In a recent development, the Internal Revenue Service (IRS) has announced a delay in the electronic filing (e-filing) requirement for Form 1042, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. This decision, outlined in Notice 2024-26, comes in response to feedback from withholding agents who have encountered difficulties in transitioning to electronic filing.
Administrative Exemptions for Withholding Agents
According to the IRS, U.S. withholding agents are administratively exempt from the e-filing requirement for Form 1042 for the calendar year 2024. Similarly, foreign withholding agents are exempt for the calendar years 2024 and 2025. Notably, this administrative exemption is automatic, and withholding agents are not required to request a waiver to be exempted from the e-filing requirement.
Background and Regulatory Framework
The delay in the e-filing requirement follows the publication of final regulations by the IRS in February 2023. These regulations, which implement the Taxpayer First Act and amend Section 6011(e) of the tax code, establish e-filing rules for certain returns and other documents. The regulations specifically apply to Forms 1042 due on or after March 15, 2024.
Situations Requiring E-Filing
Under the final regulations, e-filing of Form 1042 is required in three situations:
- When the withholding agent is required to file 10 or more returns of any type during the same calendar year in which Form 1042 is required to be filed. This threshold for e-filing was previously set at 250 returns.
- When a withholding agent is a partnership with more than 100 partners, regardless of the number of returns the partnership is required to file during the calendar year.
- When a withholding agent is a financial institution, regardless of the number of returns the institution is required to file during the calendar year.
Challenges and Feedback
Since the publication of the final regulations, withholding agents have voiced several concerns regarding the e-filing process for Form 1042. These include:
- The limited number of IRS-approved e-file business providers for Form 1042, coupled with difficulties accessing the schema and business rules for filing electronically.
- The additional time needed to upgrade their systems for filing on the IRS platform.
- Specific challenges facing foreign persons filing Forms 1042 with respect to implementing the authentication requirements necessary for accessing the IRS platform.
Request for Deferral
In response to these challenges, withholding agents requested a deferral of the e-filing requirements. Prior to the publication of the final regulations, the IRS received similar comments from stakeholders. The majority of commenters recommended delaying the applicability of the proposed changes by at least one calendar year. This delay would provide stakeholders with the necessary time to adjust inventories, allow software companies to adjust their programming, and enable paper filers and the IRS to adjust their processes accordingly.
The IRS’s decision to delay the e-filing requirement for Form 1042 reflects its commitment to addressing the concerns raised by withholding agents and other stakeholders. The agency encourages withholding agents to stay informed about further developments regarding the e-filing requirements for Form 1042.
