IRS Delays E-File Requirement for Form 1042: What You Need to Know

In a recurring theme, the IRS released communication this week that exempts the requirement to e-file Form 1042 Annual Withholding Tax Return for U.S. Source Income (Form 1042) information for 2023 transactions.

Form 1042 for 2023 transactions must be filed with the IRS by March 15, 2024.

Notice 2024-26 delays the new requirement to electronically file the form information in the IRS’s Modernized e-File (MeF) system. Specifically, the notice indicates that Withholding agents, including U.S. and non-U.S. Financial Institutions, are exempted from the electronic filing requirement for information due on March 15, 2024. Additionally, non-U.S. or foreign Withholding Agents were granted an additional year of relief and are not required to file the Form 1042 electronically for 2024 transactions.

Some in the industry had a list of concerns, according to the IRS

Despite the fact that the IRS notified the industry of the new e-file requirements over a year ago, a majority of the industry struggled to transition to the new process throughout 2023. According to the Notice, a variety of concerns were expressed to the IRS including the limited number of approved MeF providers for Form 1042. As of February 15, Sovos was listed as the only approved MeF provider for Form 1042. Other issues cited included needing additional time to build out systems for those that don’t use third-party providers. Foreign withholding agents cited the challenges specific to gaining access to IRS systems due to the IRS authentication requirements for users of their systems.

No concern to Sovos or our customers

While this was the first year the IRS required Form 1042 to be filed electronically, it is not the first year they have allowed for electronic filing of Form 1042 information. As the leading provider of U.S. tax solutions, Sovos obtained IRS approval to file 2022 versions of Form 1042 and successfully filed returns for our clients. While other providers have had over a year to build e-filing capabilities, the reality is the IRS proposed these electronic filing regulations in 2021 and other providers have had multiple years to bring their systems and processes into compliance and failed to do so. As a trusted partner, Sovos is ready to electronically file Forms 1042 for our clients for 2023 and beyond.

The exemption does NOT impact e-file requirements applicable to Forms 1042-S

An important distinction to be aware of is that the delays provided in Notice 2024-26 do not impact the new e-file requirements for Forms 1042-S. Forms 1042-S are required to be issued to the recipient and filed electronically in the IRS’s Filing Information Returns Electronically (FIRE) system no later than March 15, 2024. A business is required to file Forms 1042-S electronically following the new 10-form threshold finalized in the broader e-file regulations that were released on February 1, 2023.

Why filing electronically for 2023 is still the smart move

Although the IRS provided this exemption, e-Filing should still be the preferred method for Withholding Agents due to the following reasons:

• Paper filing processes are fraught with errors for Filers, Recipients, and the IRS. Electronic filing ensures little to no manual errors in transferring data into the IRS systems and automates the paper processes associated with preparing, issuing, and retaining all details associated with Form 1042 for each calendar year.
• Obtaining physical signatures for Form 1042 can be challenging in a virtual work environment. Authorizing an ERO to use a digital PIN to electronically file Form 1042 information with the IRS eliminates the need for people to physically sign IRS forms.
• Electronic filings improve compliance. Instant validation that the form information has been accepted by the due date minimizes the risk of unnecessary or erroneous penalties.
• Form 1042 and 1042-S compliance is a Tier 1 audit focus for the IRS. Electronically filing Form 1042 information when not required demonstrates good faith and more importantly, dedication to a compliant Form 1042/1042-S reporting program.