally does not extend the QI system to any
country that does not have acceptable KYC rules.
(10) The following is a list of countries that have submitted approved KYC rules:

Andorra Finland Monaco

Anguilla France Netherlands
Antigua Germany Netherlands Antilles
Argentina Gibraltar Norway
Aruba Greece Panama
Australia Guernsey Poland
Austria Hong Kong Portugal
Bahamas Iceland Saint Vincent and
The Grenadines
Bahrain Ireland Singapore
Barbados Isle of Man Slovenia
Belgium Israel Spain
Bermuda ................Israeli Bank St. Lucia
British Virgin Islands .....Israeli Brokers and Sweden
Broker-dealers
Brunei Italy Switzerland
Canada Japan The Republic of
China (Taiwan)
Cayman Islands ..........Japanese Trust Turks and Caicos
Banks Islands
Chile ..Japanese Securities United Arab Emirates
Dealers
.............Chilean Stock .Japanese Investment .United Arab Emirates
Brokers trust Management - Non - IFSC
Companies
Colombia Jersey ..............Dubai - IFSC
Cyprus Korea United Kingdom
Czech Republic Luxembourg Uruguay
Denmark Liechtenstein ..........Uruguay Banks
Estonia Malta .......Uruguayan Stock
Brokers
(11) If the EIN is in the range noted in paragraph (5) above and the INTERMEDI-
ARY IND on the BRTVU is 1, the entity is a Qualified Intermediary. If the
indicator is “2”, the entity is a NON-QI. This indicator comes from the top
portion of Form 1042 below the address stating “Check if you are a QI/With-
holding foreign partnership or trust”. If these conditions are present, the
taxpayer is a Qualified Intermediary and there may be a Line 66 entry.

(12) If an unnumbered Form 1042 is received without a QI EIN, but the QI box is
checked, send it back to the taxpayer with an explanation of the requirements.
21.8.2.12.10.1 (1) Qualified Intermediaries, Withholding Foreign Partnerships, Withholding

(01-01-2007) Foreign Trusts or a U.S. branch treated as a U.S. person, can request adjust-
Refund Adjustments for ments of amounts over-withheld on Form 1042 under Chapter Three
Non Resident Alien Withholding (CTW) of the code, from a Non-Resident Alien (NRA). Specific
(NRA) Over-Withholding procedures are contained in Rev. Proc. 2000-12.
(2) This credit withheld is claimed on Form 1042, Line 66 (amount withheld by a
third party withholding agent).
(3) Credit can only be requested, and refund of over withheld amounts granted to
a:
• Qualified Intermediary (QI)

• Withholding Foreign Partnership
• Withholding Foreign Trust, or
• U.S. branch treated as a U.S. person.
#
#
disallow the refund claim and send a Letter 105C advising of the
special EIN application requirement for a QI.
(4) A filer claiming a line 66 credit on an original return can have it refunded
(without pre-examination approval) only if they are one of entities listed in (3)
above. Decreases on amended returns require examination approval. See IRM
21.8.2.1.13, Examination Criteria.
(5) There is a possibility that a non-QI can list a credit on Line 66. During initial
processing, the line 66 entry may not have been accepted. A math error notice
generates, and the tax recomputed at 30% (or treaty rate) of the line 62a entry
(gross income paid).
(6) If an amended return is received after the disallowance, or if it was missed in

initial processing, the non-QI’s line 66 entry can be allowed up to the amount
of the tax (TC 150). They must provide documentation (Form 1042-S) to sub-
stantiate the credit.
Note: If there are other credits (ex. FTD, EFTPS, or subsequent payments), these
amounts may be requested and allowed for refund, but only after Examina-
tion approval.
21.8.2.12.10.1.1 (1) When the withholding agent has over-withheld under chapter three withholding
(10-01-2007) (CTW), a Qualified Intermediary (QI) may request a withholding agent to make
Adjustments for an adjustment for amounts paid to the QI by applying either the reimbursement
Non-Resident Alien procedure or the offset procedure.
(NRA) Over-Withholding
by a Withholding Agent Note: Only a QI can request refund of all or part of line 66 amounts over-withheld.
Use procedures in Credit or Refund Procedures for NRA Over-Withholding
by a Qualified Intermediary on an Amended Return. See IRM
21.8.2.12.10.1.4, Credit or Refund Procedures for NRA Over-Withholding by
a Qualified Intermediary on an Amended Return. Non QI’s cannot get a
refund from a line 66 entry.

• The reimbursement procedure must be requested by the QI from the with-

holding agent prior to the due date and/or filing of the Form 1042 (without
regard to extensions). The withholding agent repays the QI any amount
over-withheld and the withholding agent reimburses itself.
Note: This type of adjustment does not appear on IRS records since the Form
1042 has not yet been filed. Only the proper amount will be reported on
Form 1042 when it is filed.
• The offset procedure requires the withholding agent to repay the QI by

applying the amount over-withheld against any other amount that would be
subject to CTW on income paid by the withholding agent to the QI. The QI
must make this request before the earlier of the due date for the withhold-
ing agent to file Form 1042-S for the calendar year (without regard to
extensions) or the date that the Form 1042-S is actually filed with the IRS.
21.8.2.12.10.1.2 (1) A Qualified Intermediary (QI) may make an adjustment for amounts paid to its
(10-01-2007) account holders that it has over-withheld under CTW by applying either the
Adjustments For reimbursement or offset procedures within the time period prescribed for those
Non-Resident Alien procedures.
(NRA) Over-Withholding
by a Qualified Note: These are not the same as adjustments for NRA over-withholding by a with-
Intermediary holding agent.
(2) The reimbursement procedure requires that the QI may repay its account
holders an amount over-withheld. The QI then reimburses itself by reducing
the amount of a subsequent tax deposit. An amount over-withheld may be
applied to reduce a deposit in the following calendar year only if:
• The QI states on a Form 1042-S the amount of tax withheld and the
amount of any actual repayment. The Form 1042-S is issued, if applicable,
to the account holder of the income or to a reporting pool. The document
must be filed by 2 and one half months after the calendar year ends, and
• The QI states on a Form 1042 that the filing of the Form 1042 constitutes a
claim for credit in accordance with the Treas. Reg. § 1.6414-1. The
document must be filed 2 and one half months after the calendar year
ends.
(3) The offset procedure requires the QI repay its account holders by applying the
amount over-withheld against any amount which otherwise would be subject to
CTW from a payment made by a QI to the account holder before the earlier of
March 15 of the calendar year or the date that the Form 1042-S is actually
filed with the IRS.
21.8.2.12.10.1.3 (1) If a Qualified Intermediary (QI) erroneously withholds, as defined under Treas.
(10-01-2007) Reg. § 31.6413(a)-3, an amount under IRC § 3406 from an account holder, the
Repayment of Backup QI may refund the amount erroneously withheld as provided in Treas. Reg. §
Withholding 31.6413(a)-3.
(2) The withholding agent can adjust the repayment of backup withholding by
using the reimbursement or offset procedures. See IRM 21.8.2.12.10.1.1, Ad-
justments for Non-Resident Alien (NRA) Over-Withholding by a Withholding
Agent.
Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2.12.10.1.3

21.8.2.12.10.1.4 (1) Over-withholding on amounts subject to NRA withholding, paid to a Qualified
(10-01-2007) Intermediaries account holders during a calendar year (and the amount has
Credit or Refund not been recovered under the reimbursement or offset procedures explained
Procedures for NRA above), can be requested if ALL of the following conditions are met:
Over-Withholding by a
Qualified Intermediary • The QI must not have issued 1042-S forms to the account holders that
on an Amended Return received the payment that was subject to over-withholding.
• The QI must submit together with its amended return, on which it claims a
credit or refund, a statement of the reason for the over-withholding.
• The QI must submit together with its amended return, on which it claims a
credit or refund, a statement that it has repaid the amount of over-
withholding to the appropriate account holders prior to filing the claim for
credit or refund.
• The QI must retain a record showing that it repaid the account holders the
amount of the over-withholding.
(2) Correspond if any of the above information cannot be verified and/or the state-
ments are not provided.
(3) If all of the above information is provided, send the package to Examination
Classification. See IRM 21.8.2.1.13, Examination Criteria.
(4) If Examination Classification accepts the issue, allow the adjustment on ADJ54
with a TC 291 and reference code 011.
21.8.2.12.10.2 (1) If a Qualified Intermediary (QI) knows that an amount should have been
(10-01-2007) withheld under CTW from a previous payment to an account holder but was
Adjustments for NRA not withheld, the QI may:
Under-Withholding
Before Form 1042 is • Either withhold from future payments made to the same account holder, or
Filed • Satisfy the tax from property that it holds in custody for the account holder
or property over which it has control. For example, stocks, bonds etc.
(2) The additional withholding or satisfaction of the tax owed may only be made
before the due date of the Form 1042 (not including extensions) for the
calendar year in which the under-withholding occurred.
(3) QI’s responsibilities are met if it informs a withholding agent, from which it
received the payment, of the under-withholding and the withholding agent
satisfies the under-withholding.
21.8.2.12.10.2.1 (1) If, after a Form 1042 has been filed for a calendar year, and the QI’s external
(10-01-2007) auditor, or the IRS, determines that due to QI’s failed to carry out its obliga-
NRA Under-Withholding tions under the QI agreement, the QI must file an amended Form 1042 to
After Form 1042 is Filed report and pay the under-withheld tax.
(2) Increase the tax with TC 290 and Reference Code TC 011.
Note: The QI is responsible to pay the under-withheld tax, the interest due, and
any applicable penalties resulting from the amended return adjustment.
(3) If the required amended return is not filed, the IRS has authority to make such
return under IRC § 6020.
21.8.2.12.10.1.4 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

(4) This procedure also applies if a QI number was issued based on the SS-4
filing, then after the QI application was reviewed, it was determined not to
grant QI status and a QI Form 1042 had already been filed.
21.8.2.12.10.2.2 (1) QI filers who report a line 66 entry only, must show the liability on the ROFT as
(01-06-2009) occurring on the last day of the year. This should suppress the FTD penalty. If
Special Rule Regarding not, and adjusting Line 66 with a TC 766, input a TC 181 to abate the penalty.
Failure to Deposit Use Penalty Reason Code 045.
Penalties
(2) For an FTD penalty abatement request based on reasonable cause, use the
Reasonable Cause Assistant (RCA) on Account Management Services (AMS).
Note: The RCA is not available for MFT 12 at this time.
21.8.2.12.10.3 (1) The line 66 (credit for amounts withheld by other withholding agents) entry
(11-07-2008) from Form 1042 is reflected on IDRS as TC 766 (Miscellaneous Credit) and is
Amended Form 1042 for amounts withheld by other withholding agents that pertain to the total net
Returns with Line 66 liability reported on Form 1042, line 63c (total net tax liability).
Changes for Qualified
Intermediaries (2) Adjustments to line 66 entries are permitted if made by a QI, withholding
foreign partnerships, withholding foreign trusts, or a U.S. branch treated as a
U.S. person.
Note: See IRM 21.8.2.12.6.1, Form 1042 FTD Penalty Resulting From Line 66
Entry.
(3) Certain documentation/statements must be provided before allowing an

amendment to a line 66 credit that was claimed on an original return by a QI. If
#
#
(4) Most requests for adjustments occur when payers mistakenly withhold tax at
the wrong rate, or from recipients exempt from taxation, either under treaty
provisions or for reasons described in IRC § 1441 or IRC § 1442.
(5) An amended return can be filed to increase the credit originally claimed on line
66 without increasing the tax amount. Follow procedures when a refund is
requested.
(6) The following substantiation must be provided when an adjustment is

requested for line 66 after the due date of the return:
• A signed amended Form 1042

• The reason for requesting the adjustment, and
• A copy of the original, voided original and corrected Form 1042-S
(7) Correspond or call the taxpayer to request the proper documentation.
(8) If a decrease in tax is requested, and the proper documentation has been
submitted, send to Examination Classification prior to allowing. See IRM
21.8.2.1.13, Examination Criteria.
(9) If the issue is accepted by Classification, make the adjustment (if tax is
affected, use TC 29X). If the line 66 credit is affected, use TC 766 to allow or
increase credit. TC 767 is used to reverse all or part of a previous credit.

Note: There are no requirements under IRC § 1441 for the Form 1042 filer to sub-
stantiate reported credits by attaching copies of the 1042-S forms. Qualified
Intermediary filers currently do not need to support the line 66 entries when
#
#
#
documentation listed in paragraph 6 above must be provided.
21.8.2.12.10.3.1 (1) The provisions for Qualified Intermediary status were new in 2001 and, due to
(10-01-2007) lack of understanding, many of the filers submitted multiple returns for the
Multiple Duplicate Filing same period to report separate transactions.
(TC 976)
(2) When a CP 193 is received, check the account for other TC 976 transactions
and IDRS controls.
(3) Take special care in determining the correct adjustment action.
• The employee with the first open control must gather the original and all the
TC 976 returns (regardless of posting cycle).
• Receivers of subsequent CP 193 (duplicate filing) cases must contact the
person with the first control and make arrangements to forward any
documents they have to them so a combined adjustment can be made.
• Unless the Form 1042 is checked “amended”, treat each return as a
supplemental assessment.
• If there are no prior open controls, but previous duplicate filing conditions
(CP 193) were worked and closed, secure those adjustment documents.
• All of the documents must be gathered by one CSR. The New York office
has requested that we contact them to coordinate disposition of the multiple
filings. They will contact the taxpayer and advise us of action to be taken.
See your manager for the contact phone number.
• The appropriate IDRS C-Letter must be sent to the taxpayer to advise them
to submit only one consolidated return for future filings.
Caution: Some of these accounts may have TC 650 deposit credits in them. Use a
Hold Code 1 on the CC REQ54 when making subsequent adjustments to
prevent the release of any credit balances. If a large credit is still
remaining in the account, contact the taxpayer to determine the total tax
liability etc. The computer generates a refund up to $10 million, so care
must be taken to make sure all assessments are made under QI and
other EIN’s before allowing an account refund.
• Those meeting the criteria for taking a credit for an amount withheld by
other withholding agents could be requesting a refund on the Form 1042.
See specific criteria previously mentioned in this IRM subsection.

Taxpayer Authentication, for purposes of identification and to prevent unau-
Leaving Information on Answering Machines/Voice Mail .)
21.8.2.12.10.3.1 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

21.8.2.12.10.3.2 (1) Qualified Intermediary (QI) filers are permitted to take a credit for amounts
(10-01-2007) withheld by other withholding agents that pertain to the total net tax liability
Adjusting Form 1042 reported on line 63c.
when Credit for Line 66
Entry Was Not Posted to Example: A QI entered an amount on line 63c that includes amounts withheld by a
Accounts During Initial U.S. withholding agent. The QI may take credit on line 66 for the
Processing for Calendar amounts that were withheld by the U.S. withholding agent.
Years 2001, 2002 and
(2) A Non-Qualified Intermediary (NQI) can claim a credit on line 66, but cannot
2003
request a refund. The NQI can be identified by the INTERMEDIARY IND on
the BRTVU as “2.” Only the beneficial owner can request a refund. In addition,
the refund can only be released if the beneficial owner attached the Form
1042-S showing the withholding.
Caution: If the QI is requesting a refund, the QI must attach the corresponding

1042-S forms received to support the amount claimed on line 66. Failure
to do so will result in the denial of the claim.
(3) A QI filer can be identified by an EIN in the QI range with the INTERMEDIARY
IND: on the BRTVU as “1.” This indicator comes from the top portion of Form
1042 below the address stating “Check if you are a QI/Withholding foreign
partnership or trust.” If these conditions are present, the taxpayer is a Qualified
Intermediary and there may be a line 66 entry.
(4) Due to programming problems, the amounts entered on line 66 of Form 1042
for returns processed in 2001, 2002 and 2003 DID NOT generate the appli-
cable credit on Master File. This problem was corrected for processing year
2004.
Scenario #1 - If a QI files a Form 1042 with an entry on line 66 and the
account on IDRS (CC TXMOD/BMFOL) does not show the credit, take the
following action:
• Immediately input a STAUP on the account.

