IRS to Require Electronic Filing of Form 1042 and Other Returns

This blog was updated on December 13, 2023

Editor’s note: Since this blog was initially published, there have been further updates to the Form 1042 reporting requirements. Read more information on our dedicated HUB page.

Last summer, the IRS released Proposed Regulations amending the rules for filing electronically for a variety of business income tax returns, information returns, registration statements, disclosure statements and more. These regulations were proposed in conjunction with the Taxpayer First Act of 2019, which required the IRS to focus on increasing electronic return filing.

The implementation of these changes would have impacted returns filed for the 2021 season and beyond, however, the final regulations were never published.

Form 1042 is in scope

The proposed regulations seek to amend several sections of the internal revenue code, including § 301.6011-15, which describes the requirements for when a withholding agent needs to file Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons electronically.

The IRS verifies the amount of withholding reported on Form 1042 and paid over to the IRS during the year against the amounts reported as withheld on the corresponding Form 1042-S Foreign Persons’ U.S. Source Income Subject to Withholding. Form 1042-S is already required to be filed electronically by financial institutions or by non-financial companies when they issue at least 250 returns for the calendar year. But Form 1042 is not required to be electronically filed. The timing delay between paper Form 1042 and electronically filed Forms 1042-S by a withholding agent can create accuracy issues for the IRS in processing refunds and credits claimed by foreign persons.

Electronic filing required for 2022?

While the regulations are not yet final, the IRS did communicate to software filers at a recent conference that the Form 1042 and Schedule Q (Form 1042) Tax Liability of Qualified Derivatives Dealer (QDD) will be added to the Modernized eFile (MeF) system in January.

So, while it is not yet required to file Form 1042 electronically, the IRS is taking a huge step forward by making the form available for electronic submission.

What about Forms 945, 941?

While far more voluminous than Form 1042, these withholding tax returns were not included in the scope of the proposed regulations.

The Form 945 Annual Return of Withheld Federal Income Tax is used for businesses to report taxes withheld related to pension and annuity payments, gambling winnings, backup withholding and other types of non-wage related withholding. Form 941 Employer’s Quarterly Tax Return reports federal income tax withholding applied to employee wages.

In her recent testimony before congress, Taxpayer Advocate Erin M. Collins reported that as of the end of 2021, the IRS was backlogged with more than 2 million employer paper filed quarterly 941 and 941-x amended forms. Given the IRS’ goal to improve accuracy in return processing and minimize paper returns as mandated by the TFA, it is surprising that these forms were not in scope in the proposed regulations.

Even if the regulations are not finalized for the 2022 tax season, efiling is faster and more efficient than filing paper returns. Efiling makes compliance with reporting to the IRS easier by eliminating the errors associated with manual processes – including the headaches associated with downstream penalty notices that seem to take forever to get resolved.