QI Alert 2021-03

The IRS has issued draft versions of 2021 Form 1042 and 2022 Form 1042-S.

The IRS has issued draft versions of 2021 Form 1042 and 2022 Form 1042-S.

The Internal Revenue Service (IRS) has issued draft versions of both 2021 Form 1042 and 2022 Form 1042-S. The proposed changes might impact QI reporting moving forward and should, therefore, be considered accordingly.


Forms 1042 and 1042-S, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, deal with payments to non-U.S. persons, including non-resident aliens, non-U.S. entities, estates, and trusts. These forms are issued annually to report tax withheld on the income of non-U.S. persons.

It should be noted that these two forms are filed separately. The main difference between Forms 1042 and 1042-S is that Form 1042-S is filed electronically based on IRS publication 1187, while Form 1042 is filed on paper and aggregates all Forms 1042-S filed by a QI in a given year.

2022 changes to Form 1042-S

While there have not been any substantive changes to the published Draft Form 1042, the following changes have been proposed by the IRS on 2022 draft Form 1042-S:

  • Box 1 Income Code:
    • Dividend: Dividend income Code 56 was added to the draft form to capture “Dividend equivalents under IRC section 871(m) as a result of applying the combined transaction rules.”
    • Other: Other income Code 57 was added to the draft form to capture the “Amount realized under IRC section 1446(f).”
  • Chapter 3 Status Codes
    • The draft form contains a new code to indicate that an entity is a publicly traded partnership (PTP). Where applicable, payors should use Code 38 in Boxes 12b (withholding agent), 13f (recipient), 15b (intermediary), or 16d (payor).
  • Box 13j, LOB Code
    • Code 12 was added to the draft form to capture “No LOB article in treaty.”

Rationale for the changes and consequences

Regarding the change in Box 1 Income Code, it should be noted that the IRS already extended section 871(m) transitional relief in December 2020, pushing back the application of non-delta-one transactions until 1 January, 2023, and good faith efforts for delta-one transactions through 2022. At the same time, the simple combination rules under section 871(m) were extended until 2022. Hence, it is believed that this change on draft Form 1042-S illustrates that the IRS is preparing for reporting as the transitory relief period is phased out.

Concerning the addition of ‘Status codes for PTP and Other income Code 57’, in August 2021, the IRS announced that the Treasury Department and IRS would like to change the legislation under sections 1446(a) and 1446(f) to defer the applicability date for another additional year, from 1 January, 2022, to 1 January, 2023. Once the change takes place, the regulations will force withholding and reporting on transfers of interests in PTPs that occur on or after 1 January, 2023.

As far as changes regarding Box 13j, LOB Code are concerned, the IRS wants to cover situations where an LOB article is not available in the treaty between the investor’s country and the U.S. This approach is consistent with the recent changes to Form W8-BEN-E. We expect further guidelines on the use of these codes.

KPMG will continue to monitor for updates and provide comments whenever required.

How can KPMG support you in meeting QI reporting requirements?

As outlined above, the QI Reporting consists of two requirements i.e., Form 1042-S reporting and Form 1042 reporting. Form 1042-S reporting must be performed electronically as per IRS publication 1187 for the year in question.

KPMG’s QI Reporting Tool is a one-stop solution for any Qualified Intermediary looking to successfully execute QI reporting. Our one-stop solution offers:

  • an electronic file for onward submission
  • an appropriate software, meeting the IT specifications outlined in IRS Publication 1187
  • an option to allow KPMG to send electronic files to the IRS on your behalf
  • a dedicated team of QI experts

Jean Kizito

Associate Partner
+352 22 51 51 5492 

Prashant Roy

+352 22 51 51 5543

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