• Research Command Code (CC) BRTVU to determine if the withholding
agent is a QI and verify that the EIN falls within the range listed in (3)
above.
• If agent is a QI, allow the credit claimed on line 66 without further verifica-
tion.
• On CC ADJ54, enter SD remark: “Correction of line 66 credit entry.”
• Attach all documents and notice prints to the adjustment document and
close IDRS control base.
Scenario #2 - A Qualified Intermediary filed Form 1042, but there is no entry on

Line 66 and the taxpayer advises that there was a credit for amounts withheld by
other withholding agents and the entry should have been on line 66:
• Research Command Code (CC) BRTVU to determine if the withholding

agent is a QI and verify that the EIN falls within the range listed in (3)
above.
• Contact the QI via telephone and advise the QI that an amended return
must be filed reflecting the credit on line 66 in order for us to allow the
credit. The QI must also provide the supporting documentation (Form 1042-
S). Input a STAUP for 4 cycles.
• If unable to contact the QI via telephone, send a Letter 418C and input a
STAUP for 8 cycles. Follow established guidelines and suspend the case.
• If an amended return is received with the required supporting forms/docu-
mentation, allow the credit with a TC 766.
Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2.12.10.3.2
• If no reply is received within the allotted time-frame, follow established pro-
cedures and formally disallow the claim.
Caution: Follow Examination Criteria procedures if the claim is for a tax decrease
and/or refund after the due date of the return. See IRM 21.8.2.1.13, Ex-
amination Criteria.
• If the issue is “accepted as filed” by Examination, allow the credit using a

TC 766.
• On CC ADJ54, input remark: “Allowance of line 66 credit entry shown on
amended return.”
• Attach all documents and notice prints to the adjustment document and
close IDRS control base.
Reminder: Only qualified intermediaries, withholding foreign partnerships, withhold-

ing foreign trusts, or a U.S. branch treated as a U.S. person will have a
line 66 entry.
21.8.2.12.11 (1) Send loose, timely filed original (March 15 due date) copy(s) A of Form 1042-S
(10-01-2008) to Code and Edit for processing.
Loose Forms 1042-S
(2) Process late filed original copy(s) A of Form 1042-S documents as follows:
a. IMF tax examiners forward these type cases to BMF/International for

research.
b. BMF/International tax examiners research for the Form 1042 return.
(3) BMF/International tax examiners must use the following chart when research-
ing for the Form 1042 return.
Form 1042 Research Chart

If ... Then ...
A return is located Associate the Copy A of the Form
1042-S with the return’s corre-
sponding DLN.
No return is located Suspend the case and corre-
spond with the Withholding Agent
for the original Form 1042 return.
(4) If an amended Copy A of the Form 1042-S is received in the Accounts Man-
agement area, correspond with the withholding agent to inquire whether this
amended Form 1042-S indicates that an adjustment is necessary on their
Form 1042 account.
(5) Accounts Management International Units must use the following chart for
handling responses from the Withholding Agent.

Withholding Agent Guide

If ... Then ...
A response is received from the An adjustment is necessary on
Withholding Agent their Form 1042 account. The
withholding agent must include a
copy of the amended Form 1042
return with their reply and the
statement of why the adjustment
is necessary. If sending to Exam,
send all documentation with the
package.
There is no reply to this corre- Associate the amended Form
spondence 1042-S with the original Form
1042 return.
(6) When a copy A of a Form 1042-S is attached to a dummy Form 1042 return,
the tax examiners must research for the DLN of the original Form 1042 return.
a. When a DLN is found, associate the dummy with that DLN.

b. When a DLN is not found, process the dummy Form 1042 as an original
return.
(7) Associate all loose/corrected copies B, C or D of the Form 1042-S with the
recipient’s tax return, if on file.
a. When no return is located, the tax examiner must correspond with the
recipient by returning the Form 1042-S and advising them that they need
to file an income tax return if they are attempting to obtain a refund of any
taxes withheld.
b. If the recipient is attempting to obtain a refund of over-withheld tax, they
must file Form 1120-F if it is a corporation, or Form 1040NR if an indi-
vidual (or other income tax return), along with their Form 1042-S.
(8) Return loose copy(s) E of the Form 1042-S to the Withholding Agents for their
records. Close the control bases.
(9) Forward 1042-S forms received that are marked “Additions to Mag Tape” to
Code and Edit for processing as original documents.
(10) 1042-S forms marked “Corrections to Mag Tape” are considered amended
1042-S forms and are processed as indicated in (4) above.
(11) Send all original corrected/amended 1042-S forms to:

Ogden Submission Processing Campus
P.O. Box 409101
Ogden, UT 84409

21.8.2.12.12 (1) Return claims for refund of withholding at source received from Exempt Orga-
(10-01-2007) nizations and Private Foundations, with Form 1042-S, advising the taxpayer to
Withholding at Source file either Form 990-T or Form 990-PF as appropriate.
Refund Requests from
Exempt Organizations (2) A Form 1042-S is required before sending the claim to Ogden Campus Exami-
and Private Foundations nation.
21.8.2.12.13 (1) Refer questions concerning Central Withholding Agreements (CWA’s) to (702)
(02-13-2009) 868-5267. This number is for public use. The following is background informa-
Central Withholding tion on the program.
Agreements
(2) Generally, IRC § 1441(a) requires that withholding agents withhold 30 percent
of the gross income of nonresident alien entertainers and athletes performing
personal services or participating in athletic events in the United States.
However, they may be able to enter into withholding agreements with the IRS
for reduced withholding provided certain conditions are met.
Note: A withholding agent cannot reduce taxes withheld to less than the anticipated
amount of income tax liability.
(3) A Centralized Withholding Agreement (CWA) is an agreement entered into by

the nonresident alien athlete or entertainer, a designated withholding agent,
and an authorized representative of the IRS. The agreement is for a specific
tour or series of events and the withholding is based on the budget provided
and net profit estimates.
(4) Nonresident alien entertainers and athletes requesting a CWA must have filed
and paid, or made payment arrangements, for all previous U.S. taxes and they
must agree to timely file Form 1040NR or 1040NR-EZ. They must submit the
information contained in Form 13930, Instructions on How to Apply for a
Central Withholding Agreement.
Note: If an entertainment group consists of more than one NRA, generally each
NRA will need to apply for a CWA.
(5) When the IRS approves the estimated budget and the designated central with-
holding agents, the IRS will prepare the CWA. The agreement must be signed
by a designated withholding agent, the NRA covered by the CWA, and the au-
thorized IRS representative.
(6) The withholding agent must agree to withhold income tax from the payments
made to the nonresident alien and will be required to file Form 1042 and Form
1042-S for each year in which income is paid to the NRA covered by the with-
holding agreement. They will issue Form 1042-S to each NRA athlete or
entertainer affected by the agreement.
(7) CWA’s must be sent at least 45 days before the agreement is to take effect to
the following address:
Central Withholding Agreement Program
M/S 0175
110 City Parkway
Las Vegas, NV 89106

(8) Additional information about the CWA program can be found on irs.gov at
http://www.irs.gov/businesses/small/international/article/0,,id=106060,00.html or
by e-mail at mailto:CWA.Program@irs.gov .
21.8.2.13 (1) Form OECD (Organization of Economic Cooperation & Development) is used
(10-01-2007) to exchange information with the 30 member treaty countries/states.
Exchange of Information
With Treaty Countries, (2) The information for the Form OECD comes from Form 1042-S filings.
Form OECD
(3) Withholding agents file Form 1042, Annual Withholding Tax Return for U.S.
Source Income of Foreign Persons, with the accompanying 1042-S forms,
Foreign Person’s U.S. Source Income Subject to Withholding, reporting income
paid and tax withheld at source to nonresident aliens and/or foreign corpora-
tions.
(4) Once OECD forms are generated, they are exchanged electronically with the
Competent Authorities in the various treaty countries.
(5) This process is completely automated and is controlled by the Office of the
Deputy Commissioner (International), LMSB. The Philadelphia IRS Campus no
longer has any role in this exchange of information.
21.8.2.14 (1) A computer matching program has been implemented using the Tier II CTW
(10-01-2007) Database which automates the Form 1042 and Form 1042-S validation
CTW Reconciliation - process. This implementation obsoletes the procedures for this matching
Validation of Form 1042 process contained in prior versions of this IRM.
and Form 1042-S
21.8.2.14.1 (1) The Accounts Management BMF/International Group performs the following
(10-01-2007) analysis upon receipt of the CTW 25-45 Listing:
Procedures for Working
the Under-Withheld a. #
Form 1042-S #
Correspondence Listing
(CTW 25-45) Math Error Guide
If ... Then ...
Math error is below tolerance Input a TC 290 for .00 in Blocking
Series 18. File a copy of the
listing with each original Form
1042.
b. Review the remaining listing and verify that the tax rate is consistent with
the Country Code and Income Code.
Country and Income Code Guide

If ... Then ...
The country code is blank Use the country code of the re-
cipient’s address on the listing.

Country and Income Code Guide

If ... Then ...
The listing does not show the re- Use country code OC (other
cipient’s address country) and apply the statutory
tax rate of 30%.
Missing information does not Use 30% as the tax rate.
allow verification of any of the
entries
The tax rate is incorrect based on Annotate the listing with the
an analysis correct tax rate.
c. Review the listing and verify that the tax withheld is consistent with the
withholding rate for the Country Code identified.
Withholding Rate Decision Chart

If ... Then ...
The gross income paid multiplied Annotate the listing with the
by the verified tax rate does not correct amount.
equal the tax withheld
The correction results in a math Follow procedures in (a) above.
error below tolerance
There are numerous similar Attempt to resolve the discrep-
errors (2 pages or more) for one ancy via telephone prior to
withholding agent or the error making the math error assess-
results in a large dollar adjustment.
ment amount ($50,000 or more)
The final analysis shows no Notate “correct” on the listing and
under-withheld amount. follow procedures in (a) above.
The final analysis shows under Open a control base in Category
withholding Code P810 and issue Letter
1791C.
d. The “IRS Received Date” for the open control must be the date the Corre-
spondence Listing was actually received in the Accounts Management
area, International Units.
e. The Letter 1791C being issued to the withholding agent must include the
proposed assessment for the under withheld amount and 2 copies of the
notated Correspondence Listing. Suspend the third copy for 90 days in
“M” status.
(2) When there is no record of Form 1042 being filed, research to ensure that a
TC 150 is not present under another EIN.
(3) When unable to locate a TC 150 for the withholding agent:
a. Secure the withholding agent’s entity information from the Form 1042-S or
the entity module when available.

b. Correspond with the withholding agent requesting the filing of Form 1042.
c. Provide the withholding agent with copies of the Correspondence Listing.
d. Advise the taxpayer of credits available to be applied against the tax if any
are on the module.
e. Suspend the case for 60 days.
(4) When and if the return is filed, verify for accuracy, and forward for processing.
(5) When no response to IRS correspondence for the Form 1042 Tax Return is
received, contact the International Coordinator on the Compliance Planning &
Analysis Staff.
21.8.2.14.2 (1) When a response is received from the Withholding Agent, use the following
(10-01-2007) charts to determine the appropriate action when the proposed assessment has
Processing Responses not been processed:
from the Withholding
Agent
Withholding Agent Response Chart
If ... Then ...
The withholding agent agrees Input a TC 290 for the proposed
with the whole amount of the amount. Attach a copy of the
proposed assessment listing as the source document.
The withholding agent agrees to Input a TC 290 for the amount for
a partial assessment which the taxpayer has agreed.
Follow the procedures below after
determining if the contested
amount is substantiated or not.
Note: Use Blocking Series 18 for these adjustments.
(2) Use the following chart to determine the action to take on contested amounts
when the proposed assessment has not been processed:
Contested Amount Decision Chart

If ... Then ...
Substantiated via an acceptable Input a TC 290 for .00 using
response (see IRM 21.8.2.15.5 Blocking Series 18. Attach the
for a list of acceptable response as a source document.
responses.)
The contested amount has not Adjust the unsubstantiated
been substantiated amount as a math error.
(3) When the withholding agent disagrees with the proposed assessment and the
math error assessment has been processed:

Math Error Processing

If ... Then ...
Substantiation is provided for the Abate the assessment using
withheld amount Blocking Series 18 and file a
copy of the correspondence
listing with adjustment document.
Substantiation is not provided for Follow procedures outlined in
the withheld amount IRM 21.5.4.4.5 to initiate the Math
Error Unsubstantiated Protest
Process.
(4) When the withholding agent states that the IRS has made a mistake and that
they have no record of the recipients in question, request the original Form
1042 and 1042-S (if they filed paper documents) from Files and verify the
name and EIN of the withholding agent.
Assessment Verification Procedures

If ... Then ...
The paper document(s) verifies Notify the withholding agent and
that the proposed assessment attach a photocopy of the Form
was correct 1042 and 1042-S in question.
(5) When the Form 1042-S documents identify a different withholding agent than
the first withholding agent contacted:
a. Follow the procedures outlined above to process the under withheld

amount for the correct withholding agent. See IRM 21.8.2.15.1
b. Apply the substantiated response procedures above to the first withholding
agent’s account, apologize to them and notate a reference to the second
withholding agent’s account.
(6) When the withholding agent responds to IRS correspondence regarding the tax
return that we can’t find, and states that the return was filed by another with-
holding agent on their behalf, follow the steps below:
a. Obtain the name, EIN, address and telephone number of that agent.
b. Verify the filing of a Form 1042 return for the second withholding agent.
c. Request the return and Form 1042-S transcripts, if necessary.
(7) When the withholding has been reported and paid under the second withhold-
ing agent’s EIN, apply the substantiated response procedures, when
applicable, to the first withholding agent’s account and reference the second
withholding agent’s account.
a. Apologize to the first withholding agent and notate.

b. If it is determined that the second withholding agent was responsible for
the withholding, but failed to report or submit a deposit for the liability,
follow the procedures outlined in Applicable Forms - W/H Tax on Foreign
Partners. See IRM 21.8.2.15.1.
c. When the responsibility for reporting and depositing can’t be ascertained,

follow the procedures outlined in IRM 21.5.4.4.5, Math Error Unsubstanti-
ated Protest Processing.
21.8.2.14.3 (1) When a response is not received from the withholding agent to our proposed
(10-01-2007) assessment within the original suspense period:
Processing Discrepancy
Items When the a. Assess the under-withheld amount.
Withholding Agent Did b. Follow the procedures outlined in IRM 21.5.4.4.1, Setting the Initial Math
Not Respond Error Action.
(2) When the under-withheld amount is assessed, provide the taxpayer with an
explanation of the math error showing both the original and the corrected
figures.
a. For lengthy or complicated explanations, include an exhibit illustrating the

error and the correction.
b. Attach a copy of the return identifying the withholding agent’s figures and
the corrected figures.
21.8.2.14.4 (1) The following are acceptable responses from withholding agents for abating
(10-01-2007) substantiated math errors:
Acceptable
Substantiation for Math a. The under-withheld amount was previously corrected on an amended
Errors Form 1042 or Form 1042-S (request the documents from Files for verifica-
tion).
b. They inadvertently used the wrong country or income code and provide
the correct one.
c. The income reported is not considered U.S. source income.
d. The under withheld amount is due to converting foreign currency to U.S.
dollars and there is no additional tax due (primarily Canada).
e. The income is not subject to normal withholding because the recipient is a
foreign tax exempt organization, but is subject to the reduced 4% with-
holding for a foreign government or instrumentality.
f. The income is effectively connected with the conduct of a trade or
business in the United States and the taxpayer submits a valid Form
W-8BEN, Form W-8ECI, W-8EXP, W-8IMY, or W-8CE.
g. The income was jointly owned or that there was a partial return of capital.
h. The under-withheld tax was paid by the recipient and this is verified by a
copy of the recipient’s tax return.
i. The gross amount paid was in error.
j. The withholding agent is Canadian and is only withholding the additional
taxes not previously paid by the U.S. withholding agent.
k. The Form 1042-S was filed in error and the appropriate taxable return and
information returns were filed and submitted (i.e. Form 1099 or Form W-2).
(2) Do not request an amended or corrected Form 1042 or 1042-S forms from the
withholding agent. However, if the withholding agent submits a corrected Form
1042 or 1042-S forms as proof of the under-withheld amount, be careful not to
allow a tax decrease on the Form 1042 account if the withholding agent is at-
tempting to abate the math error assessment.
a. If the withholding agent substantiates the under-withheld amount with in-

formation attached to the amended Form 1042 or 1042-S forms, abate the
math error assessment.

