[Title 26 CFR 1.1461-2]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.1461-2 - Adjustments for overwithholding or underwithholding of tax.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE122002-04-012002-04-01false1.1461-2Sec. 1.1461-2INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.1461-2  Adjustments for overwithholding or underwithholding of tax.

    (a) Adjustments of overwithheld tax--(1) In general. A withholding 
agent that has overwithheld under chapter 3 of the Internal Revenue Code 
(Code) and made a deposit of the tax as provided in Sec. 1.6302-2(a) may 
adjust the overwithheld amount either pursuant to the reimbursement 
procedure described in paragraph (a)(2) of this section or pursuant to 
the set-off procedure described in paragraph (a)(3) of this section. 
Adjustments under this paragraph (a) may only be made within the time 
prescribed under paragraph (a) (2) or (3) of this section. After such 
time, a refund of the amount overwithheld can only be claimed by the 
beneficial owner with the Internal Revenue Service (IRS) pursuant to the 
procedures described in chapter 65 of the Code. For purposes of this 
section, the term overwithholding means any amount actually withheld 
(determined before application of the adjustment procedures under this 
section) from an item of income pursuant to chapter 3 of the Code or the 
regulations thereunder in excess of the actual tax liability due, 
regardless of whether such overwithholding was in error or appeared 
correct at the time it occurred.
    (2) Reimbursement of tax--(i) General rule. Under the reimbursement 
procedure, the withholding agent repays the

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beneficial owner or payee for the amount overwithheld. In such a case, 
the withholding agent may reimburse itself by reducing, by the amount of 
tax actually repaid to the beneficial owner or payee, the amount of any 
deposit of tax made by the withholding agent under Sec. 1.6302-
2(a)(1)(iii) for any subsequent payment period occurring before the end 
of the calendar year following the calendar year of overwithholding. Any 
such reduction that occurs for a payment period in the calendar year 
following the calendar year of overwithholding shall be allowed only if-
-
    (A) The withholding agent states, on a timely filed (not including 
extensions) Form 1042-S for the calendar year of overwithholding, the 
amount of tax withheld and the amount of any actual repayment; and
    (B) The withholding agent states on a timely filed (not including 
extensions) Form 1042 for the calendar year of overwithholding, that the 
filing of the Form 1042 constitutes a claim for credit in accordance 
with Sec. 1.6414-1.
    (ii) Record maintenance. If the beneficial owner is repaid an amount 
of withholding tax under the provisions of this paragraph (a)(2), the 
withholding agent shall keep as part of its records a receipt showing 
the date and amount of repayment and the withholding agent must provide 
a copy of such receipt to the beneficial owner. For this purpose, a 
canceled check or an entry in a statement is sufficient provided that 
the check or statement contains a specific notation that it is a refund 
of tax overwithheld.
    (3) Set-offs. Under the set-off procedure, the withholding agent may 
repay the beneficial owner or payee by applying the amount overwithheld 
against any amount which otherwise would be required under chapter 3 of 
the Code or the regulations thereunder to be withheld from income paid 
by the withholding agent to such person before the earlier of the due 
date (without regard to extensions) for filing the Form 1042-S for the 
calendar year of overwithholding or the date that the Form 1042-S is 
actually filed with the IRS. For purposes of making a return on Form 
1042 or 1042-S (or an amended form) for the calendar year of 
overwithholding and for purposes of making a deposit of the amount 
withheld, the reduced amount shall be considered the amount required to 
be withheld from such income under chapter 3 of the Code and the 
regulations thereunder.
    (4) Examples. The principles of this paragraph (a) are illustrated 
by the following examples:

    Example 1. (i) N is a nonresident alien individual who is a resident 
of the United Kingdom. In December 2001, a domestic corporation C pays a 
dividend of $100 to N, at which time C withholds $30 and remits the 
balance of $70 to N. On February 10, 2002, prior to the time that C 
files its Form 1042, N furnishes a valid Form W-8 described in 
Sec. 1.1441-1(e)(2)(i) upon which C may rely to reduce the rate of 
withholding to 15 percent under the provisions of the U.S.-U.K. tax 
treaty. Consequently, N advises C that its tax liability is only $15 and 
not $30 and requests reimbursement of $15. Although C has already 
deposited the $30 that was withheld, as required by Sec. 1.6302-
2(a)(1)(iv), C repays N in the amount of $15.
    (ii) During 2001, C makes no other payments upon which tax is 
required to be withheld under chapter 3 of the Code; accordingly, its 
return on Form 1042 for such year, which is filed on March 15, 2002, 
shows total tax withheld of $30, an adjusted total tax withheld of $15, 
and $30 previously paid for such year. Pursuant to Sec. 1.6414-1(b), C 
claims a credit for the overpayment of $15 shown on the Form 1042 for 
2001. Accordingly, it is permitted to reduce by $15 any deposit required 
by Sec. 1.6302-2 to be made of tax withheld during the calendar year 
2002. The Form 1042-S required to be filed by C with respect to the 
dividend of $100 paid to N in 2001 is required to show tax withheld of 
$30 and tax released of $15.
    Example 2. The facts are the same as in Example 1. In addition, 
during 2002, C makes payments to N upon which it is required to withhold 
$200 under chapter 3 of the Code, all of which is withheld in June 2002. 
Pursuant to Sec. 1.6302-2(a)(1)(iii), C deposits the amount of $185 on 
July 15, 2002 ($200 less the $15 for which credit is claimed on the Form 
1042 for 2001). On March 15, 2003, C Corporation files its return on 
Form 1042 for calendar year 2002, which shows total tax withheld of 
$200, $185 previously deposited by C, and $15 allowable credit.
    Example 3. The facts are the same as in Example 1. Under 
Sec. 1.6032-2(a)(1)(ii)), C is required to deposit on a quarter-monthly 
basis the tax withheld under chapter 3 of the Code. C withholds tax of 
$100 between February 8 and February 15, 2002, and deposits $75 
[($100x90 percent) less $15] of the withheld tax within 3 banking days 
after February 15, 2002, and by depositing $10 [($100-$15) less

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$75] within 3 banking days after March 15, 2002.

    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent may withhold from future payments made to a beneficial 
owner the tax that should have been withheld from previous payments to 
such beneficial owner. In the alternative, the withholding agent may 
satisfy the tax from property that it holds in custody for the 
beneficial owner or property over which it has control. Such additional 
withholding or satisfaction of the tax owed may only be made before the 
date that the Form 1042 is required to be filed (not including 
extensions) for the calendar year in which the underwithholding 
occurred. See Sec. 1.6302-2 for making deposits of tax or Sec. 1.1461-
1(a) for making payment of the balance due for a calendar year.
    (c) Definition. For purposes of this section, the term payment 
period means the period for which the withholding agent is required by 
Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3 of 
the Code.
    (d) Effective date. This section applies to payments made after 
December 31, 2000.

[T.D. 8734, 62 FR 53470, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]