We’re fast approaching the 1042-S US information return season. Which means it’s one of the times that causes a lot of grumbles at TConsult, and in financial institutions.  Because something happens every single year that just shouldn’t happen. But it does all too often, usually because of one thing. You see the deadline for filing a 1042-S information return and the 1042 tax return is the 15^th of March (unless that date falls on a weekend, in which case it’s the next working day). That might not seem like a problem on the surface, but there are two issues it causes.

Issue 1

The first part of the problem is that the same deadline applies to all of the financial institutions in the chain of payment. Everyone is expected to have filed both returns on or by that date. On top of that, because the reporting system is a cascade, one firm’s 1042-S submission must match up to the total of returns made by its counterparties (i.e. the amount that your counterparties reported they paid you must match what you report you paid your clients). If it doesn’t, you can likely expect a penalty notice, a fine and/or a claim for repayment of under-withheld tax plus interest.

Issue 2

The second issue is that when submitting a 1042 US tax return, a financial institution (whether they’re a QI or an NQI) must attach the recipient copies of the 1042-S forms that it received from its counterparties. This is so that the IRS can reconcile the whole payment chain and identify who is making the mistakes.

Now, most people know that the US allows for a 30-day extension of time to file a 1042-S return, and a 6-month extension for 1042 returns. But almost everyone files for these extensions automatically, so the real dates for submission change. This year, because the 15^th of March is a weekend, the standard deadline for 1042-S returns is the 17^th March and the extended is the 16^th of April, with the 1042 returns deadline being the 14^th of September. But all of this shifting of dates does is move the matching problems – it doesn’t solve them.

The Domino Effect

The issue that we see all too often is that firms with financial institutions below them in the payment chain delay providing these forms to their customers. Or worse, they never provide them at all. Sometimes it’s because they aren’t aware of the obligation or the associated IRS penalties, but sometimes it’s a deliberate act.

For QIs, these obligations are clearly laid out in Section 8.02 of the QI agreement. If there’s any doubt, the very structure of the 1042-S form also makes it crystal clear. Copy A is for the IRS, and copies B, C and D are for the recipient. So if your client is operating omnibus accounts, then your client is the recipient for the purpose of reporting and must receive a recipient copy. If your client is a QI, you can reference section 8.02(A), and if they’re a non-disclosing NQI, see section 8.02(E).

When an institution doesn’t receive these 1042-S recipient copies, or gets them late, it creates a serious problem for the recipients as well as the issuers. We’ve seen many financial institutions having to file multiple extension requests on form 8809 using the check box at line 7 to indicate that they didn’t receive a 1042-S in time to prepare their information returns. Some financial institutions don’t even get the information as a 1042-S, but instead get it as a spreadsheet or something similar. This isn’t a massive issue in itself, but the key is to make sure that the data on that spreadsheet is confirmed as the data your counterparty will use to submit its 1042-S to the IRS, and that you do eventually get the formal 1042-S (or substitute).

So What’s The Message?

Essentially, for financial institutions to meet their obligations. If you have financial institutions as customers receiving US-sourced FDAP income (typically dividends and portfolio interest), then you MUST provide them with recipient copies of the forms 1042-S that you include in your IRS filing.

If you want to be really customer-friendly, you could send your recipients a spreadsheet containing the data used to generate the 1042-S form, including a payment-by-payment breakdown covering the full year, income, exemption, recipient codes and tax rates that will be reflected on the 1042-S. You can then do your own filing, and provide your recipient with the formal recipient copies as soon as you’ve finalised your own filing. This means that your customer can prepare their own 1042-S filing, and everyone in the payment chain can meet their obligations without having to make formal complaints to the IRS.

At TConsult, this is one of our biggest bugbears, and something we see many financial institutions struggling with. If you’re not able to manage your reporting, or aren’t sure what your obligations are, we can help. Just get in touch today to speak to one of our subject matter experts.