b. Associate the amended documents and the Correspondence Listing with
the original return.
21.8.2.15 (1) Form 8804, Form 8805, and Form 8813 are used to pay and report only the
(10-01-2007) §1446 withholding tax that is based on effectively connected taxable income
Withholding Tax on allocated to foreign partners, without regard to distribution.
Foreign Partners - Form
8804 (2) Prior to 1/1/2005, Form 8804, Annual Return for Partnership Withholding Tax,
was processed to the Non-Master File (NMF). For tax periods 200412 and
subsequent, Form 8804 is processed to the Business Master File under MFT
08. The form was processed at the Philadelphia Accounts Management
Campus through 2006 and is now processed at the Ogden Submission Pro-
cessing Campus.
21.8.2.15.1 (1) The total withholding tax liability of the partnership for its tax year is reported
(10-01-2009) on Form 8804, Annual Return for Partnership Withholding Tax.
Applicable Forms - W/H
Tax on Foreign Partners (2) Form 8805, Foreign Partner’s Information Statement of § 1446 Withholding
Tax, is used to show the amount of effectively connected taxable income and
the withholding tax attributable to each foreign partner for the partnership’s tax
year. If the foreign partner is a foreign trust or estate, the foreign trust or estate
must provide a copy of the Form 8805 furnished by the partnership to each of
its beneficiaries. In addition, the foreign trust or estate must complete Schedule
T for each of its beneficiaries and must provide that Schedule T information to
each beneficiary. The partnership may need to provide additional information
on the Form 1065 K-1 regarding the components making up the amount of ef-
fectively connected taxable income reported to the partner in order for the
partner to prepare its tax return.
• A separate Form 8805 must be filed for each foreign partner.

• A copy of each Form 8805 must be attached to the Form 8804 when filed.
(3) The foreign partner must attach Form 8805 to its return in order to claim a
credit on Form 1040NR, Form 1120-F, or Form 8804.
(4) Any U.S. person erroneously made subject to the withholding tax would also
receive Form 8805 from a partnership and must attach the form to its income
tax return to obtain credit.
(5) A foreign partnership that is a partner in another partnership that has withheld
and paid over amounts under IRC § 1446 must treat the tax withheld by the
lower-tier partnership as though it were an amount paid by the upper-tier part-
nership for purposes of §1446. Accordingly, the upper-tier partnership must
complete and file Form 8804 and Form 8805 as appropriate to satisfy its
§1446 withholding tax obligation and report the amount of tax withheld on their
behalf to its partners.
(6) Form 8813, Partnership Withholding Tax Payment Voucher (§1446), is used to
transmit installment payments to the IRS.
(7) If a discrepancy exists between the amounts shown on the Form 8804 and the
posted IDRS data, resolve the matter at the Campus level. Where appropriate,
#
#

(8) The due date for filing Form 8804 and for paying any amount due with the
return is generally the 15th day of the 4th month after the close of the partner-
ship’s tax year. However, for partnerships who keep their books and records
outside the United States and Puerto Rico, the due date is the 15th day of the
6th month after the close of the Partnership’s tax year. Taxpayers may request
an extension of time to file Form 8804 by filing Form 7004. The extension is
generally for 6 months. However, partnerships who keep their books and
records outside the United States and Puerto Rico may only receive a 4 month
extension beyond their initial due date. Filing Form 7004 does not extend the
time to pay.
Note: The Form 7004 extension of time to file has been reduced from 6 months to
5 months for Form 8804 that has a tax year ending on or after September
30, 2008.
(9) Generally, all effectively connected taxable income (ECTI) allocated to foreign
partners is subject to withholding at 35%. However, as indicated in the 2008
instructions to Form 8804, etc., if a foreign partner has allocated to it an
amount included on line 4d that includes both a net capital gain and qualified
timber gain (QTG), an alternative maximum 15% capital gain may apply to the
qualified timber gain. For this purpose, a qualified timber gain means the net
gain described in IRC § 631(a) and (b), determined by taking into account only
trees held more than 15 years. Only qualified timber gains for the period that
begins after May 22, 2008, and before May 23, 2009, are eligible for the alter-
native tax. The instructions also require that the partnership enter “QTG” on
the dotted line to the left of the line 5e entry.
21.8.2.15.2 (1) Tax due on Form 8804, Annual Return for Partnership Withholding Tax (§
(10-01-2009) 1446), is required to be paid as estimated tax following essentially the same
Form 8804 Estimated rules as those existing for corporations, except as modified by Internal
Tax Penalty Revenue Regulation 1.1446-3. There was a major revision to the Form 8804
for tax year 2005 with the addition of a Schedule A for calculating the
estimated tax penalty. For specific information regarding the estimated tax re-
quirements and the penalty computation, see the Form 8804 Schedule A
instructions.
Note: Requests for abatement or reduction of estimated tax penalties on Form

8804 filings prior to the release of the revised form were made using Form
2220. The estimated payments are due the 15th day of the 4th, 6th, 9th and
12th months of the partnership’s tax year.
(2) The following are the requirements that a partnership must have met in order
to qualify for the prior year safe harbor:
• The partnership return for the prior year must have been filed on time
(including extensions).
• The prior taxable year must have been a full year comprising 12 months.
• The Form 8804 for the current taxable year must have been filed on time
(including extensions).
• The ECTI for the prior year must have been at least 50% of ECTI for the
current year.
• The average of the total of estimated tax installments paid by the due date
of any installment must be at least 25% of prior year tax computed without
regard to the adjustments allowed under Internal Revenue Regulation
1.1446-6.

Example: If the prior year ended 12/31/2007, prior year tax would be computed by
finding the sum of Form 8804, line 4a times .35, plus line 4d times .28,
plus line 4g times .25, plus line 4h times 15.
(3) Programming to identify taxpayers who have met the “prior year safe harbor”
requirements is not yet in place. If the necessary information is not available
via cc BRTVU or via cc TRDBV, it may be necessary to request the return for
the prior year to determine if the requirements have been met, and the penalty
should be removed.
(4) The partnership may elect to use the annualized income installment method, or
the adjusted seasonal method in lieu of the safe harbor method. If the taxpayer
elects to use the safe harbor method, that method must be used for all install-
ments, with one exception: If, in an installment period following the first
installment, the partnership determines that current year ECTI will exceed
twice prior year ECTI, the partnership may elect to change installment method
at that time.
(5) There is no provision for the estimated tax penalty under IRC § 6655 to divide
withholding credit equally among the required installments as exists in IRC §
6654(g) (relating to individuals, trusts, and estates). Since the penalty for Form
8804 is assessed under IRC § 6655 in conjunction with Treas. Reg. §
1.1446-3, the computer will not re-compute the ES penalty for Form 8804
when TC 766 withholding credit is applied to an account.
Note: This situation does not apply to TC 660 estimated tax payments.
(6) Without data on when tax was actually withheld, Master File cannot accurately
compute the ES penalty when withholding credit is claimed. The partnership
should file Form 8804 Schedule A to assure proper treatment of tax and credits
in the penalty computation.
(7) Advise partnerships who question the assessment of an estimated tax penalty
that they must file Form 8804, Schedule A, if they claimed withholding credit
on their return, and they do not meet the ″safe harbor″ requirements for prior
year tax. For more information on the “safe harbor” requirements, see IRM
20.1.3.3.1.1.8, Tax Withheld by Partnerships Under IRC Section 1446, para-
graphs (4) and (5).
(8) These estimated tax penalties must be addressed manually if a TC 766 credit
is being added to an account and there is a TC 176 present. Adjust account
using TC 290 .00 with a TC 17X.
(9) A CP 234 generates when the computer computation of the estimated tax
penalty (TC 176) differs from the amount computed by the taxpayer (TC 170).
Process CP 234 notices generated on Form 8804 returns using procedures in
IRM 21.7.11.4.8, CP 234 - Processing Potential ES Penalty Notices.
(10) For tax year 2005 only: Form 8804 Schedule A is detached from Form 8804
and forwarded to Philadelphia Accounts Management for manual processing of
the estimated tax penalty. Input a Posting Delay Code of 4 when inputting a
TC 170 estimated tax penalty assessment on the account.

21.8.2.15.3 (1) Use the following instructions to supplement the general guidelines for pro-
(10-01-2010) cessing CP 193 notices found in IRM 21.7.9, BMF Duplicate Filing Conditions.
Processing Amended
Form 8804 and CP 193 (2) Verify the entity data on the CP 193 notice with the entity data on the return
Notices and input any necessary changes or corrections.
Note: The entity data on the account was established on Master File as a result of
the Form 1065 filing requirement.
(3) If the duplicate filing appears to be a “true duplicate ”, verify via CC BMFOLR
or BRTVU that the taxable income is the same as reported on the original
return before inputting a TC 290 for .00 to release the - A freeze.
Reminder: Resolve any misapplied or subsequent payment application issues as

necessary.
(4) Input Form 8804 tax increases with a TC 290 for the amount of the tax
increase. If the adjustment is made without the original return, use Blocking
Series 15. If the original return is attached, use Blocking Series 00.
(5) A partnership that has filed a Form 8804 may not file an amended Form 8804
and obtain a refund of any amount shown on the 8805 forms filed. See Regu-
lations §1.1446-3(d)(2)(iv).
(6) Refer to the following table if the listed Forms are attached to the Form 8804:
Form 8804 Attachment Guide

If ... Then ...
Form 1042-S, Foreign Person’s Refer to local Maildex for routing
U.S. Source Income Subject to to data input area.
Withholding, Copy A ONLY
Form 1042-S, Foreign Person’s Leave attached.
U.S. Source Income Subject to
Withholding, Copy B ONLY
Form 1042-S, Foreign Person’s Return to Taxpayer.
Withholding, Copy C or D ONLY
Form 1042-S, Foreign Person’s Return to Withholding Agent.
Withholding, Copy E ONLY
Form 7004, Application for If the extension is for a different
Automatic Extension of Time To period, route to Receipt and
File Certain Business Income Control for processing.
Tax, Information, and Other
Returns
Form 8804 Schedule A, Penalty Verify with estimated tax penalty
for Underpayment of Estimated § posted on module and adjust if
1446 Tax by Partnerships necessary.

Form 8804 Attachment Guide

If ... Then ...
Form 8804-C, Certificate of Route to:
Partner-Level Items to Reduce § Internal Revenue Service
1446 Withholding Examination Branch DP S-607
11601 Roosevelt Blvd.
Philadelphia, PA 19154
Form 8804-W, Installment Leave attached to Form 8804.
Payments of § 1446 Tax for Part-
nerships
Treas. Reg. § 1.1446-6 Notation Route to:
Withholding Certificate or any as- Internal Revenue Service
sociated reasonable cause Examination Branch DP S-607
request 11601 Roosevelt Blvd.
Philadelphia, PA 19154
Form(s) 8805 are attached and After working the CP 193, detach
they are not in substantiation of and route Form(s) 8805 to
any credits claimed on Form Batching and Numbering for pro-
8804 cessing to the International
Database/IRMF.
Form(s) 8805 are attached and Do not detach the Form 8805.
they support withholding claimed These types of Form 8805 reflect
on Form 8804 the foreign partnership entity data
on the left side of the Form 8805
and can be verified on the
FIRPTA database.
Form 8288-A is attached to the The credit must be verified on the
Form 8804 FIRPTA database.
Note: For attachments not listed, refer to IRM 3.11.154.2.8, Routing Guide for At-
tachments.
(7) When allowing withholding credit claimed on Form 8804 and Form 1042-S, use
the appropriate Credit Reference number (331, 332, etc.). See Document
6209.
Note: When issuing a manual refund from a Form 8804 account, use Line Number
15.
21.8.2.15.4 (1) The final §1.1446 regulations were effective for partnership taxable years
(10-01-2010) beginning after May 18, 2005 (see IRM 21.8.2.15.1). However, a partnership
Form 8804 §1.1446 whose taxable years began after December 31, 2004, and before May 19,
Elections 2005, could elect to apply the final regulations to the partnership by attaching a
statement to Form 8804. If this partnership attached the necessary election to
Form 8804, it could take advantage of the provision in the final regulations
allowing partnerships to withhold at the reduced rates applicable to preferential
rate income rather than the rate applicable to ordinary income. However,
making the election subjects the partnership to all of the other provisions of the
final regulations.
Note: An election under §1.1446-6 or §1.1446-7 is not required to be attached to

returns for tax periods 200605 and later.
(2) Partnerships are instructed to attach withholding certificates filed under Reg.
§1.1446-6 that support the reduced §1446 withholding, along with a computa-
tion of the reduction in withholding relating to each partner for which it is
submitting a certificate, to their Form 8805 and Form 8813. Partnerships must
file these items even if the certificate(s) reduce the §1446 withholding to zero.
Route any loose withholding certificates, or those attached to a Form 8804, to
the Low Income Housing Team at the Philadelphia Campus: Drop Point S-607.
(3) Prior to 8/22/2006, Form 8804 returns filed without the election attached were
processed at the 35% rate and CP 132 notices were issued. Advise partner-
ships who reply to these notices requesting the reduced rate that they must file
an amended return with the required §1.1446-7 election attached to claim the
reduced rate.
(4) §1.1446-6T was finalized on April 29, 2008. The regulations are effective for
partnership taxable years ending after December 31, 2007. The final regula-
tions have a transition rule providing that any certificate submitted on or before
July 28, 2008, that met the requirements of the temporary regulation, is not
defective solely because it does not meet the requirements of the final regula-
tions. However, any certificate (including any updated certificates and status
reports) submitted, or required to be submitted after July 28, 2008, must
comply with the requirements of the final regulations and be submitted using
Form 8804-C.
(5) Process amended returns requesting the reduced tax rate if the §1.1446-7
election is attached.
21.8.2.15.5 (1) When a taxpayer claims credit for §1446 withholding (Form 8805) on amended
(10-01-2008) Form 1040NR, Form 1120-F, etc., and Form 8805 is attached:
IRC § 1446 Withholding
Tax on Foreign Partners • Verify the credit from Line 10 of Form 8805. Also verify the name of the
partner and TIN/ITIN on the Form 8805 with the TIN/ITIN or name provided
on the Form 1040NR, 1120-F, etc.
• Verify the name and TIN/ITIN. Allow credits that can be verified using CC
IRPTR without further research. The taxpayer must submit the Form 8805
to receive the credit.
#
• For IMF, input a TC 766, Credit Reference Code 331, Reason Code 069
and adjust the tax if necessary.
• For BMF Form 1120-F, allow the credit with a TC 766 and adjust the tax if
necessary. For Form 8804, use credit reference number 331.
(2) If the name of the partner or the TIN/ITIN of the partner (or both) provided on
Form 8805 does not match the information on the U.S. tax return of the
partner, correspond with the taxpayer for the information before allowing the
credit amount shown.
(3) If this credit is claimed on either the Form 1040NR or Form 1120-F, and Form
8805 is not attached, correspond with the taxpayer for the information before
allowing the credit amount shown.

