A qualified intermediary (QI) is a non-US entity that has entered into an agreement with the Internal Revenue Service (IRS) to manage US tax withholding and reporting on behalf of its customers.
There are benefits from entering the QI regime, such as simplified reporting and limited sharing of client information to other institutions, but a comprehensive compliance programme is required that meets IRS requirements. Under the latest Revenue Procedure 2022-43, effective from 1 January 2023, QIs are expected to adopt a robust compliance framework, culminating in a responsible officer (RO) certification submitted every three years.
The RO certification requires confirmation that the QI has maintained effective internal controls and met its obligations related to documentation, withholding, and reporting of US source income – including under related regimes such as the Foreign Account Tax Compliance Act (FATCA).
Fresh requirements, higher standards
The current certification cycle for most QIs spans the period from 1 January 2024, to 31 December 2026. As a result of the latest QI agreement, this poses several new challenges compared with previous periods:
- Responsible officers are now required to submit detailed 1042-S reconciliations for each year within the cycle
- QIs that hold publicly traded partnership (PTP) interests should consider their compliance obligations under the QI agreement
- To the extent a qualified certification is submitted, a specific remediation plan must be uploaded to the IRS at the same time – to address the deficiencies highlighted in the certification
- Most importantly, the IRS expects more than a procedural checklist – compliance programmes must be customised, well-documented, and capable of adapting to operational changes over time
This cycle signals a shift toward deeper, more dynamic oversight, making it essential for QIs to treat compliance as an ongoing discipline, not a once-every-three-years task.
Future-proofing your QI compliance strategy
Although certification isn’t due until 2027, QIs should begin preparing without delay. IRS scrutiny is intensifying, and submitting a flawed certification (or failing to certify at all) can lead to serious consequences, including:
- material failure notices or even events of default under the QI agreement
- lengthy IRS inquiries into internal controls and compliance procedures
- referrals to domestic tax authorities in FATCA-related cases, particularly in Model 1 jurisdictions.
In short, weak compliance doesn’t just risk tax penalties, it can cause reputational damage, impact client relationships, disrupt operations, and drain internal resources.
Building a strong QI compliance strategy
There’s no universal template for a strong QI compliance programme, but the most effective ones share a few essential traits:
- Structured systems and processes for handling documentation, withholding, and reporting that will enable the QI to comply with its obligations
- A clear compliance manual with roles, responsibilities, and escalation protocols that demonstrates a QI has considered the wider obligations and impacts on its business
- Evidence of ongoing reviews and internal health checks that provide assurance around the compliance programme
- Training and communication plans to keep relevant staff up to date and ensure they're aware of the impact of their responsibilities
- Tools to help the RO detect and disclose failures or events of default to the IRS, as would be the case for areas like anti-money laundering and prevention of tax evasion
- Alignment with broader obligations – such as FATCA, the Common Reporting Standard (CRS), anti-money laundering/know your customer (AML/KYC), and section 871(m) of the IRS code – as many of the QI obligations interact with other compliance requirements
Preparing early allows QIs to identify and address gaps well before the pressure of certification builds. It also creates space for thoughtful remediation, system improvements, and staff training, making the official periodic review a confirmation of readiness, rather than a scramble to catch up.
Getting started
With the certification deadline still some way off, many institutions are taking a proactive approach by reviewing current QI processes ahead of the official periodic review. This early assessment can be a valuable opportunity to:
- identify gaps in documentation, systems and processes – eg, in respect of PTPs, as changes will need to be made to update compliance programmes
- test readiness for the 1042-S reconciliation requirements and avoid last-minute issues
- evaluate FATCA alignment to avoid duplication or inconsistencies, and maintain effective compliance that aligns with the certification requirements
- reduce the risk of negative findings during the formal periodic review process – by that stage it may be too late to remediate compliance issues without incurring further cost
- note that the transitional relief under Section 871(m) expires on 31 December 2026 for QIs that are also qualified derivatives dealers (QDD) – governance and controls for those activities will need to be reflected in the QI compliance programme by then, and will be subject to periodic review from 2027.
Crucially, early assessment also allows time for corrective action. It gives firms a clearer path to demonstrating ‘good faith’ compliance, which can be a mitigating factor if minor issues are uncovered later. Reviewing current QI processes with respect to calendar year 2024 would enable a QI to remediate any issues prior to the periodic review being undertaken in respect of 2026.
Key takeaways
With the increased compliance obligations for QIs and the 2027 certification deadline approaching, responsible officers and compliance teams should plan now, not react later. A strong, auditable compliance framework doesn’t just satisfy IRS expectations, it also reduces risk and builds trust with counterparties and regulators.
If your institution hasn’t yet started thinking about its next certification, now's the time.
For more information on US QI compliance, contact Martin Killer.
