U.S. Qualified Intermediary regime – Upcoming changes for Form 1042 and 1042-S reporting

Electronic filing of Form 1042 (as from 2026) 

The IRS is in the process of modernizing its filing procedures, making electronic submission of Form 1042 mandatory for withholding agents that are financial institutions. While this initiative started with tax year 2023 filings, the IRS has consistently provided an automatic administrative exemption for foreign withholding agents, including non-U.S. financial institutions, allowing them not to file electronically. However, no such exemption notice has been issued yet for the 2025 tax year (filing season 2026). Therefore, until stated otherwise, non-U.S. financial institutions, including QIs, will be required to electronically prepare and file Form 1042 via the Modernized e-File (MeF) system.

Anticipating challenges

Access to U.S. IRS e-Services, including the MeF system, can be particularly challenging for non-U.S. financial institutions. Consequently, those who plan to manage this process internally should have already started their preparations for XML filings, though they may still be working with preliminary data as the tax year is ongoing.

Recommendations:

• Familiarize yourself with MeF: Ensure a thorough understanding of the MeF system and its associated business rules. Address any questions or challenges now while there is still ample time to master the learning curve effectively.
• Consider external assistance: Alternatively, engaging an external service provider to handle the filing process can ensure compliance and help avoid potential pitfalls.

Transitioning Information Reporting (Form 1042-S) Systems (as from 2027) 

The reporting process for Form 1042-S is also evolving. The current Filing Information Returns Electronically (FIRE) system will be replaced by the Information Returns Intake System (IRIS) starting with the 2027 filing season (applicable to the 2026 tax year). FIRE will not be available for submissions in filing season 2027. In addition to the transition, the IRS plans to require for tax year 2026 that a chapter 3 exemption code (or code for a reduced withholding tax rate) must be included in all cases where the tax withheld is less than 30%.

Recommendations:

• Complete your IRIS TCC application: We encourage you to complete your IRIS Transmitter Control Codes (TCC) application and begin transitioning to IRIS to ensure you are ready for 2027 filing season. Existing TCCs will remain valid until this transition. The IRS is working on potential solutions for QIs regarding the acquisition of TCCs in cases where they cannot obtain or confirm ITINs or SSNs.
• Evaluate your strategy: While getting ready for your 2025 Form 1042 electronic submission, take the time to evaluate your strategy for Form 1042-S in 2026 as well. Choose a holistic solution that effectively manages both transitions. 
• Timely preparation for 2025 Form 1042-S reporting: Start analysing the impact of the changes to the 2025 Form 1042-S reporting. Key changes to consider include: 
  • Introduction of new Box 7: A new checkbox has been added to Form 1042-S to indicate that the form is being filed to revise an amount subject to withholding within a withholding rate pool for a specific recipient. 
  • New process for extension requests: The IRS has introduced an updated process for requesting an extension of time to furnish recipient statements. 

Contact

Do you have any questions after reading this article? Do not hesitate to contact Joëlle Simons