(4) If the taxpayer fails to supply Form 8805, or fails to supply information that
clarifies who is the appropriate partner entitled to the credit, reject the claim for
credit using a Letter 916C.
21.8.2.16 (1) Form 1041 is filed by an estate or trust to report income tax.
(10-01-2008)
Form 1041, U.S. Income (2) Form 1041 is due by the 15th day of the 4th month following the end of the tax
Tax Return for Estates year.
and Trusts
Note: Form 7004, Application for Automatic Extension of Time To File Certain
Business Income Tax, Information, and Other Returns, extends the time to
file to 5 months for Form 1041 that has a tax year ending on or after
September 30, 2008. For prior tax years, the extension is for 6 months.
(3) If an adjustment is necessary, use credit reference number 886 (taxable

income) from Form 1041, line 22.
(4) Amended Forms 1041 changing income from taxable to non-taxable that result
in the original tax liability being reduced to zero, and the tax decrease is
#
(5) Taxpayers claiming a foreign tax credit must complete Schedule G, line 2a,
and attach Form 1116.
(6) Foreign tax credit is a nonrefundable credit. Input the adjustment as a TC 291.
Use Blocking Series 00 with original return or Blocking Series 17 without the
original.
Note: If the taxpayer had no tax liability, they cannot claim the credit in that year.
Advise the taxpayer that they may carryback or carryover the credit. See
IRM 21.5.9, Carrybacks.
(7) For additional information on Form 1041, refer to IRM 21.7.4.4.1, Form 1041,
U.S. Income Tax Return for Estates and Trusts.
21.8.2.16.1 (1) Form 1041-QFT was new for tax year 2001.
(10-01-2007)
Form 1041-QFT, U.S. (2) Cincinnati Submission Processing Campus (CSPC) processes, as BMF, Form
Income Tax Return for 1041-QFT submitted by domestic taxpayers. Adjustment procedures are found
Qualified Funeral Trusts in IRM 21.7.4.4.1.1.4, Qualified Funeral Trusts, Form 1041-QFT.
(3) Ogden Submission Processing Campus (OSPC) processes Form 1041-QFT

submitted by international taxpayers. Adjustment procedures are the same as
for domestic filers. See IRM 21.7.4.4.1.1.4, Qualified Funeral Trusts, Form
1041-QFT.
(4) Form 1041-QFT shows on IDRS TXMOD as MFT 05, tax class 2, document
code 39, and on ENMOD, the Filing Requirement Code (FRC) is 1041-9 for
both Domestic or International filers.
(5) Calendar year returns are due on April 15 regardless of the address of the
taxpayer. International taxpayers are not given a two month extension to file.

21.8.2.17 (1) Form 1065 is an annual return which is used to report each partner’s share of
(10-01-2010) the income, losses, expenses, and operations of a partnership. Each partner is
Form 1065, U.S. Return issued a Schedule K-1 which must be attached to their income tax return.
of Partnership Income
(2) Form 1065 is an information return. However, there are a few that are taxed.
See IRM 21.7.4, Income Taxes/Information Returns.
(3) Form 1065 is due by the 15th day of the 4th month after the close of the
taxable year.
Exception: For a partnership that keeps its books and records outside the U.S.
and Puerto Rico, the return is due by the 15th day of the 6th month
after the close of the taxable year.
(4) Form 7004, Application for Automatic Extension of Time to File Certain
Business Income Tax, Information, and Other Returns, can be filed to request
additional time to file a U.S. Return of Partnership Income.
Note: The extension of time to file from Form 7004 has been reduced from 6
months to 5 months for Form 1065 that has a tax year ending on or after
September 30, 2008.
(5) An amended, corrected, and, superseding Form 1065 is Cat-A if any of the
conditions in IRM 21.7.4.4.2.9, Duplicate Filing Conditions on Form 1065, exist.
If there is an “A” freeze on the account, release it with a TC 290 .00. Use
Blocking Series 00 with the original return or Blocking Series 17 without the
original return.
(6) Form 1065 is subject to failure to file penalty (TC 160/166) and an IRC § 6698
miscellaneous penalty (TC 246 reference number) for missing or late filed
Schedule K-1’s. The previous penalty rate of $50 for each partner for each
month, (or part of a month) the return is late or incomplete, not to exceed 5
months, was increased to $85 by the Mortgage Relief and Forgiveness Act for
returns filed after December 20, 2007. The Hokie Act increased the penalty
rate by $1 for return taxable years beginning in 2008. Then Public Law 110-
458 increased the amount to $89 for returns required to be filed after
December 31, 2008. Public Law 111-92 increased the penalty amount to $195
for taxable years after December 31, 2009. See IRM 20.1.2.9.2, Penalty Calcu-
lation, for information on the various penalty rates.
Note: Reasonable Cause consideration applies to Form 1065 penalties.
(7) For additional information on Form 1065, refer to Publication 541 and IRM
21.7.4.4.2, Form 1065, U.S. Return of Partnership Income.
(8) Refer taxpayers with questions regarding waiver requests by large partnerships
required to file electronically to the toll-free number, 866-255-0654. The
number for international callers is 01-512-416-7750.
21.8.2.17.1 (1) The CP 282 was developed to notify taxpayers of possible additional filing re-
(11-07-2008) quirements related to the partnership’s foreign partner(s).
CP 282 - Form 1065
(2) When Form 1065, Schedule B, Question 16 or Form 1065-B, Schedule B,
Question 4 is answered “yes”, this notice is generated.
(3) The additional filing requirement is related to IRC § 1446 which requires the
partnership to report and pay a withholding tax to the IRS when the partner-

ship had taxable income effectively connected with the conduct of a trade or
business within the United States that is allocated to a foreign partner.
(4) If the IRC §1446 withholding requirements apply, the taxpayer is required to
file:
• Form 8804, Annual Return for Partnership Withholding Tax (§ 1446)

• Form 8805, Foreign Partner’s Information Statement of § 1446 Withholding
Tax, and
• Form 8813, Partnership Withholding Tax Payment Voucher (§ 1446)
(5) Penalties and/or interest may be assessed if the partnership does not comply
with the IRC §1446 reporting and withholding tax requirements.
(6) Final and temporary IRC §1446 regulations were published on May 18, 2005.
The final and temporary regulations are effective for partnership taxable years
beginning after May 18, 2005. However, a partnership may elect to apply the
final regulations to partnership years beginning after December 31, 2004, by
attaching a statement to Form 8804 indicating that the partnership is making
the election under regulation § 1.1446-7. A partnership may apply the
temporary regulations to partnership years beginning after December 31, 2004
by electing to apply the final regulations and electing under Treas. Reg. §
1.1446-6(f) to apply the temporary regulations.
Note: An election under §1.1446-6 or §1.1446-7 is not required to be attached to

returns for tax periods 200605 and later.
(7) Treas. Reg. § 1.1446-6T was finalized on April 29, 2008. The regulations are
effective for partnership taxable years ending after December 31, 2007. The
final regulations have a transition rule providing that any certificate submitted
on or before July 28, 2008, that met the requirements of the temporary regula-
tion, is not defective solely because it does not meet the requirements of the
final regulations. However, any certificate (including any updated certificates
and status reports) submitted, or required to be submitted after July 28, 2008,
must comply with the requirements of the final regulations and be submitted
using Form 8804-C.
(8) A sample of a CP 282 notice can be found on the Notice Gatekeeper Web site
at http://gatekeeper.web.irs.gov.
21.8.2.18 (1) Several withholding certificates are available and must be filed with a withhold-
(10-01-2007) ing agent if exemption or reduced rates are being claimed under IRC § 1441,
Withholding Certificates IRC § 1442 , or IRC § 1446. These certificates are prepared solely by the
taxpayer and not a determination by the Service.
(2) In recent years, some of the forms were obsolete and others replaced with a
form in the W-8 series.
(3) Additional information and the purpose for each is contained in the following
subsections.
21.8.2.18.1 (1) As of December 31, 2000, Form W-8 became obsolete. Form W-8BEN, Certifi-
(10-01-2009) cate of Foreign Status of Beneficial Owner for United States Tax Withholding,
Form W-8, Certificate of replaced it. Only the new forms from foreign recipients of income subject to
Foreign Status withholding are acceptable.

(2) The change in the form was necessary to reflect changes made to the regula-
tions under IRC § 1441. Further changes to the Form W-8 series were
required to reflect the new regulations under IRC § 1446.
(3) The chart below shows the forms that became obsolete on December 31,
2000 and their replacements.
Form W-8 Replacement Guide

Obsolete Form New Form W-8 Series Replacement
W-8, Certificate of Foreign Status Form W-8BEN , Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding
Form 1001, Ownership, Exemption, or Reduced Form W-8BEN , Certificate of Foreign Status of
Rate Certificate Beneficial Owner for United States Tax Withholding
Form 4224, Exemption From Withholding of Tax on Form W-8ECI , Certificate of Foreign Person’s
Income Effectively Connected with the Conduct of Claim That Income Is Effectively Connected With
a Trade or Business in the U.S. the Conduct of a Trade or Business in the United
States
Form 8709, Exemption From Withholding on In- Form W-8EXP , Certificate of Foreign Government
vestment Income of Foreign Governments and or Other Foreign Organization for United States
International Organizations Tax Withholding
Form W-8IMY , Certificate of Foreign Intermediary,
Foreign Flow-Through Entity, or Certain U.S.
Branches for United States Tax Withholding
Note: This is a new form and does not replace a
prior form.
Form W-8CE, Notice of Expatriation and Waiver of
Treaty Benefits
(4) CAUTION: When the nonresident alien files a claim for erroneous backup with-
holding:
a. Return the claim to the taxpayer, and

b. Advise the taxpayer to file the appropriate tax form (1040NR Individual,
1120-F Corporation) with a copy of the 1099INT or Form 1042-S attached.
21.8.2.18.2 (1) If the income is considered “fixed or determinable annual or periodic income”,
(11-07-2008) such as interest, dividends, rents, royalties, premiums, annuities, profits, gains,
Form W-8 BEN, etc., the nonresident alien recipient must provide Form W-8 BEN to the with-
Certificate of Foreign holding agent in order to claim a reduced, or exemption from, withholding
Status of Beneficial under a United States tax treaty.
Owner for United States
Tax Withholding (2) A foreign partner may submit Form W-8 BEN to qualify a partnership to use a
preferential rate of withholding under § 1446 relating to the foreign partner sub-
mitting the form.
(3) Return Form W-8 BEN, or any W-8 series document, to the individual taxpayer
if it is received loose. The taxpayer must provide the form to their withholding
agent/financial institution. Form W-8 BEN should not be sent to the Service.

(4) Associate loose Form W-8 series documents sent in by business taxpayers
with their withholding tax return (i.e., Form 1042).
21.8.2.18.3 (1) Effectively connected income from a U.S. trade or business is described as
(10-01-2007) “income from services performed” or “fixed or determinable annual or periodic
Form W-8ECI, Certificate income” (e.g., interest, dividends, rents and certain similar amounts), if the
of Foreign Person’s income is from assets used in, or held for the conduct of that trade or
Claim That Income Is business, or the activities of that trade or business were a material factor in the
Effectively Connected realization of the income.
With the Conduct of a
Trade or Business in the (2) Income that is “effectively connected”, which is earned other than through a
United States partnership, may be exempt from Chapter 3 withholding only if the nonresident
alien is materially involved in the operation of the trade or business, as
opposed to merely being a passive investor.
(3) Foreign persons are generally subject to U.S. tax at a 30% rate on income
they receive from U.S. sources, however, no withholding under IRC § 1441 or
IRC § 1442 is required on the following types of income when it is, or is
deemed to be, income effectively connected with the conduct of a trade or
business in the United States. The types of income are:
• Personal service income

• Income subject to withholding under IRC § 1445 (disposition of U.S. real
property interests), and
• Income subject to withholding under IRC § 1446 (foreign partner’s share of
effectively connected income)
(4) A foreign person is defined as a:
• Nonresident alien individual

• Foreign corporation
• Foreign partnership
• Foreign trust
• Foreign estate, or
• Any other person that is not a U.S. person
(5) The Form W-8ECI, Certificate of Foreign Person’s Claim for Exemption from
Withholding on Income Effectively Connected with the Conduct of a Trade or
Business in the United States, is used by foreign persons to:
• Establish that they are a foreign person

• Claim that they are the beneficial owner of the income for which Form
W-8ECI is being provided
• Claim that the income is effectively connected with the conduct of a trade
or business in the United States
(6) The Form W-8ECI is not filed with the IRS. It must be filed with, and main-
tained by, the withholding agent when a recipient considers their “effectively
connected income” exempt from withholding. Return loose forms to the
preparer of the Form.
(7) The Form W-8ECI is filed by foreign persons who are beneficial owners of
U.S. source income that is, or is deemed to be, effectively connected with a
trade or business in the United States and may be eligible for exemptions from
Chapter 3 withholding.

21.8.2.18.4 (1) Investment income (stock, bonds and other domestic securities, interest on
(10-01-2007) deposits in banks, and payments from any other source) earned in the United
Form W-8EXP, States by foreign governments, international organizations, foreign central bank
Certificate of Foreign of issue, foreign tax-exempt organizations, foreign private foundations, or the
Government or Other government of a U.S. possession is exempt from Chapter 3 Withholding, if the
Foreign Organization for income is not derived from a commercial activity or received from or by a con-
United States Tax trolled commercial entity.
Withholding
(2) Foreign governments, international organizations foreign central bank of issue,
foreign tax-exempt organizations, foreign private foundations, or the govern-
ment of a U.S. Possession must file Form W-8EXP with the withholding agent
to:
• Establish that they are a foreign person

• Claim that they are the beneficial owner of the income for which Form
W-8EXP is being filed, and
• Claim a reduced rate of, or exemption from, withholding
(3) The withholding agent must keep Form W-8EXP for at least four years after
the end of the year in which the income to which it applies is paid. Form
W-8EXP should not be sent to the IRS.
21.8.2.18.5 (1) Foreign persons are subject to U.S. tax at a 30% rate on income they receive
(11-07-2008) from U.S. sources that consists of:
Form W-8 IMY,
Certificate of Foreign • Interest
Intermediary, Foreign • Dividends
Flow-Through Entity, or • Rents
Certain U.S. Branches • Premiums
for United States Tax • Annuities
Withholding • Compensation for, or in expectation of services performed, or
• Other fixed or determinable annual or periodical gains, profits or income
(2) This tax is imposed on the gross amount paid and is generally collected by
withholding on that amount.
(3) A payment is considered to have been made whether it is directly to the ben-
eficial owner or to another person, such as an intermediary, agent, trustee,
executor or intermediary agent, trustee, executor or partnership for the benefit
of the beneficial owner.
(4) Form W-8 IMY must be provided to a withholding agent by:
• A foreign person, or a foreign branch of a U.S. person, to establish that it is

a qualified intermediary that is not acting for its own account, to represent
that it has provided or provides a withholding statement for withholding re-
sponsibility
• A foreign person to establish that it is a non-qualified intermediary that is
not acting for its own account, and if applicable, that it is using the form to
transmit withholding certificates that provides a withholding statement as
required
Note: A U.S. person cannot be a non-qualified intermediary.

