The IRS has updated its Foreign Account Tax Compliance Act (FATCA) general FAQs page, specifically FAQ 23 under the general compliance section, to extend penalty relief for the 2025 and 2026 calendar years for withholding agents that fail to withhold and report by March 15 of the subsequent year on a dividend equivalent payment made with respect to a derivative referencing a partnership.
The relief was previously available for calendar years 2017–2024. The applicable withholding and reporting are completed on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.
Generally, as in previous years, to qualify for the relief from interest, penalties, or additions to tax for failing to withhold and report by March 15 on a dividend equivalent payment made with respect to a derivative referencing a partnership, the withholding agent must withhold and report on Form 1042 and Form 1042-S with respect to the payment by September 15.
Withholding agents withholding after March 15 and filing Form 1042 by September 15 should write “Dividend Equivalent—Partnership” in the top center portion of the form. In addition, when depositing the tax withheld for a dividend equivalent payment made in 2025 or 2026, the withholding agent must designate the payment as being made for the applicable calendar year in accordance with the instructions for Form 1042.
BDO Insights
This extension provides continued flexibility for withholding agents navigating complex derivative transactions involving partnerships. Timely compliance with the September 15 deadline remains critical to avoid penalties.
Please visit BDO’s International Tax Services page for more information on how BDO can help.