Ross McGill

March 23, 2022|6 Minutes

Four things you need to know in the US tax reporting season

1. Never assume

Check any 1042-S forms that are provided by your upstream counterparties. You should not assume that just because they are further up the payment chain, or much bigger than you, that they will get their reporting correct. For example, a recent poll we conducted showed that 34% of financial institutions did not understand how to represent a payment to non-disclosing NQIs on a 1042-S. As we conduct reporting for our clients, we’re also seeing several large withholding agents issuing 1042-S with substantial coding errors. 

2. Code your payment data

The point of the IRS’s checks on reporting is to make sure that the amounts that are reported as paid to you are the same as the amounts that you report as paid to your clients. US reporting is a cascade system. To report properly, you will have to apply the US income codes and chapter 3 and 4 exemption codes and tax rates to each payment as you make it. If you don’t do this as you go along, you’ll not only be adding a big last-minute task to your reporting, but you’ll be removing your ability to reconcile during the year.

3. Don’t break the chain

We are seeing some concerning activities out there that appear to halt the correct process for 1042-S reporting. The biggest culprits are those firms providing a W-8BEN-E to their counterparty when they are actually acting as an intermediary. This is caused either by the requesting firm deliberately guiding their client to make their life easier or by the firm itself submitting the form knowing that it will remove them from the work of reporting to the IRS. The firm receiving a W-8BENE will include amounts withheld in their pooled reporting and so the downstream chain of payment to the firm and its clients is broken. The receiving firm should conduct enough due diligence to know that the W-8BEN-E is unreliable in those circumstances. Second, the firm submitting one should understand that they are signing a false document under penalty of perjury.

Another example of breaking the chain of reporting lies in the derivatives space. US tax regulations, section 871(m) provide tests to determine if a non-US financial instrument is connected to an underlying US security (an equity linked instrument or ELI) and, if it is, how US tax withholding and reporting should be conducted. There are Issuers of these derivatives out there who are creating these ELIs and purchasing the underlying US securities using a W-8BENE. This will often be incorrect because a distribution by the US Issuer will generally trigger a distribution on the ELI. In other words, the ELI Issuer may be the owner of the US asset, but they are not the ultimate beneficial owner of the income from the US securities because that income flows down the payment chain of the ELI. The W-8BEN-E at the top of the ELI payment chain has the same effect as I just described, it breaks the chain of 1042-S reporting that should occur.

4. Don’t over-report

We have seen this season, several QIs that are producing recipient 1042-S forms for direct account holders that are individuals and entities, whose withholding was included in a pooled 1042-S to the IRS. The QI Agreement Section 8.02(A)-(I) provides the list of account holder types that must receive “recipient copies”. That list does not include direct account holders that are individuals or entities. There are a couple of issues with this. First, because the reporting was pooled upstream, technically, there cannot be a “recipient copy”, because the IRS did not get this information at that level. Second, as soon as you provide a recipient copy in these circumstances, you will be unable to provide those clients with any form of refund if they were over-withheld. If the account holder, then tries to claim a refund from the IRS, you may get contacted by the IRS because as soon as they grant the claim, your pooled reporting will be inaccurate and amended returns will be required.


Many firms struggle with US tax reporting because they don’t prepare properly or in good time. Others believe it’s easy and make simple mistakes that can result in penalty notices. The IRS is still following up on penalty notices as far back as the 2016 reporting year. So, our final observation is to make sure you keep good records, just because you don’t receive an immediate notification of a problem, doesn’t mean that you won’t get a penalty notice a couple of years down the line. 

If you’d like help understanding and planning how to meet your US tax obligations efficiently and effectively, get in touch at

Ross McGill

Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.

Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.