• A U.S. branch of certain foreign banks or foreign insurance companies to
represent that the income it receives is not effectively connected with the
conduct of a trade or business within the United States
• A flow-through entity to represent that it is either a withholding foreign part-
nership or withholding foreign trust, and provides a withholding statement,
as required, or a non-withholding foreign partnership or a non-withholding
foreign simple or grantor trust (The income which it receives is not effec-
tively connected with a U.S. trade or business, and it has provided a
withholding statement as required.)
• A partnership or grantor trust that is a partner in a partnership and is
allocated effectively connected taxable income
(5) Form W-8 IMY must be provided to the withholding agent or payer before
income is paid or credited on behalf of the beneficial owner. Form W-8 IMY
should not be sent to the Service.
Note: Failure to provide a Form W-8 IMY, or failure to provide necessary documen-
tation and withholding statements, may lead to withholding at a 30% rate, or
the backup withholding rate.
21.8.2.18.6 (1) Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits, is used to
(10-01-2009) notify a payer that a covered expatriate individual is subject to special tax
Form W-8CE, Notice of rules.
Expatriation and Waiver
of Treaty Benefits (2) Covered expatriates are required to give Form W-8CE to the payer if they had
any items identified in boxes 1-4 on the day before their expatriation date.
Note: Expatriates must file Form 8854 with the Service.
(3) The Form W-8CE must be filed within 30 days of expatriation for each
specified tax deferred account, item of deferred compensation, or interest in a
nongrantor trust. The form is given to each payer of the identified income and
is not filed with IRS.
21.8.2.18.7 (1) If income is for independent personal services, or from dependent personal
(10-01-2007) services by nonresident alien individuals, the recipient must file Form 8233
Form 8233, Exemption with the withholding agent to claim reduced or exempt withholding, when the
From Withholding on recipient is eligible. Use the following chart to determine if Form 8233 should
Compensation for be used by nonresident alien individuals:
Independent (and
Certain Dependent)
Form 8233 Use Chart
Personal Services of a
Nonresident Alien If ... Then ...
Individual
Receiving compensation for inde- Use Form 8233 to claim a tax
pendent personal services treaty withholding exemption for
performed in the United States part or all of that compensation
and/or to claim the daily personal
exemption amount.

Form 8233 Use Chart

If ... Then ...
Receiving compensation for Use Form 8233 to claim a tax
dependent personal services treaty withholding exemption for
performed in the United States part or all of that compensation.
Note: Do not use Form 8233 to
claim the daily personal
exemption amount.
Receiving non-compensatory Use Form 8233 to claim a tax
scholarship or fellowship income treaty withholding exemption for
and personal services income part or all of both types of
from the same withholding agent income.
(2) This form is not used if the taxpayer is a beneficial owner who is:
If ... Then ...

Receiving compensation for Form W-4 is used.
dependent personal services
performed in the United States,
and is not claiming a tax treaty
withholding exemption for any
part of that compensation
Receiving non-compensatory Form W-8BEN or, if elected by
scholarship or fellowship income, the withholding agent, Form W-4
and is not receiving any personal is used for the non-compensatory
services income from the same scholarship or fellowship income.
withholding agent
Claiming only foreign status or Form W-8BEN is used.
treaty benefits with respect to
income that is not compensation
for personal services
Note: This exemption is not retroactive.
(3) The Form 8233 is processed at the Philadelphia Accounts Management

Campus. Processing procedures for this form are located in IRM 21.8.6, Ex-
emptions from U.S. Withholding (Form 8233).
(4) Withholding agents keep a copy of Form 8233 for their records, give a copy to
the nonresident alien, and attach a copy to Form 1042.
21.8.2.18.8 (1) Form 1078, Certificate of Alien Claiming Residence in the United States,
(10-01-2009) became obsolete on December 31, 2000. A new series of forms was
Form W-9, Request for developed to comply with the new regulations under Chapter 3 (IRC §§ 1441-
Taxpayer Identification 1446) and related sections of the Internal Revenue Code. Form W-9 replaced
Number and the Form 1078.
Certification

(2) A person who is required to file an information return with the IRS must obtain
a correct Taxpayer Identification Number (TIN) to report:
• Income paid to them

• Real estate transactions
• Mortgage interest they paid
• Acquisition or abandonment of secured property
• Cancellation of a debt
• Contributions they made to an IRA
(3) The form is used by a U.S. person (including a resident alien) to give their
correct TIN to a requester, when applicable, to:
• Certify that the TIN is correct (or to show that the taxpayer is waiting for a
number to be issued)
• Certify that the taxpayer is not subject to backup withholding, or
• Claim exemption from backup withholding if the taxpayer is a U.S. exempt
payee
(4) Due to regulatory changes, Form W-9 serves a triple function:
• Vehicle for U.S. persons to report Taxpayer Identification Numbers (ITINs)

to certain withholding agents
• Vehicle for informing withholding agent that the payee is a U.S. person
• Vehicle for a U.S. person to claim tax treaty exemptions
21.8.2.19 (1) Form 706-NA is used to compute estate and generation-skipping transfer
(10-01-2007) (GST) tax liability for nonresident alien decedents.
Form 706-NA, U.S.
Estate (and (2) The estate tax is imposed on the transfer of the decedent’s taxable estate,
Generation-Skipping rather than on the receipt of any part of it.
Transfer) Tax Return
(3) A nonresident alien decedent is a decedent who is neither domiciled in, nor a
citizen of, the United States at the time of death.
(4) For purposes of this form, a U.S. citizen who was a resident of a U.S. Posses-
sion at the time of his death was considered a “nonresident - not a citizen of
the United States”, but only if such person acquired U.S. citizenship solely as a
result of:
a. His/her being a citizen of such possession, or

b. His/her birth or residence within such possession
(5) The executor must file Form 706-NA, if at the date of death, the value of the
decedent’s gross estate located in the United States under Internal Revenue
Code situs rules exceeds the filing limit. The filing limit is $60,000, which is
reduced by the sum of:
a. The gift tax specific exemption (§ 2521) allowed with respect to gifts made
between September 9, 1976, and December 31, 1976.
b. The total taxable gifts made after December 31, 1976, that are not
included in the gross estate.
Note: For the estates of decedents dying after November 10, 1988, the estate tax
is computed using the unified rate schedule in IRC § 2001(c).

(6) Form 706-NA is due 9 months after the date of death, unless an extension of
time for filing and/or payment was granted using Form 4768, Application for
Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-
Skipping Transfer) Taxes.
(7) Campus Directors can approve an extension of time for filing.
a. The extension may be granted, even though an application is made later

than 9 months from the date of death.
b. However, unless the personal representative is abroad, the extended due
date for filing the estate tax return may not be later than 15 months from
the date of the decedent’s death.
(8) The MFT for Form 706-NA is 52 and the tax period is always 000000.
(9) The tax is due when the return is filed, unless deferred payment under IRC §
6161(a) or IRC § 6163(b) has been granted. For more information, see IRM
3.12.263.13, Math/Consistency Errors-Priority IV General (Form 706-NA
series).
(10) Form 706-NA filers do not have the same privilege that Form 706 filers have to
make installment payments for the balance due under IRC § 6166.
a. The balance due must be paid within 9 months after the decedent’s death
unless an extension of time to pay was granted.
b. In that case, they must attach a copy of the approved Form 4768 to Form
706-NA.
(11) Payment must be made by check or money order payable to the United States
Treasury for the face value in U.S. dollars.
(12) Process requests for transfer certificates and/or closing letters received in cor-
respondence as follows:
a. If no TIN is specified, research CC NAMES and NAMEI to locate an SSN

or ITIN using a “W” or a “V” at the end of the TIN.
b. If the account has an unreversed TC 420 and the status is higher than 08,
route correspondence and Audit Information Management System (AIMS)
print to BMF Classification at the Philadelphia Campus - DP S-605, on
Form 3210, since the case has been selected and is being reviewed by
the estate tax attorney (Washington, D.C.).
c. If the account has an unreversed TC 420 and status is lower than 06,
explain to the taxpayer that the Service has nine months from the date of
return submission to provide a closing letter. If more than 9 months have
passed, refer to BMF Classification.
d. If TC 421 is posted on the account, request the original return from Files
using the controlling DLN and mail the taxpayer a photocopy of the closing
letter that is attached to the closed Form 706-NA.
e. If no return is located, or no TIN is located on Master File, forward Form
706-NA to Entity to assign a TIN and route return for processing.
Reminder: Refile the complete 706-NA package.
(13) Do not send payment tracers, penalty abatement claims, or mixed entity cases
to BMF Classification.

21.8.2.19.1 (1) Estate tax treaties are in effect with the following countries:
(10-01-2007)
Estate Tax Treaties • Australia
• Austria
• Canada (see income tax treaty)
• Denmark
• Finland
• France
• Germany
• Greece
• Ireland
• Italy
• Japan
• Netherlands
• Norway
• Republic of South Africa
• Switzerland
• United Kingdom
(2) The maximum unified credit is $13,000 for all decedents dying after November
10, 1988, and for all former U.S. citizens who expatriated within the 10 years
prior to death with a principal purpose of tax motivation, regardless of the date
of death.
(3) The maximum unified credit for a citizen of a U.S. possession (Section 2209)
is the greater of:
a. $13,000, or
b. $46,800 times a fraction.
Note: The numerator of the fraction is line 1 of Schedule B, and the denominator is
line 3 of Schedule B.
21.8.2.19.2 (1) All tax abatements and assessments are processed using BMF Adjustment
(10-01-2010) procedures, see IRM 21.7.5.4.1, Form 706 Procedures.
Form 706-NA
Adjustment Procedures (2) All tax adjustments to Form 706-NA are Category A Examination criteria.
(3) The MFT for Form 706-NA is 52. The date of death (DOD) must be entered on
the tax period 000000.
(4) Returns are subject to normal penalty and interest assessments. Reasonable
cause guidelines are applicable to penalty assessments.
(5) For inquiries on Form 706-NA accounts, as well as Form 706 and Form 709
with foreign addresses that cannot be addressed using IDRS research,
prepare a Form 4442 and fax to the Cincinnati Estate and Gift Tax Team at
#
21.8.2.19.3 (1) The paragraphs below outline the provisions and potential credits allowable for
(10-01-2007) U.S. and Canadian returns under this Protocol.
Estate Tax Provisions in
the 1995 Canadian (2) Nonresident alien Form 706-NA: A charitable deduction is now generally
Protocol Article XXIXB allowable for transfers at death to Canadian charities with respect to property
subject to U.S. Estate tax.

(3) Pro-rata unified credit: Nonresident alien Form 706-NA estate returns may now
claim a pro-rata unified credit, but the gross estate outside the United States
must be substantiated.
(4) The pro-rata formula is the gross estate subject to U.S. estate taxation (divided
by) the gross estate worldwide (multiplied) by the unified credit amount. For
yearly maximum allowable amounts, see table in IRM 21.7.5.4.1.4, Applicable
Credit Amount (Unified Credit).
(5) Marital credit:
• All U.S. estate tax returns are now allowable, with respect to bequests to
Canadian spouses, of a marital credit.
• This credit is limited to the amount of the unified credit allowable.
• It is not an unlimited marital deduction.
• If the surviving spouse is a U.S. citizen, the credit can’t exceed the U.S.
estate tax attributable to the property that qualifies for a marital deduction.
(6) Treatment of trusts - For Canadian returns, the Canadian exemption for the
Canadian deemed capital transfer tax to some U.S. spousal trusts has been
extended.
(7) Credit for U.S. estate tax - For Canadian returns, a credit is permitted to be
claimed against the Canadian deemed capital transfer tax for U.S. federal and
state estate tax paid on U.S. situs assets.
(8) Credit for Canadian deemed capital transfer tax - For Form 706 U.S. estate tax
returns, a credit is allowable for the Canadian federal and provincial deemed
capital transfer tax on assets situated outside the United States under situs
rules.
(9) $1,200,000 “Small Estate” exemption:
a. On nonresident alien Form 706-NA returns, unless the decedent’s

worldwide gross estate exceeds U.S. $1,200,000, the only asset subject to
U.S. estate tax is U.S. real estate.
b. Article IV of the treaty and Article 3 of the 1995 Protocol determine
residence.
(10) Claims for refund and retroactivity of the treaty:
a. All U.S. estate tax return claims must be filed within the time limits set by
the Code.
b. Claims that are otherwise filed untimely are acceptable if they were filed
within one year from the date the Protocol was effective (November 9,
1995).
c. The Protocol’s estate tax provisions, other than (1)(a), have retroactive
effective dates. These apply to estates of decedents who died after
November 10, 1988, if appropriate claims for refund are timely filed.
d. The treaty does not contain a restricted interest provision
21.8.2.19.4 (1) Form 706-CE must be filed before the IRS can allow a credit for foreign death
(10-01-2010) taxes claimed on Form 706.
Form 706-CE, Certificate
of Payment of Foreign (2) Three copies of Form 706-CE must be prepared for each foreign death tax
Death Tax credit claimed.

(3) The original and one copy are sent to the foreign government where the tax
was paid. That office certifies the form for resident or nonresident U.S. citizens
and sends it to the appropriate address listed below. The taxpayer keeps the
third copy of the form.
If ... Then ...

Decedent was a Resident U.S. Department of The Treasury
Citizen Internal Revenue Service Center
Cincinnati, OH 45999
Decedent was a Non-Resident Internal Revenue Service
U.S. Citizen International Estate Tax Group
S:SE:SP:EG:EC:1205
820 First Street, N.E. UCP-CNN-
730
(4) If the foreign government refuses to certify Form 706-CE, the executor must
file it directly with the IRS Service Center for resident or nonresident citizens
listed above as appropriate . The following must be submitted:
• A completed Form 706-CE (except the certification part)

• A statement signed under penalties of perjury to explain why the foreign
government did not certify it
• A copy of the foreign death tax return, and
• A copy of the receipt or cancelled check verifying the payment of the
foreign death tax
(5) The IRS Service Center for resident U.S. citizens must be notified if there is a
refund of any of the foreign death taxes already paid to a foreign government
for which a credit is being claimed, and the estate must pay any additional
federal estate tax due resulting from the foreign refund to the IRS.
(6) Death tax conventions are in effect with the following countries:
Australia Germany Norway

Austria Greece Republic of South
Africa
Canada * Ireland Switzerland
Denmark Italy United Kingdom
Finland Japan
France Netherlands
* Article XXIX B of the United States - Canada income tax treaty.

21.8.2.20 (1) The Small Business Job Protection Act of ’96 (SBJPA) expanded information
(10-01-2007) reporting under IRC § 6048 for:
Information Reporting
Under IRC § 6048 • U.S. persons who make transfers to foreign trusts, and
• U.S. owners of foreign trusts
(2) The SBJPA also added:
• Reporting requirements for the U.S. beneficiaries of foreign trusts (IRC §

6048(c)), and
• Revised civil penalty procedures
(3) U.S. owners are responsible for ensuring that the foreign trust annually
furnishes the IRS prescribed information to:
• The U.S. owner, and

