After giving QIs many rather dubious gifts, the IRS has made available a 1042-S data integrity tool to assist QIs with their 1042-S filing process: is this finally a gift worth keeping?

After giving QIs many rather dubious gifts (new QI agreement, LoB restrictions, s871(m), s1446(f) and now most likely crypto reporting)*, the IRS has made available a 1042-S data integrity tool to assist QIs with their 1042-S filing process: Form 1042-S Data Integrity Tool | Internal Revenue Service (irs.gov)

This is in our view unambiguously good news for QIs, as the current certification cycle highlights that the ever-changing requirements of 1042-S reporting remain a challenge in the market. That it is only good news does not, however, mean that it is the panacea for all that ails QIs!

And indeed there are a few small clouds:

  1. The tool does not identify all possible errors, but appears focused on “consistency” errors (i.e. withholding rate inconsistent with exemption code or missing codes), so should not give users a false sense of confidence. According to the IRS, use of the tool is voluntary, “but the IRS will take into account a withholding agent’s use of the tool when making enforcement and penalty determinations.” Importantly, that does not shelter QIs from responsibility with incorrect data used in the 1042-S.
  2. If the IRS has chosen to offer this tool, it is perhaps partly because they have also become aware just how many QIs are struggling with 1042-S reconciliation, a state of affairs that they are clearly not happy with. The existence of this tool will likely increase the IRS’ expectations around the quality of QI filings.
  3. If the IRS can offer this tool, it is partly as a result of the significant work done internally to improve their own data reconciliation, and matching, processes. This suggests increasing pain for QIs whose reporting accidentally excludes certain income (which this tool will not necessarily detect). As this tool only “validates” the data within a 1042-S and does not reconcile across 1042-Ss, the IRS’s data matching abilities remain, whilst imperfect, more robust than what this tool give you access to.

We strongly recommend clients use the tool, perhaps even as part of “mock” quarterly reporting to ensure rapid identification and correction of errors and to reduce the year-end workload.

Finally, but importantly, the IRS states that:

The tool can be used as many times as necessary on new or revised data. The IRS has no access to an individual user’s data. The IRS tracks only summary statistics on the types of errors uncovered by the tool. The user can access its data for 90 days, after which time it is purged.

If you have questions about your results, we are of course happy to help with those.

*Yes, technically many of these things were the US Congress not the IRS, but the IRS wrote the regs which created most of the pain.