Guidance on FDAP withholding penalties

Your Guide to State, Local, Federal, Estate + International Taxation

In an International Practice Unit released in May 2016, the IRS provides guidance to IRS examiners on the appropriate penalties associated with fixed or determinable annual or periodical (FDAP) withholding. Unless there is a treaty or other exception, payments of U.S. source FDAP income to foreign persons are generally subject to 30% withholding tax. Withholding agents need to be mindful of the requirements so they aren’t liable for tax, penalties and interest.

Penalties for noncompliance are outlined in the International Practice Unit as follows:

  • Intentional failure to file correctly can result in penalty of 10% of gross income (even when no tax is due).
  • The IRS will compare deposits made during the year to the required deposit dates filled out on lines 1-60 of Form 1042. If any deposits are deemed to be paid late, the IRS will likely issue a penalty between 2% to 10% of the underpayment, depending on how late the payment was deposited.
  • Penalties increase to 15% if the IRS issues a demand for payment and payment is not made within 10 days.
  • The following chart provided by the IRS shows the general penalties associated with noncompliance of FDAP withholding, such as Forms 1042, 8805, and 8288-A.

FDAP withholding, income, international tax

Please be sure to consult with a qualified tax professional for assistance with meeting all your compliance requirements.

Jill A. Helm, CPA