• U.S. beneficiaries
(4) U.S. persons treated as owners of a foreign trust under IRC § 671 through IRC
§ 679 are responsible for ensuring that the foreign trust files an annual return
containing a full and complete accounting of all:
• Trust activities
• Trust operations, and
• Other relevant information
21.8.2.20.1 (1) Organization Function Program (OFP) code 710-12320 is designated for Form
(10-01-2007) 3520 & 3520-A activity. However, Accounts Management in Philadelphia has
Penalties Assessed been approved to report work performed relating to Form 3520 & Form 3520-A
Under § 6677 - Form to a fifth digit OFP 710-33039. This includes related Civil Penalty adjustments
3520 & Form 3520-A (CP 15 & CP 223) and duplicate filing conditions (CP 193) for:
• Form 3520, Annual Return to Report Transactions with Foreign Trusts and
Receipt of Certain Foreign Gifts, and
• Form 3520-A, Annual Information Return of Foreign Trust with a U.S.
Owner (Under § 6048(b))
(2) Penalties are assessed under §6677 of the Internal Revenue Code for each
tax year in which the Form 3520 and/or 3520-A was not timely filed with the
required information.
(3) The penalty is 35% of the gross reportable amount transferred to (Form 3520
page 2; total line 13), or distributed from, the foreign trust (Form 3520 Page 4,
total of lines 24 and 25), and/or 5% of the gross value of the portion of the
foreign trust’s assets at the close of the year treated as owned by the U. S.
person (Form 3520 Page 4, Line 23).
21.8.2.20.2 (1) Notice 2003-75, 2003-50 IRB 1204, provides a new simplified reporting regime
(05-19-2010) that Treasury and the IRS have developed for taxpayers who hold interests in
Interim Reporting Canadian Registered Retirement Savings Plans (RRSP’s) and Canadian Reg-
Regime for Canadian istered Retirement Income Funds (RRIF’s). The new reporting regime, which is
Registered Retirement effective for taxable years beginning after December 31, 2002, is in lieu of the
Savings Plans and Form 3520 (Annual Return to Report Transactions With Foreign Trusts and
Registered Retirement Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return
Income Funds of Foreign Trust With a U.S. Owner) filing obligations that otherwise apply to
U.S. citizens and resident aliens who hold interests in RRSP’s and RRIF’s, and

to the custodians of such plans. The new simplified reporting regime is
designed to permit taxpayers to meet their reporting obligations by using infor-
mation that is readily available to them.
(2) Under the authority of IRC § 6001, Treasury and the IRS have designed a new
form, Form 8891 (U.S. Information Return for Beneficiaries of Certain
Canadian Registered Retirement Plans) that a U.S. citizen or resident alien,
who holds an interest in an RRSP or RRIF, must complete and attach to his or
her Form 1040. The Form 8891 also coordinates the reporting rules with the
procedure set forth in section 4 of Revenue Procedure 2002-23, 2002-1 C.B
744, for making the election under Article XVIII(7) of the U.S. - Canada income
tax convention to defer U.S. income taxation of income accrued in the RRSP
or RRIF.
Note: Refer to IRM 21.5.1.4.4, Processing of Loose Forms or Schedules for loose
filed Forms 8891.
(3) A U.S. citizen or resident alien who has received any distributions during the
taxable year from an RRSP or RRIF must report the total amount of distribu-
tions received during the taxable year from all such RRSP’s and RRIF’s on line
16a of the Form 1040 and the taxable amount of all such distributions (as de-
termined under section 72) on line 16b of the Form 1040.
(4) For purposes of the new simplified reporting regime described in this Notice, a
beneficiary of an RRSP or RRIF is an individual who is subject to current U.S.
income taxation on income accrued in the RRSP or RRIF, or would be subject
to such taxation, had the individual not made the election under Article XVIII(7)
of the U.S. - Canada income tax convention to defer U.S. income taxation of
income accrued in the RRSP or RRIF. For these purposes, an annuitant of an
RRSP or RRIF is an individual who is designated pursuant to the RRSP or
RRIF as an annuitant.
(5) Taxpayers must retain supporting documentation relating to information

required by the new reporting regime, including Canadian Form T4RSP, Form
T4RIF, or Form NR4, and periodic monthly or annual statements issued by the
custodian of the RRSP or RRIF.
(6) The new simplified reporting regime provides the information needed for tax
compliance purposes. Therefore, pursuant to IRC § 6048(d)(4), no reporting is
required under §6048 with respect to RRSP’s and RRIF’s that have beneficia-
ries and annuitants who are subject to the new simplified reporting regime.
Accordingly, the associated penalties described in IRC § 6677 do not apply to
such RRSP’s and RRIF’s and their beneficiaries and annuitants. A beneficiary
or annuitant of an RRSP or RRIF may, however, be subject to other penalties
(e.g., the penalty imposed by IRC § 6651 for failure to file a tax return or to
pay tax).
21.8.2.20.3 (1) A U.S. person files Form 3520 on trust activities and operations to report
(10-01-2010) certain activities, operations, or transactions with foreign trusts such as:
Form 3520 & Applicable
Penalties • A creation of a foreign trust by a U.S. person
• A transfer of any money or property to a foreign trust by a U.S. person
• Reporting the death of a U.S. person, if such person was treated as an
owner of a foreign trust, and reporting any portion of a foreign trust that
was included in the decedent’s estate
• A distribution from a foreign trust received by a U.S. person
• A U.S. person, who has no interest in a foreign trust, must use the Form
3520 to report the receipt of certain large gifts or bequests from certain
foreign persons
• A U.S. person treated as an owner of a foreign trust, without regard to the
year of creation or whether property was transferred in the current year
(2) This form is required of any U.S. person, directly or indirectly transferring
property to a foreign trust, whether or not the trust has one or more U.S. ben-
eficiaries. An Individual, Partnership, Corporation, Trust or Estate may be
required to file this return.
Note: A separate Form 3520 must be filed for transactions with each foreign trust.
(3) Processing: The Form 3520 is processed at the Ogden Submission Processing
Campus (OSPC) under MFT 68, to the Business Master File (BMF). Filing is
done using the trust EIN or a social security number followed by a “V” (if valid)
or “W” (if invalid) - like Form 706. The DLN used is 60383-XXX-XXXXX-X
(98383-XXX-XXXXX-X for returns processed in Philadelphia prior to 2007).
Prior to processing year 1999, the Form 3520 was not recorded on any
automated system.
(4) Due Date: In general, the due date is the same as for income tax returns
(1040, 1041 Series, 1041, 1065 & 1120 Series). Most taxpayers are liable for
some type of income tax return and the Form 3520 is due on the date that the
income tax return is due, including extensions. Thus, the due date may vary.
All required attachments must be submitted with Form 3520 for it to be consid-
ered a complete return.
(5) Civil Penalties: A CP 215 and/or CP 15 generates after Examination reviews

Form 3520, and they determine that it was filed late, or if the required informa-
tion is incomplete or incorrect on the return. Because the Form 3520 due date
is governed by the due date of the income tax return, it is not possible to have
a computer-generated penalty. When the income tax return is under field or
campus examination, the Form 3520 is reviewed for potential civil penalty and
Examination may make assessments under MFT 13 (BMF account numbers)
or MFT 55 (IMF account numbers), with civil penalty reference number 659.
IDRS posts the assessment as a TC 240.
Note: Prior to 7-1-2004, civil penalty reference number 677 was used to assess
this penalty.
(6) Application of Penalties: The following general criteria are used: Failure to
report or timely file the required information on Form 3520 is subject to a:
• 35% penalty on the gross value of any property transferred to a foreign

trust, for failure by a U.S. transferor to report the transfer. The penalty is
assessed against the U.S. transferor (using transferor’s TIN under MFT 13
(BMF account numbers) or MFT 55 (IMF account numbers)).
• 35% penalty on the gross value of the distributions received from a foreign
trust, for failure by a U.S. person to report receipt of the distribution. The
penalty is assessed against the U.S. person (using such person’s TIN
under MFT 13 or MFT 55).
Note: A U.S. person is a Citizen, Resident, Domestic Corporation, Domestic Part-

nership, Domestic Estate or Domestic Trust.

• 5% of the amount of certain foreign gifts for each month for which the
failure to report continues (not to exceed a total of 25%). The penalty is
assessed against the person receiving the gift (using such person’s TIN
under MFT 13 (BMF account numbers) or MFT 55 (IMF account numbers)).
• Penalties are only imposed to the extent that the transaction is not
reported.
• This penalty cannot exceed the gross reportable amount.
Example: If a U.S. person transfers property worth $1 million to a foreign trust, but
only reports $400,000 of the amount, penalties could only be imposed
on the unreported $600,000.
(7) When a Form 3520 is filed after the return due date, or if the gross value of
the foreign trust on a timely filed return is zero or blank, a campus notice CP
223 is generated to pull the return from Files. The CP 223 notice is sent to
Accounts Management for penalty determination with the return attached, if it
is located in Files.
If ... Then ...

The Form 3520 was filed late Request an explanation of late
filing and/or a copy of an
approved extension Form 7004.
• If the conditions in Paragraph
(8) below are met, do not
assess a penalty. Close IDRS
control base and classify
waste the CP 223.
(8) below are not met, assess
a penalty equal to 35% of the
amount shown on page 4, line
23 on U.S. owner’s account,
MFT 13 or 55.
The Form 3520 is not attached to Suspend the case and request
the CP 223 and the received date the return from Files.
and/or the page 4, line 23 amount
cannot be determined from IDRS
research
Return is for tax year 2006 and is Contact the international Planning
charged out to Statistics of and Analysis analyst for assis-
Income (SOI) tance with securing the necessary
information.
Return is for any other tax year Attempt to contact the area noted
and is charged out to any other on the charge-out to secure the
area. return.

If ... Then ...

Return cannot be secured from Send a Letter 3653C to the
files, P&A, or any other area. taxpayer to request a copy of the
form.
Caution: When composing the
3653C letter requesting
a copy of the Form
3520, do not include
paragraphs which imply
that we have viewed
the return, such as
Paragraph G which
begins “Form 3520
shows that you
answered, YES to the
question on Line 3,
Page 1. ”
Page 4 of the Form 3520 is not 1. Correspond for the missing
attached to the return, or if the information using a 3653C
amount on line 23 is missing letter and suspend the case
for 90 days.
2. Send one copy of the letter to
the Trust, and a second copy
to the U.S. owner of the trust.
3. Change IDRS category code
to ITRQ if a follow up letter
needs to be sent and
suspend the case for longer
than 45 days.
The taxpayer replies to the IDRS • If the return was filed late,
3653C letter and there is an assess a penalty equal to 35%
amount shown on page 4, line 23 of the amount shown on page
4, line 23 on U.S. owner’s
account, MFT 13 or 55.
• If the return was timely filed,
attach the 3653C letter
response to the 3520 return
and close the IDRS control
base.
The amount on line 23 of page 4 Close the IDRS control base.
of Form 3520 has not been Refile the return or classify waste
secured from the taxpayer, and the CP 223 if the original return is
the 90-day suspense period has #
expired #
Note: The manager of the employee processing a CP 223 must review any manual
assessment of a §6039F(c) penalty on a Form 3520 account resulting from
the processing of a CP 223. Authorization for the assessment may be in the
form of the manager initialing the CP 223.
(8) Abatement Procedures - Reasonable cause criteria must be considered:

• If the taxpayer can demonstrate that the failure to comply was due to rea-
sonable cause and not willful neglect, do not assess penalties. If penalties
were assessed, abate them.
• Proof of an approved extension of time to file an income tax return can be
considered if the Form 3520 was filed within the approved extension period
(Form 4868 or Form 7004).
• Check MFT 68 and/or the income tax module as applicable for timely filing
or the presence of a posted or unposted TC 460. Abate penalty if extended
due date shown is equal to or greater than the filing date.
• To abate, adjust the MFT 13 (BMF account numbers) or 55 (IMF account
numbers) module with a 290 .00, Blocking Series 52, and Reference
Number 659 with minus (–) after the abatement amount. As a result, trans-
action TC 241 generates on the Master File. Abatement requests for both
BMF and IMF modules are worked in PAMC by the BMF International units.
Caution: For accounts with a penalty assessed with a reference number 677,
abate with a reference number 677.
Note: Form 7004, Application for Automatic Extension of Time To File Certain
Business Income Tax, Information, and Other Returns, cannot be used to
request an extension on Form 3520, unless it is filed for the taxpayer’s
business tax return. However, if the income tax return has an extended due
date, the Form 3520 is due on the same extended due date. Be sure to
check all applicable income tax MFTs, depending on filing requirements, to
determine timely filing. Check all “XREF” TIN accounts for a TC 460 for the
year in question to determine if an extension was filed.
(9) Non-Abatement Procedures:
• Advise taxpayer if research shows that the Form 3520 was filed late and
give the specifics. Make sure the income tax return due date is checked to
determine timely filing of the Form 3520.
• Research IDRS for prior year reasonable cause adjustments.
• Allow the taxpayer to submit additional information for consideration of
penalty abatement (i.e., copy of approved income tax return extension,
certified mail receipt, reasonable cause statement).
• If additional information is not accepted, deny the request. Input 290 .00,
Penalty Reference Number 659 for .00, Blocking Series 98/99, and advise
the taxpayer of their penalty appeals rights using an IDRS Letter 854C.
• If a Form 843 claim is received and is being denied, follow normal penalty
denial procedures.
Caution: Most of these penalties are large dollar amounts since the penalty is
based on the gross reportable amount transferred or distributed, and/or
gross value of assets, property, receipts etc., which are usually a sub-
stantial amount. After checking for a large corporation indicator on IDRS,
follow local procedures for Accounts Receivable Cases.
(10) Additional Information: For filing year 2002, a “Report Plan Number” (RPN) is
shown on the tax module of Form 3520, MFT 68. This is a three-digit number
shown on the second line of TXMOD on the IDRS module. This number
generates from Line 2b (Employer Identification Number) and consists of the
last three digits of that number. If line 2b is blank or contains a number other
than an EIN, a default report plan number of “520” is shown. This field was
created to capture foreign trust return information from multiple trusts filed by
the same person that were previously “G” coded and refiled.
Example: TXMODA98-XXXXXXX
68 RPN 200112
21.8.2.20.4 (1) A foreign trust annually files a Form 3520-A, Information Return of a Foreign
(10-01-2010) Trust, when a U.S. person is treated as an owner of any portion of the foreign
Form 3520-A & trust.
Applicable Penalties
(2) Form 3520-A is required for the foreign trust to satisfy the U.S. owner’s annual
obligation under IRC § 6048(b). If there are multiple Foreign Grantor Trust
Owners or U.S. Beneficiaries, there may be several pages 3 & 4 of the Form
3520-A required to be provided. If Form 3520-A is received late (after the 15th
day of the 3rd month from the end of the trust’s tax year), the computer
generates campus Notice CP 223. A CP 223 requires the tax examiner to
manually calculate and assess the failure to file (FTF) Civil Penalty Reference
Number 660 using the U.S. owner’s TIN listed on Line 6b, Page 3 of Form
3520-A under MFT 13 (BMF account numbers) or 55 (IMF account numbers).
Note: Prior to 7-1-2004, civil penalty reference number 677 was used to assess
this penalty.
(3) Processing: Beginning with the 2000 year returns, Form 3520-A was
processed at Philadelphia (PSPC) on the Business Master File (BMF) under
MFT 42. Filing is done using the trust’s EIN or the taxpayer’s SSN. The DLN
was shown as 98382-XXX-XXXXX-X. Returns prior to 2000 were not
processed, but rather filed in Alpha order in the Document Retention (Files)
area. Beginning in 2007, these returns are processed at the Ogden Submis-
sion Processing Campus with a DLN of 60382-XXX-XXXXX-X.
(4) Due date: This form is due the 15th day of the 3rd month (e.g. calendar year
2007 is due 3/15/08) following the end of the Trust’s tax year or extended due
date (Form 7004).
(5) When a Form 3520-A is filed after the return due date, or if the gross value of
the portion of the trust treated as owned by the U.S. owner on a timely filed
return is zero or blank, a campus notice CP 223 is generated to pull the return
from Files. The CP 223 notice is sent to Accounts Management for penalty de-
termination with the return attached if it is located in Files.
(6) Penalties are assessed on the Form 3520-A if the form is not filed timely.
• The U.S. owner is subject to a 5% penalty of the gross value of the portion
of the trust’s assets treated as owned by that person at the close of the
foreign trust tax year if (Form 3520-A, Page 3, Line 6a, 6b & 9) the trust
fails to file a timely Form 3520-A and/or they do not furnish the information
required by IRC § 6048(b).
• This penalty cannot exceed the gross reportable amount.
• Assess the FTF Penalty to the U.S. Owner’s TIN account (using Page 3,
Line 6b) under either MFT 13 (BMF, if EIN), or MFT 55 (IMF, if SSN) with
TC 290 .00, Reference Number 660, if no reasonable cause was estab-
lished or no approved Form 7004 was present. A TC 240 generates on
IDRS for the penalty amount.

• Additional penalties (Examination imposed) may be assessed if noncompli-
ance continues after the IRS mails a notice of failure to comply with the
required reporting.
• Criminal penalties (Examination imposed) for failure to file on time and for
filing a false or fraudulent return may be assessed.
Note: The manager of an employee processing a CP 223 must review any manual
assessment of a Form 3520-A penalty resulting from the processing of a CP
223 per §6751(b)(1). Authorization for the assessment may be in the form of
initialing the CP 223.
If ... Then ...

