We’ve previously discussed how the IRS released final electronic filing requirements for information returns effective with 2023 returns. One of those key changes is that businesses can no longer submit Form 1042 withholding tax returns on paper starting with tax year 2023 filings and beyond. But how will that actually impact businesses for the upcoming reporting season? What can be done to ensure compliance?
Here are important things for businesses to keep in mind for electronically submitting returns in the upcoming filing season.
What is the Form 1042 return update?
Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
must be filed electronically when the withholding agent is also required to file at least 10 information returns for the 2023 calendar year (and years beyond). This form previously could only be filed with the IRS on paper.
Note that the 94x form series are not required to be filed electronically as part of these changes. However, when determining whether the aggregate of 10 forms has been met that would trigger the requirement to file information returns electronically, a business must include the 94x series of forms.
This new electronic filing requirement may be difficult for many businesses to implement. Since Form 1042 could previously only be filed on paper, businesses now need to find a system that is able to support electronic filing of Form 1042 following the IRS’s specific layouts. Additionally, employees that facilitate filing activities for withholding agents will need to secure proper credentials and approval to file electronically.
Who will be impacted?
Any business that is required to issue at least 10 information returns (including Forms 1099, W-2, 1042-S, etc.) will need to comply with the new electronic filing requirements. Note that if the withholding agent is an individual, estate or trust, the change will not impact those filers.
What other forms are included in this update?
The changes made in TD 9972 included lowering the electronic filing threshold for a number of different returns, including Forms W-2, 1099s, 1095, etc. It is important to understand that when determining whether your organization is required to file electronically, returns should be counted in the aggregate. Meaning if you are required to issue 10 or more information returns or withholding tax returns, you must file all of those returns electronically. Previously, businesses followed a 250 per return type threshold for electronic filing so that some returns could be filed on paper and others electronically.
As part of this update, businesses are also required to file corrections in the same method in which the original version was filed. For example, if Form 1099-NEC is filed on paper and a correction needs to be filed later, the corrected version must also be filed electronically. Similarly, amendments to Form 1042 must also be submitted electronically if the original version was filed electronically.
How do I electronically file Form 1042?
Filing Form 1042 electronically is a strenuous process that can take time and resources away from your staff. All Forms 1042 are submitted through the IRS Modernized e-File (MeF) system. Unlike the File Information Return Electronically (FIRE) System for submitting series 1099 and 1042-S forms, MeF requires a additional background requirements and a longer application process.
Businesses must appoint Responsible Officers to oversee the use of the MeF services and these officials require specific credentials such as a licensed attorney or more extensive background checks including fingerprinting. Once the application is submitted, the IRS process to receive and review all information can take up to 45 days to complete.
Once approved, you will then need either a reporting solution or assistance from your IT team to build out a method to produce the electronic transmittal that will be accepted by the MeF system.
How can Sovos help?
The IRS approved Sovos as a Modernized e-File (MeF) Business Provider for 1042 returns, in compliance with updated IRS e-filing requirements. In an increasingly digital and regulated world, businesses have to materially transform their approach to managing tax information reporting and compliance. Sovos now stands as one of the first providers approved for 1042 MeF filings, continuing to lead the industry in this transformation, offering a comprehensive suite of products and services to ensure complete compliance with electronic filing requirements.
Reach out to our team to learn more about the Form 1042 return update and how Sovos can help.