QI reporting requirements for financial year 2025

Section 1.1461-1(b) of the US Internal Revenue Code requires a withholding agent (including Qualified Intermediaries (QIs)) to file a withholding tax return Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons). A withholding agent must file Form 1042 on or before March 15 (unless an extension is sought) of the year following the calendar year in which the income was paid.

On February 23, 2023, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published final regulations introducing electronic filing requirements for Form 1042, effective for tax years beginning in 2024. However, the IRS had granted an exemption through Notice 2024-26 for tax year 2024, and this exemption has now expired.

This administrative relief granted to withholding agents (including QIs) from the requirement to electronically file Form 1042 has now expired. As a result, QIs are required to file Form 1042 electronically for tax year 2025. The deadline to file Form 1042 for tax year 2025 is March 15, 2026. An automatic six-month extension may be obtained by filing Form 7004 by March 15, 2026.

A withholding agent must file Form 1042 electronically (i.e., cannot file on paper) if any one of the following conditions applies:

• Withholding agent is a financial institution for FATCA purposes;
• Withholding agent is required to file 10 or more information returns, as described in IRC § 301.6011-2, during the year; or
• Withholding agent is a partnership with more than 100 partners.

QIs required to electronically file Form 1042 must submit the return through the IRS Modernized e-File (MeF) system. There are two primary filing options:

1.       Direct Filing with the IRS: QIs may file directly with the IRS by registering under the IRS e-file program, provided all technical and authorization requirements are met.

2.       Filing Through an Authorized Provider: Alternatively, QIs may use IRS-approved commercial tax software or engage an authorized e-file provider that supports Form 1042 submissions through the MeF platform.

As per the latest IRS Notice (Notice 2026-03, released on February 27, 2026), the IRS may waive the mandatory electronic filing requirement for Form 1042 if a withholding agent (including QI) can demonstrate undue hardship. To request a waiver for Tax Year 2025, the QI must submit a written request by March 15 (or 45 days before the due date if filing under an extension), including detailed information on unsuccessful e-filing efforts, incremental costs, and future compliance steps. The request must be properly labeled, signed under penalties of perjury by an authorized officer (with Form 2848 if applicable), and submitted by fax or mail to the IRS Ogden Submission Processing Center.

Electronic filing of Form 1042 is now mandatory. There is however a possibility for QIs to obtain a hardship waiver. In considering the preceding, we are of the view that QIs should proceed with electronic filing.

Accordingly, QIs should review their internal processes for the preparation and submission of Form 1042 to ensure compliance.

All QIs should act promptly, keeping in mind the filing deadline of March 15, 2026, for tax year 2025.

KPMG has the capability to prepare and electronically file both Forms 1042 and 1042-S in accordance with IRS requirements. Please feel free to contact us if you require further clarification or assistance.