The Form 3520-A was filed late Request an explanation of late
filing and/or a copy of an
approved extension Form 7004.
(8) below are met, do not
assess a penalty. Close IDRS
control base. Input TC 290 .00
to refile the return or classify
waste the CP 223 if the
original return is not with the
case.
(8) below are not met, assess
a penalty equal to 5% of the
amount shown on page 3, line
9 on U.S. owner’s account,
MFT 13 or 55.
The Form 3520-A is not attached Suspend the case and request
to the CP 223 and the received the return from Files.
date and/or the page 3, line 9
amount cannot be determined
from IDRS research
Return is for tax year 2006 and is Contact the International P&A
charged out to SOI Analyst for assistance with
securing the necessary informa-
tion.
Return is for any other tax year Attempt to contact the area noted
and is charged out to any other on the charge-out to secure the
area return.

If ... Then ...

Page 3 of the Form 3520-A is not 1. Correspond for the missing
attached to the return, or if the information using a 3653C
amount on line 9 is missing letter and suspend the case
for 90 days.
2. Send one copy of the letter to
the Trust, and a second copy
to the U.S. owner of the trust.
3. Change IDRS category code
to ITRQ if a follow up letter
needs to be sent and
suspend the case for an addi-
tional 45 days.
Return cannot be secured from Send a Letter 3653C to the
files, P&A or any other area taxpayer to request a copy of the
form.
The taxpayer replies to the IDRS • If the return was filed late,
3653C letter and there is an assess a penalty equal to 5%
amount shown on page 3, line 9 of the amount shown on page
3, line 9 on U.S. owner’s
account, MFT 13 or 15.
• If the return was timely filed,
attach the 3653C letter
response to the 3520 return
and close the IDRS control
base.
The amount on line 9 of page 3 Close the IDRS control base.
of Form 3520-A has not been Input TC 290 .00 to refile the
secured from the taxpayer, and return or classify waste the CP
the 90-day suspense period has 223 if the original return is not
expired #
#
(7) Civil Penalties: A CP 215 generates after the CP 223 has been processed and
the FTF Civil Penalty has been posted to the MFT 13 (BMF account numbers)
or 55 (IMF account numbers) account of the U.S. Owner.
(8) Abatement Procedures - Reasonable Cause Criteria must be considered:
• Abate penalty if the taxpayer can demonstrate that the failure to comply
was due to reasonable cause and not willful neglect.
Note: A taxpayer does not have reasonable cause merely because a foreign
country imposes a civil or criminal penalty on the trustee (or other person)
for disclosing the required information (§ 6677(d)). Also, refusal on the part
of a foreign trustee to provide information for any other reason, including dif-
ficulty in producing the required information or provisions in the trust
instrument that prevent the disclosure of required information, is not consid-
ered reasonable cause.

• Proof of an approved extension of time to file an income tax return can be
considered, if the Form 3520-A was filed within the approved extension
period (Forms 4868 or Form 7004).
• Check MFT 42 and/or the income tax module as applicable for timely filing
or the presence of a posted or unpostable TC 460. Abate penalty if
extended due date shown is equal to or greater than the filing date. (Check
the SSN followed by “V” or “W”, or other TINs found through research on
NAMEB, NAMEE, etc.).
• Adjust the MFT 13 (BMF account numbers) or 55 (IMF account numbers)
module with a 290 .00 and Reference Number 660 with a minus (–) after
the abatement amount. Abatement requests for both BMF and IMF
modules are worked in PAMC by the BMF International units.
(9) Non-Abatement Procedures:
• Advise taxpayer if research shows that the Form 3520-A was filed late and
give the specifics. Make sure the income tax return due date is checked to
determine timely filing of the Form 3520-A.
• Research IDRS for prior year reasonable cause adjustments.
• Allow the taxpayer to submit additional information for consideration of
penalty abatement (i.e., copy of approved income tax return extension,
certified mail receipt, reasonable cause statement).
• If additional information is not accepted, deny the request. Input 290 .00,
Penalty Reference Number for .00, Blocking Series 98/99, and advise the
taxpayer of their penalty appeals rights using an IDRS Letter 854C.
• If a Form 843 claim is received and is being denied, follow normal penalty
denial procedures.
(10) Per Period of Limitations IRC § 6501(c)(8) : The time for assessment of any
tax with respect to a period to which the information relates does not expire
before 3 years after the date on which the information is furnished. This
applies to all information on Form 3520 and 3520-A.
21.8.2.20.5 (1) If a duplicate filing condition exists, a CP 193 generates. To resolve:

(10-01-2007)
Form 3520 & Form • Review return to see if it is an exact duplicate. If it is, release the “A” freeze
3520-A Possible with a TC 290 .00 under MFT 42 or 68 as applicable.
Duplicate Filing • If it is a true amended/supplemental return, the taxpayer should have
Conditions (CP 193) checked the Amended box on line “A” of the Form 3520 (MFT 68) or Form
3520-A (MFT 42). Release the “A” freeze with a TC 290 .00.
• Review to see if a copy was sent in reply to the Letter 3563C. If so, route
to the originator of the 3653C letter.
Note: These returns are for information only and tax is not assessed on them.
However, penalties may be appropriate. Review the original return to see if it
was timely filed. If it was filed late (without extension), a civil penalty may
need to be assessed. It is assessed against the U.S. owner’s TIN data
located on Form 3520-A, Page 3, Line 6a, 6b & 9. Check all MFT’s, EIN’s,
SSN’s, and SSN’s with “V” or “W” for the U.S. person or trust to see if a
penalty had already been assessed, or if an extension (TC 460) was
processed.
(2) If the original Form 3520-A was filed late, compare the amount on Page 3,
Line 9, of both the original and subsequent return to see if the amounts are the
same. (If the original return is not available, the Page 3, Line 9 amount from
the original return also appears on the TXMOD.) If the same, release the “A”
freeze with TC 290 .00 under MFT 42. Check the U.S. Owner TIN listed on
Line 6b, Page 3 of Form 3520-A under MFT 13 (BMF account numbers) or 55
(IMF account numbers) for an assessment.
If ... Then ...

A penalty was assessed at 5% of No penalty adjustment is needed.
the Page 3, Line 9 entry, to the
U.S. owner’s TIN account
A penalty has not been assessed Assess 5% of the entry on Page
3, Line 9. The penalty is
assessed under the U.S. owner
TIN listed on Line 6b, Page 3 of
Form 3520-A under MFT 13 or
55. Use a TC 290 .00, Reference
Number 660, with the amount of
penalty.
(3) If the amounts on Page 3, Line 9 differ, and the second return is an additional
return, check to see if a penalty was assessed against the U.S. owner (Form
3520-A, Page 3, Line 6a, 6b).
If ... Then ...

A penalty was assessed on the The penalty must be increased to
original return include the additional amount
reported as long as it is the same
U.S. owner. If a different U.S.
owner, assess under the different
TIN.
A penalty was not assessed Compute a 5% penalty on the
total of both Page 3, Line 9
entries, if both were late. If both
were not late, then assess the
5% FTF civil penalty to the U.S.
owner TIN listed on the late filed
3520-A, Page 3, Line 6a, & 6b,
and use the amount from Line 9
from the late filed 3520-A.
(4) If the amounts on Page 3, Line 9 differ, and the second return is a correction
to the original return, check to see if a penalty was assessed.

If ... Then ...

A penalty was assessed Determine the difference (+ or -)
and assess or abate 5% of the
difference between the Page 3,
Line 9 entries as appropriate.
A penalty was not assessed Compute the 5% on the amended
returns Page 3, Line 6a, 6b, & 9
entry.
Reminder: All Civil Penalty adjustments on Form 3520 & 3520-A are made to the
U.S. owner TIN (Form 3520-A), or Filer TIN (Form 3520) under MFT 13
or 55 with a TC 290 .00 and Reference Number 660. Use minus (–)
after the amount, if the difference is a decrease in the penalty.
21.8.2.21 (1) Form 5471 is required to be filed by certain U.S. citizens and residents who
(11-12-2009) are officers, directors, or shareholders in certain foreign corporations to report
Form 5471 - Information their international activities.
Return of U.S. Persons
with Respect to Certain (2) The Form 5471 is a four page document that includes Schedules A, B, C, E, F,
Foreign Corporations G, H, and I. There are also three separate Form 5471 Schedules connected
with this Form - Schedules J, M, and O. Schedule O consists of Part I and
Part II.
(3) The form and schedules are used to satisfy the reporting requirements of IRC
§ 6038, IRC § 6046, and related regulations.
(4) The Form 5471 (and schedules) is filed with the income tax return filed by the
taxpayer. For tax years 2005 and prior, taxpayers were required to send a
second copy of the Form 5471 to the Philadelphia IRS Campus by the due
date of the income tax return. These returns were processed to a stand-alone
database.
(5) The Form 5471 and the related Schedules J, M, and O can be filed electroni-
cally, after receiving IRS approval, by submitting Form 9041, Application/
Registration for Electronic/Magnetic Media Filing of Business Returns.
(6) The due date of the Form 5471 is the same as that of the related income tax
return.
(7) An extension of time to file the income tax return is an extension of time to file
Form 5471.
(8) Taxpayers are instructed to attach Form(s) 5471 to their income tax return and
to file both by the due date for that return. Attach loose forms to the appropri-
ate income tax return. If the income tax return cannot be located or has not
been filed, fax the loose Form 5471(s) to the following number and close the
case on IDRS:
859-669-4043
Attn: PIN Unit - Stop 97

21.8.2.21.1 (1) Failure to file Form 5471 and the appropriate schedule(s) can result in civil
(10-01-2010) penalties under IRC § 6038 and . The penalties are assessed on civil penalty
Form 5471 Penalties modules with Penalty Reference Numbers 599 and 623. These reference
numbers are located in Document 6209.
(2) Form 5471 penalties assessed by Area Office Examination are manually
assessed with Penalty Reference Number 623 using Document Code 47. Only
Examination can recommend reconsideration of this penalty when it is
assessed by Exam.
(3) Beginning in 2010, Master File systemically assesses IRC § 6038 penalties on
Form 5471 returns attached to late filed Form 1120 returns using Penalty
Reference Number 599 with Document Code 54.
Exception: In 2009 only, Master File systemically assessed IRC § 6038 penalties
on Form 5471 returns that were attached to late filed Form 1120
returns. The assessments contained a TC 240 for amounts in multiples
of $10,000, Document Code 54, Tax Class 3, Penalty Reference
Number 623, and 00 as the first two digits of the Blocking Series.
(4) BMF international units at the Philadelphia Accounts Management Campus

process requests for reasonable cause relief on these systemically assessed
Form 5471 FTF penalties. See IRM 21.8.2.21.2.
(5) Forward all requests for abatement of Examination assessed penalties,

including Form 843 claims, to the Compliance Area Office where the assess-
ment was recommended per AIMS data.
21.8.2.21.2 (1) Beginning in 2009, Master File systemically assesses IRC § 6038 penalties on
(12-21-2009) Form 5471 returns that are attached to late filed Form 1120 returns. The
Form 5471 Penalties penalty amount is $10,000 for each attached Form 5471 and is assessed on a
Systemically Assessed civil penalty module (MFT 13) as a TC 240 with Penalty Reference Number
from Late Filed Form (PRN) 623 for 2009 or 599 for 2010 and subsequent years. The systemically
1120 assessed penalties will post as a TC 240 for amounts in multiples of $10,000,
Document Code 54, Tax Class 3, Penalty Reference Number 623 or 599, and
00 as the first two digits of the Blocking Series. The assessment will result in a
CP 215 notice being issued to the taxpayer.
Caution: Penalties manually assessed by Examination will have a Document Code

47 and generally contain a TC 300. Accounts Management WILL NOT
consider penalty abatement requests on Examination assessed penalties.
Examination will consider all requests for Exam assessed 5471 FTF
penalties.
(2) Ogden and Cincinnati Accounts Management will continue to process Form
1120 Failure to File penalty abatement requests while only Philadelphia
Accounts Management international will process Form 5471 FTF penalty
abatement requests.
Exception: In instances where Philadelphia receives a request for abatement of

both the 1120 and 5471 FTF penalties, they will process both requests.
(3) Research to see if there is an open Accounts Management IDRS control base
on related Form 1120 account.

If ... Then ...

There is an open control base on Suspend case until the Form
the related Form 1120 1120 account failure to file (FTF)
penalty determination is made.
1. If the Form 1120 FTF is
abated, abate the Form 5471
penalty.
2. If the Form 1120 penalty
abatement request is denied,
proceed to Paragraph (4)
below to determine whether
to abate the Form 5471
penalty.
There is not an open control base Use the Failure to File Decision
on the related Form 1120 module Tree (see (3) below) to determine
whether to abate the Form 5471
penalty. Do not address the Form
1120 penalty unless the taxpayer
is also requesting abatement of
that penalty.
Note: In cases where the late filed Form 1120 with Form(s) 5471 attached is full
paid, no FTF penalty will be assessed on the 1120 account but FTF Form
5471 penalties will systemically be assessed on the civil penalty module.
(4) International Accounts Management will evaluate reasonable cause requests

for penalties that are systemically assessed using the Failure to File - Form
5471 Decision Tree at http://serp.enterprise.irs.gov/databases/irm-sup.dr/
job_aid.dr/21.dr/21.8.dr/FTFDecisionTree.htm which is located on SERP in the
Job Aid Book under the IRM Supplements tab. Use the following directions
when using the Decision Tree:
• Question 1 - Research IDRS for the related Form 1120 filing. If the failure
to file penalty was abated on the related 1120 account, abate the 5471
penalty.
• Question 2 - Refer to IRM 21.5.3.4.16.8, Identifying Frivolous Returns/Cor-
respondence and Responding to Frivolous Arguments .
Note: If the request for the Form 5471 penalty abatement ALSO requests
abatement of the Form 1120 failure to file penalty, consider the Form 1120
penalty first and process request. Abate/deny the 5471 penalty consistent
with that determination.
If... Then...
The Penalty Tree determination is Input TC 290 .00 and appropriate
to: PRN (599 or 623) with a minus
• Abate/Waive (-) after the abatement amount.
Use Blocking Series 052, Reason
Code 62 and the appropriate 4th
position Penalty Reason Code.

If... Then...
The Penalty Tree determination is Input TC 290 .00 with appropriate
to: PRN (599 or 623) for .00 and
• Deny Blocking Series 98. Send Letter
• Deny or Refer to specialist 854C. Include the following as the
• Refer to Exam open paragraph in the 854C:
Note: These cases will not be “If you wish to appeal, you must
referred to Exam or to a first pay the penalty in full and
specialist due to program then file a Form 843, Claim for
guidelines. Abatement. You may also petition
a U.S. District Court for a refund
after you pay the penalty in full. ”
Note: Notate in the remarks section of the ADJ54 which question, in which section
of the Penalty Tree, led to your decision to abate or deny the reasonable
cause request.
(5) Advise callers that a request for reasonable cause relief for Failure to File
Form 5471 penalties must be submitted in writing. The taxpayer must provide
a written statement to request relief from failure to file information return
penalties.
(6) Route ALL Form 5471 penalty issues, other than reasonable cause abatement
requests on systemically assessed PRN 599 or 623 penalties, to the appropri-
ate Compliance Area Office.

