It’s that time of year again – US 1042-S reporting season! It’s a financial institution’s worst nightmare, and many aren’t sure if they’re filing the right thing in the right place, or with the right information. Even if you’ve been operating for years, the regulations are complex and only get more complicated as you read into them, so it’s no surprise deadlines get missed and reports get misfiled. But if you’re a financial institution and have any clients that received US-sourced investment income like dividends or portfolio interest (or any one of the twenty or so other types of US FDAP income), then you probably need to file a 1042-S.

What is 1042-S, and What’s The Deadline?

A 1042-S is an information return designed to gather information on any payments made to clients from US-based income and any US tax withheld on it as part of QI or FATCA regulations. This form is to be filled in by the financial institution and then submitted to the IRS by March 15^th of each year.

If you are non-qualified intermediary (or NQI), a separate 1042-S is required for:

• Each recipient, regardless of whether or not you withheld tax
• Each type of income that you paid to that same recipient
• Each tax rate (if you withheld at more than one tax rate) or a specific type of income that you paid to the same recipient

1042-S forms can only be filled electronically, which is a lot of work for financial institutions of any kind!

How do You File A 1042-S

If you do have an obligation to file that return (contact us if you’re not sure and we can help), then your immediate deadline this year is March 15^th 2024. That’s not a lot of time to get ready. That’s the date you have to submit your returns to the IRS using their FIRE Portal. FIRE stands for Filing Information Returns Electronically by the way – imagination was never a strong point for the IRS! In order to access this portal, you’ll need two things:

IRS Publication 1187: This is the document from the IRS that gives you instructions on how to make the file. It provides specifications for electronic filing of 1042-S forms, and provides detailed information on what format information should be written in and how forms should be created and populated. Any form that doesn’t follow these rules will be rejected.

A Transmitter Control Code (TCC): Your Transmitter Control Code is unique to your organisation, and it’s how the IRS knows who’s submitting the report. You apply for one through the IRS, and it has to be used (or renewed) once a year in order to stay valid. If it isn’t renewed or used in 12 months, it becomes invalid. If you’re one of the financial institutions that is using a consultant to compile and submit 1042-S reports for them, then the consultant will have their own code to use when submitting.

Why is it a 9 Month Timeline?

Most people working in financial institutions think of reporting as a single activity that takes place around March of each year. That’s when it’s in the calendar for, and many don’t really think too much of it until the month or two before. But this couldn’t be further from the truth. In our experience, it’s a process that actually takes around 9 months, starting in January or February and ending in September of each year.

This is mainly because the US reporting system for 1042-S is a cascade system. Everyone in the payment chain has to submit these returns, but sometimes multiple institutions will be submitting 1042-S forms for the same clients. If your client’s US assets are co-mingled in an omnibus account at another financial institution (let’s call them institution B), then institution B will submit their own 1042-S to the IRS telling them what they paid into your omnibus account during the last calendar year (at time of writing, 2023). You’ll get a recipient copy from them when they file. The IRS will then compare what your counterparty says they paid you against what you say you paid your clients. And the numbers had better match!

The problem here is that the deadline is March 15^th for everyone in the payment chain. The IRS does recognise that this is problematic, and so they allow you to ask for an automatic extension. If you’re not sure how to do that, just give us a call. That extension is just 30 days, which makes your new deadline April 14^th. During that time you’ll need to collect all of the 1042-S recipient copies from your counterparts, calculate how much you paid your clients and how much tax was withheld on that income (even if you didn’t compare it yourself), and compare it to the sum of the recipient copies. Then you need to create your own 1042-S file using publication 1187. If the numbers don’t match, you’ll need to fix it fast because the clock is ticking. The IRS doesn’t like lateness or mistakes, so if you file late (whether that’s the original one or the extension), you’ll get a penalty notice.

All of that has to be done using specific reporting codes published by the IRS, which allow you to group your information returns by income type. So, if you have clients that received two types of US sources of FDAP income, you’ll be producing two 1042-S returns – one for each type of income. Returns are also grouped by withholding agent, so if your client’s US assets are held at different withholding agent counterparties, then you’ll need to create a 1042-S for each income type and each withholding agent.

Confused yet?

And There’s More

Sadly, that’s not where the 9-month ordeal ends – there’s a lot more to take into account. You see, some types of US investment can change the way they characterise income. For example, mutual funds and real estate investment trusts (or REITs) often distribute dividends during the year. But after the year end, they then decide to re-classify the income into return of capital – which is taxed differently from a dividend. If that happens to you, then you’ll get an ‘amended information return’ from your counterparty that changes the numbers, and your job is to figure out which of your clients this affects and change your own reports to the IRS. And if that happens after you submit your original report to the IRS, you’ll need to go back to them and submit amended returns. That typically gets you to June or July.

The Last Stretch

Now we’re into the last part of the journey. If you have the obligation to submit a 1042-S, then you’ll also have an obligation to file a US tax return, which is a form 1042. This is essentially a summary of all the 1042-S forms you filed, along with some other accounting and reconciliation information. If you’ve started and followed all of the steps of the process correctly, you would have asked for an extension on this too. This extension is a bit longer than the one for the 1042-S, and gives you 6 months to file. This means your new deadline is September 14^th.

And that is why your US reporting is a 9-month activity. Because even if you’ve done your job right, there are so many external factors at play that  you will be working on it for months, going back and forth until your reporting is finally correct. If that all sounds a bit overwhelming, don’t worry, we’re here to help. At TConsult we can help you understand your obligations and if there are any risks to your reporting using something called an Exposure Map Report, which is a great place to start if you aren’t sure what your obligations are. If you already know you have an obligation but you don’t have a TCC to submit your reports with, we can help you file to the IRS. Just get in touch to book your consultation with one of our subject matter experts today.