Ross McGill

March 28, 2024|13 Minutes

US Reporting Tax – How Does It All Work?

As we get to the end of March, most of you will probably be fussing over your reporting obligations and trying to make sure you’re getting everything right. And many of you will be struggling. That’s no slight on you – it’s just an incredibly detailed, complex process and there’s lots of room for error! Most financial institutions will have domestic reporting obligations, based on their home legislation. But while these can be relatively simple to manage, US tax reporting is a very different animal.

You’d hope that there would be a level of consistency from the US regulator. You’d be hoping in vain though. As with most aspects of tax, consistency is not really a feature. Instead, there are three reporting frameworks that apply: 1042-S & 1042, 1099 & 945 and FATCA reporting.

1042-S and 1042 reporting relate to any payments of US-sourced FDAP (Fixed, Determinable, Annual or Periodic) income, which is paid to non-US recipients.

1099 and 945 reporting is for any payments of US-sourced FDAP income when it’s paid to US persons.

8966 FATCA reporting is anti-tax evasion reporting of assets of US persons held in non-US bank accounts.

So just a few things to keep track of! Each of these report types have their own peculiarities, which take some getting used to. To help you get up to speed, I’ll explain some of them here.

1042-S and 1042

Firstly, let’s get one thing cleared up.

The 1042 is a tax return.

The 1042-S is an information return.

This causes a lot of confusion, and we can see why! The 1042 represents a summary of all US FDAP income and tax withheld by a financial institution. So if, for example, you’re a financial institution and have three counterparties who send you US income, then your 1042 aggregates all of that income into one tax return, not three.

On the other hand, the 1042-S reporting is a breakdown of the gross US income and tax withheld, reported separately by income type, withholding chapter and withholding agent. So if you had US income through three withholding agents, then you would have three sets of 1042-S reporting to do, in one electronic file, to the IRS. And each one would have separate groupings of data for income type and withholding agent.

Oh, and if that wasn’t enough, the level of reporting depends on the capacity you acted in through each withholding agent. For example, if you act as a qualified intermediary (QI) with one counterparty, you can pool your 1042-S reports by aggregating the reports by the tax rate and withholding chapter. If you act as a non-qualified intermediary (NQI) with another counterparty, then your 1042-S reports will be at the recipient level. That means names, addresses and TINs of all your customers, as well as the gross income and tax withheld will be sent to the IRS.

1099 and 945

These are specific to income type, which means there are several variations on the returns you file. For example:

  • If you’re reporting dividends paid to a US person, you’ll be filing a 1099-DIV
  • If you’re reporting interest, you’ll be filing a 1099-INT

And so on.

Now comes the complicated bit. The correct rate of tax for US FDAP income paid to a US person outside the US is 0%. But there are two scenarios that will change this up to 24%, or ‘backup withholding’. The two scenarios are:

  1. The US person has been told by the IRS that they’re subject to backup withholding, which they then tell you about on their W-9, or;
  2. The person’s SSN or EIN on their W-9 doesn’t match the IRS database, or isn’t present at all.

If either of those situations happens, then you will have to physically withhold at 24%. The reporting effect is that, if that happens, you will need to report the income using a 1099 and file a form 945 report.


FATCA reporting is another name for Form 8966 reporting. This is a reporting of the bank balances and other account data of a US person as of December 31st of each year. If you’re in a jurisdiction with a Model 1 IGA, then your reporting will be to your domestic tax authority. They will then aggregate your report with reports from other financial institutions before sending it to the IRS. If you’re in a Model 2 IGA jurisdiction or non-IGA jurisdiction, then your reporting will generally be direct to the IRS.

Now For The Tricky Bit

You would think, logically, that all of these different types of reports would have a similar format and delivery mechanism, to make it easy for the organisations submitting them and the IRS to manage them. But in reality, it’s maddeningly inconsistent, and so each is a bit different. Specifically:

The 1042-S returns are to an ASCIII text format, as described in Publication 1187 delivered at the Filing Information Returns Electronically (FIRE) portal

The 1099-X reporting is to an ASCII text format described in Publication 1220 delivered at the Modernized efile Portal (MeF).

You might have seen news recently that 1042 reporting is going electronic as well, using the MeF portal. But, due in part to the efforts of the Association of Qualified & Authorised Intermediaries (AQAI) and other market participant lobbying, this has been deferred until 2026. And to make like even more complicated, 8966 reporting is to an xml (eXtended Markup Language) standard, delivered to either a domestic tax authority (who might have their own separate portals) or to the International Data Exchange System (IDES), run by the IRS. xml standards also apply to 1042 electronic reporting through MeF in 2026.

So essentially, the types of reporting you may be subject to depends on whether you receive US-sourced FDAP income on behalf of others, whether any of those clients are US persons, and whether they’re subject to backup withholding.

Difficult Access

Putting all of that aside, you will need to access a few different systems in order to file these reports and returns. To do this, you’ll need to obtain a variety of identifiers whether you’re a financial institution or a third-party service provider. And that depends on what returns/reports you need to file.

For the FIRE portal you’ll need a Transmitter Control Code, or TCC. We talk more about those in this blog.

For the MeF system you’ll need an account and an ITIN (Individual Taxpayer Identification Number), to get which you need to file a W-7 form.

If you’re a financial institution then you’ll need an EIN (Employer Identification Number) or a QIEIN (Qualified Intermediary Employer Identification Number) from the IRS.

If you are using a third party to prepare your returns on a paid basis, that person or entity will need to have a PTIN (paid preparer’s tax identification number).

So to sum up what’s quite a complicated subject – your US reporting obligations sometimes depend on:

  • Whether you receive US-sourced FDAP income on behalf of clients.
  • What kind of clients you have.
  • In what capacity you acted towards them when they received it.

Once you’ve figured that out, you’ll need the various documents that give you the file specifications and identifiers you’ll need to include in your file. Definitely not simple!

Reporting is often seen and treated as an annual ‘project’ that only lasts from March to May. But it’s actually a nine-month ‘project’, not counting all the work you need to do to actually get the data you need to include in the reports themselves. And the reporting deadline for most of this to happen is March 15th (or May 31st for FATCA, and February for 1099-X).

Thankfully (and just to add another step), you can ask for one or more of the three extensions of time to file. As you can imagine, most people do. You can get an automatic 30-day extension to file your 1042-S by submitting form 8809. You can also get a 6-month extension to file your 1042 by submitting a form 7004, and you can get a 30-day extension to provide recipient copies to your customers by writing directly to the IRS.

One last thing. Certain types of US investment vehicles, notably mutual funds and real estate investment trusts (REITs), can re-classify income distributions after the end of the tax year. A payment that was classified, for example, as a dividend during the year, might be re-classified after the year end as a return of capital. This affects everyone in the chain of payment because you’ll have included such amounts as if they were dividends, but once you’ve been informed, you’ll have to amend your returns accordingly. Amended reporting typically takes place between May and September and follows the same formats and delivery mechanisms as your original returns. The IRS can connect those dots because every 1042-S must be allocated a unique form identifier (UFI).

If this all sounds a bit overwhelming, you’re not alone. It is. Many of our clients come to us in the first instance because they’ve found themselves in an ever-deepening hole because they made a mistake somewhere along the line. Rather than struggle along on your own, get in touch with the experts at TConsult, and we can help you out.

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.