This Page Intentionally Left Blank

Exhibit 21.8.2-1 (10-01-2009)

Failure To File - Form 5471 Decision Tree
Name of Foreign Corporation Form 5471 Filing Date
Failure to File - Form 5471 Decision Tree - General Information
1) Did taxpayer receive reasonable cause for failure to timely file Form 1120?
IF THEN
a) Yes Abate Penalty
b) No continue
2) Is the taxpayer’s request based on a frivolous position?
IF THEN
a) Yes Deny
b) No continue
3) Is the taxpayer claiming they are first time filer and were unaware of the filing requirements?
IF THEN
a) Yes Deny
b) No continue
Ordinary business care and prudence requires the taxpayer to determine their tax obligations when establishing
a business in a foreign country.
Cat. No. 49814S (10-01-2010) Internal Revenue Manual Exhibit 21.8.2-1

Exhibit 21.8.2-1 (Cont. 1) (10-01-2009)
4) Is the taxpayer requesting that the penalty be waived because of financial problems?
IF THEN
a) Yes Deny
b) If taxpayer refers to IRC § 7811 Follow IRM procedures
c) No continue
Ordinary business care and prudence requires the taxpayer to determine their tax obligations when establishing
a business in a foreign country.
5) Is the taxpayer claiming that the return was filed late because the transactions, laws or business structure
was complicated?
IF THEN
a) Yes Deny
b) No continue
6) Is the taxpayer claiming that because the corporation was involved in multiple layers of ownership, it
prevented them from filing timely?
IF THEN
a) Yes Deny
b) No continue
7) Is the taxpayer claiming that the return was filed late because of difficulty of obtaining foreign information?
IF THEN
a) Yes Deny
b) No continue
8) Is the taxpayer asserting that a Form 5471 is not required to be filed for the foreign corporation?
IF THEN
a) Yes Refer to Exam - attach penalty file
b) No continue
Exhibit 21.8.2-1 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

Exhibit 21.8.2-1 (Cont. 2) (10-01-2009)

CATEGORIES
IRM Reference 20.1 Abatement Penalty Reason Code

REASON IMF BMF
1st position 4th position 4th position
ASSESSMENT ERROR 045 045

BANKRUPTCY 062 030 030
CASUALTY or DISASTER 062 025 025
EXTENSION 062 030 030
IGNORANCE OF THE LAW 062 030 030
IRS ERROR 045 045
MAIL PROBLEMS 062 022 022
RECORDS UNOBTAINABLE 062 025 025
RELIANCE 062 022 022
IMF BMF
Taxpayer _______________________ TIN_______________ Year_________
ASSESSMENT ERROR
1) What type of assessment error?
IF THEN
a) Wasn’t given credit for an extension Go To EXTENSION
b) Claims the return was mailed timely Go To MAIL PROBLEM
c) Multiple $10,000 assessments Analysis of as- **
sessment document required

Exhibit 21.8.2-1 (Cont. 3) (10-01-2009)
2) Does research show any errors in the computation?
IF THEN
a) Yes Abate/Waive (Not RC)
b) No Deny (Explain computation)
BANKRUPTCY
1) When did the taxpayer file for bankruptcy?
a) Enter date
2) Is there a -V freeze (Bankruptcy) on the module?
IF THEN
a) Yes continue
b) No continue
3) Was the bankruptcy filed after the return due date, including extensions?
IF THEN
a) Yes Deny
b) No continue
4) Was the penalty assessed after the bankruptcy?
IF THEN
a) Yes continue
b) No continue
5) Identify type of bankruptcy ___________________________

Exhibit 21.8.2-1 (Cont. 4) (10-01-2009)

6) What documentation is provided to confirm the bankruptcy?
IF THEN
a) Taxpayer is operating under protection of court continue
b) Documentation available continue
c) Lack of complete documentation Deny or refer to SPECIALIST
CASUALTY or DISASTER (sudden or unexpected event)
1) What kind of casualty or disaster occurred?
IF THEN
a) A disaster recognized by FEMA continue
b) Officially declared local disaster, but not FEMA continue
c) Fire continue
d) Theft continue
e) Flood, wind or water damage continue
f) Vandalism continue
g) An accident continue
h) Some other casualty Deny or refer to SPECIALIST
2) When did the casualty/disaster begin? _________________continue
3) When did the casualty/disaster end? __________________continue
4) What was destroyed or lost?
IF THEN
a) Necessary tax records were destroyed or stolen continue
b) The taxpayer’s place of business was destroyed continue
c) Some other property was destroyed Deny
d) The casualty caused personal injury Deny
e) Other Deny

Exhibit 21.8.2-1 (Cont. 5) (10-01-2009)
5) What documentation is provided to confirm the casualty?
IF THEN
a) Insurance claim or report continue
b) Police report continue
c) Newspaper clippings or credible documentation continue
d) Lack of complete documentation Deny
6) Did the casualty/disaster begin after the return due date, including extension(s)?
IF THEN
a) Yes Deny
b) No continue
7) Did the taxpayer file returns, or required forms, within a reasonable time after the disaster ended?
IF THEN
a) Yes Abate/Waive
b) No Deny
EXTENSION
1) What claim does the taxpayer make about the extension?
IF THEN
a) Requested first extension of time to file (FTF) continue
b) First extension lost in mail continue
c) Forgot to request an extension (FTF) Deny
d) Believed 3rd party filed (FTF) Deny
e) Other Deny

Exhibit 21.8.2-1 (Cont. 6) (10-01-2009)

2) What documentation of the 1st extension request did the taxpayer provide?
IF THEN
a) Copy of a valid first extension request continue
b) Lack of complete documentation Deny
3) Was the Form 5471 filed by the extended due date?
IF THEN
a) Yes Abate/Waive
b) No Deny
IGNORANCE OF THE LAW
1) Why was the taxpayer ignorant of filing requirements?
IF THEN
a) US resident investor Deny
b) Resided outside of US with no US tax represen- Deny
tation
c) Individual not aware of requirement to file US Deny
tax returns
2) Of what does the taxpayer claim ignorance?
IF THEN
a) Did not understand filing requirements continue
b) First year operating continue
c) CPA / Attorney ignorance Deny
3) Did the taxpayer receive tax help from a US, or International, experienced tax professional?
IF THEN
a) Yes Go To RELIANCE

Exhibit 21.8.2-1 (Cont. 7) (10-01-2009)
IF THEN
b) No Deny
IRS - ERROR
1) What was the nature of the IRS error?
IF THEN
a) Error in an IRS publication continue
b) IRS employee gave incorrect technical advice continue
c) IRS advised taxpayer not to file during compli- continue
ance activity
d) IRS incorrectly processed TP’s return continue
2) When was the advice requested?
IF THEN
a) Enter Date:
b) Unknown -- not provided by taxpayer continue
3) What documentation of oral advice is provided?
IF THEN
a) Proof TP provided relevant information to IRS continue
b) Proof IRS addressed question, but was wrong continue
c) Name or ID of employee who gave the advice continue
4) What documentation of written advice is provided?
IF THEN
a) Documentation does not support the claim Deny
b) Taxpayer’s request & IRS response support continue
claim

Exhibit 21.8.2-1 (Cont. 8) (10-01-2009)

IF THEN
c) Copy only of taxpayer’s request Deny
d) Copy only of IRS response Deny
e) Lack of complete documentation Deny
5) What publication did the taxpayer rely on?
a) Publication number:
b) Publication date:
6) Was the IRS publication* in error?
IF THEN
a) Yes, pub indicated no return or form required Abate/Waive
b) No, in fact, the pub is factually correct Deny
MAIL - PROBLEM
1) What was the nature of the mail problem?
IF THEN
a) Form sent to other tax agency continue
b) Properly addressed, but insufficient postage continue
c) Form lost in mail continue
d) Form delayed in mail continue
e) TP claims error by the postal service continue
f) First extension request lost in the mail continue
g) Second extension request lost in the mail Go To EXTENSION

Exhibit 21.8.2-1 (Cont. 9) (10-01-2009)
2) What documentation did the taxpayer provide?
IF THEN
a) Proof of timely mailed certified letter continue**
b) Proof of timely mailing and of US postal error continue
c) Lack of complete documentation Deny
IF THEN
a) Postmark shows return was mailed timely (US) Abate/Waive
b) Taxpayer’s claim not supported Deny
RECORDS UNOBTAINABLE
1) Did the taxpayer file and receive an approved extension(s)?
IF THEN
a) Yes continue
b) No Deny
2) From whom was the taxpayer unable to obtain the records?
IF THEN
a) CPA or Accountant continue
b) Financial Advisor continue
c) Attorney continue
d) Tax Preparer continue
e) Responsible Officer / Partner continue
f) Court continue
g) Someone else Deny

Exhibit 21.8.2-1 (Cont. 10) (10-01-2009)

3) Why was the taxpayer unable to obtain the records from person in #2?
IF THEN
a) The person went out of business continue
b) The person refused to provide the records Deny **
c) A disagreement about payment for services Deny
4) Did the taxpayer’s representative go out of business after the return due date?
IF THEN
a) Yes Deny
b) No continue
5) What documentation did the taxpayer provide?
IF THEN
a) Proof of death, illness, or business closing continue
b) Credible level of detail continue
c) Lack of credible documentation Deny
6) What steps did the taxpayer take to secure the records?
7) What date did the records become available?
a) Enter Date:
8) Did the taxpayer file returns, or required forms, within 90 days of Records Unobtainable #7 (Date records
became available)?
IF THEN
a) Yes Abate/Waive
b) No Deny

Exhibit 21.8.2-1 (Cont. 11) (10-01-2009)
** A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal
penalty on the trustee (or other person) for disclosing the required information. Also, refusal on the part of a
foreign trustee to provide information for any other reason, including difficulty in producing the required informa-
tion or provisions in the trust instrument that prevent the disclosure of required information, will not be
considered reasonable cause. Failure to File, Cumulative Bulletin Notice 97-34, 1997-1 CB 422, (June 02, 1997)
RELIANCE (on others)
1) Who did the taxpayer rely on?
IF THEN
a) Responsible Officer / Partner continue
b) CPA or Accountant continue
c) Attorney continue
d) IRS Employee Go To IRS-ERROR
e) Bookkeeper Deny
f) Person assisting in establishment of Foreign Deny
Corporation
g) Information in a tax plan or promotion Deny
h) Financial advisor Deny
i) Business associate Deny
j) Someone Else Deny
2) When did the taxpayer notify the advisor of the foreign corporation?
a) Enter Date:
3) Is the date in Reliance #2 prior to the return due date, including extension(s)?
IF THEN
a) Yes continue
b) No Deny

Exhibit 21.8.2-1 (Cont. 12) (10-01-2009)

4) When was the taxpayer given the incorrect information?
a) Enter Date:
5) What was the nature of the reliance?
IF THEN
a) Person said taxpayer did not need to file continue
b) Person handled everything continue
c) Person was too busy to take timely action Deny
d) Person lost or wouldn’t return records Go To RECORDS-UNOBTAINABLE
e) Other Deny or refer to SPECIALIST
6) What documentation is available?
IF THEN
a) Shows representative advised that taxpayer not continue
liable
b) Shows representative professionally qualified to continue
handle taxes
c) Copies of promotional material continue
d) Shows TP provided representative with records continue
prior to RDD
e) Lack of complete documentation Deny
7) Was the taxpayer’s reliance unreasonable?
IF THEN
a) The reliance involved avoidance of substantial Deny
income
b) The reliance was based on frivolous positions Deny
c) The taxpayer substantially changed filing Deny
patterns
d) The taxpayer did not take reasonable steps to Deny
investigate
e) The taxpayer did not request a 2nd opinion Deny

**If the penalty amount is more than $10,000, the

O
penalty is for:......................................................145
(a) multiple delinquent Forms 5471 for different Office of Penalties and Interest ..........................145
corporations........................................................145
P
(b) the Form 5471(s) were not filed after a notice
was issued ..........................................................145 Penalty: MFT______ Year_______________
(c) both (a) and (b) Continue to secure the Penalty Reference Number______________....145
information ..........................................................145
R
A Regulation Section 1.6038-2 Requirement:

Information Return, Form 5471, is required to be
Amount of penalty assessed filed by certain US persons who are officers,
$__________________** .....................................145 directors, or shareholders of certain foreign
Approved 1st extension corporations. IRC § 6038(b) imposes a penalty
____________________......................................145 for failure to timely file complete and accurate
Approved 2nd extension Form(s) 5471 by U.S. persons possessing more
____________________ ..................................145 than 50 percent of the total combined voting
power of all classes of all shares of stock, or
the total value of all shares of stock. The
F
penalty can be waived if reasonable cause
Failure To File - Form 5471 Decision Tree.........145 exists....................................................................145
Return Received Date
G _____________________....................................145
General Information .............................................145 T
Taxpayer______________________ ....................145
H The penalty applies to each Form 5471 that was
How many Form 5471 was the taxpayer required required to be filed. The Form 5471 is required
to file this tax year? _________ ........................145 to be filed on the same date as the related
income tax return. Analysis of the related
income tax modules will be needed for required
I
dates and extensions.........................................145
Income Tax: MFT________ Year___________....145 TIN__________________________ ......................145
Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2 Index


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MANUAL

(2) IRM 21.8.2.1.5(5) - Updated list of designated PDS’s. (IPU 090958)

(3) IRM 21.8.2.1.9 - Removed reference to Form 5391.

(5) IRM 21.8.1.2.3.8.1(7) - Added Item adjustment codes 115,116,117.

(7) IRM 21.8.2.3.8.1(12) - Added paragraph regarding HIRE Act.

(11) IRM 21.8.2.4.3(3) - Revised interest ascertained date instructions.

(13) IRM 21.8.2.7.2 (2) Removed reference to quick pad.

(15) IRM 21.2.8.1(2) - Changed address to Office of International Operations.

(17) IRM 21.8.2.9.3(2) - Added Note regarding FTD coupon usage.

(18) IRM 21.8.2.9.7(2) - Revised IRM citation.

(19) IRM 21.8.2.9.10(2) - Added Note regarding FTD coupon usage.

(20) IRM 21.8.2.9.12(1) - Added Form 1120–S to GATT rule.

(21) IRM 21.8.2.9.12.1(1) - Updated 990-T reference.

(28) IRM 21.8.2.11.2(2) - Revised IRM citation.

(30) IRM 21.8.2.12.4 - Added Paragraph 3 regarding FTD coupon usage.

(34) IRM 21.8.2.19.2(4) - Reworded sentence.

(35) IRM 21.8.2.19.4(3) - Revised mailing addresses for Forms 706–CE.

EFFECT ON OTHER DOCUMENTS

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2

Table of ContentsTable of Contents

21.8.2.1 International BMF/NMF and CADE Overview

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2

21.8.2.3.8.2 Form 941-X(PR) and Form 941-X(SS)

21.8.2 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

21.8.2.9.9 FSC Repeal and Extraterritorial Income Exclusion

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2

21.8.2.12.10.2 Adjustments for NRA Under-Withholding Before Form 1042 is Filed

21.8.2 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2

• IRM 13, Taxpayer Advocate Service

• Representative Authorization alerts

• IAT Legacy-Jeeda tool which is available at all Accounts Management sites.

(6) “IRC Sections” and “Regulation numbers” may be used interchangeably in

21.8.2.1.1 (1) As a result of the ramp-down of the Philadelphia Submission Processing

21.8.2.1.2 (1) BMF International Corporate Income Tax Returns:

Note: American Samoa Economic Development Credit, reported on Form 5735,

• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation

21.8.2.1.1 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

(2) BMF International Employment Tax Returns:

(3) BMF Foreign Withholding Tax Returns:

(4) BMF Foreign Estate Tax Returns:

• Foreign and possession addressed Form 706

(5) Foreign Trust and Estate Tax Returns:

• Form 1040NR (Fiduciary)

(6) BMF Foreign Exempt Organization Returns:

• Foreign and possession addressed Form 990

(7) BMF Foreign Information Statements:

• Alien Exemption Certificate Form W-8BEN, Form W-8ECI, Form W-8EXP,

(8) NMF International Income Tax Returns:

• Form 1120-IC-DISC K-1

(9) Forms Associated with Foreign Withholding Tax Returns:

(2) Helpful telephone numbers for working international issues:

21.8.2.1.3 Internal Revenue Manual Cat. No. 49814S (10-01-2010)

(2) To have a document translated, download a Translation Request Sheet at

Cat. No. 49814S (10-01-2010) Internal Revenue Manual 21.8.2.1.5

• DHL Express (DHL): DHL Same Day Service

(3) Failure to File - Transaction Code (TC) 166/160

a. If an overseas return is not filed timely by the extended due date, a

(4) Failure to Pay - TC 276/270

e. If a taxpayer complies with the requirements mentioned above, the failure

Example: For a calendar year return, June 15.