Why You Need to Pay Attention to Form 1042 Changes Right Now

Changes announced: Click here for the most up to date Form 1042 information.

If in reading this blog you are realizing for the first time that the IRS made changes to the reporting requirements for Form 1042 by no longer accepting paper filings starting with tax year 2023 filings, you are unfortunately already considerably behind in your preparation.

Here’s why.

To electronically file Form 1042, you need access to the IRS Modernized e-File (MeF) system. This is a different system than the IRS Filing Information Returns Electronically (FIRE) system. The process for completing and submitting your application to the IRS MeF system through the IRS e-Services system is a long and arduous process. It requires, for starters, you to assign two responsible officers to own your account and process. These people must be a licensed professional in one of the following areas: attorney, bank official, CPA, EA or an officer of a publicly owned corporation. If they don’t meet one of these criteria, they will be required to go through an extensive background check, which includes a fingerprinting process.

How long does it take?

Well, it depends. It will take at least 45 days from the date of submission for your application to be reviewed and processed. After this process, you are required to test your MeF transmittal with the IRS to get final approval to file, which can take as long as it takes for your organization to build a compliant transmittal that is accepted through the IRS testing process. However, as we get closer to the deadline and organizations are beginning to realize the significance of this change, we are hearing reports of applications and testing processes taking much longer. If you’ve had to get a passport issued or renewed in the past year, you know what I’m talking about.

Can’t I just use my current provider to file for me?

You can if they have been approved by the IRS. However, seeing as only two providers have been approved to date the chances of yours being one of them is unlikely. In fact, your current provider may not even be aware of this development at this time as we still see a number of companies offering this service on their website when we know for a fact, they are not IRS approved for e-Filing.

Why is this such a big deal?

The 1042 Form has been identified by the IRS as a Tier 1 audit. Transactions involving U.S. income and non-U.S. payees have been a Tier 1 audit focus for the IRS since the Foreign Account Tax Compliance Act (FATCA) was implemented.

Per IRS guidelines, failing to file Form 1042 electronically can trigger an IRS examination/audit of all transactions involving non-U.S. payees. This passage is taken directly from the Internal Revenue Manual for IRS Auditors related to Form 1042 and Forms 1042-S audits:

An examination should verify that all payments subject to reporting and withholding are identified, withheld upon if necessary, paid to the U.S. Treasury, and that required forms are properly and timely filed with the IRS. An examiner should look at various payment streams (such as vendor payments, treasury, and custodial) to ensure that all applicable payments are captured by the reporting system used to compile Form 1042 reporting. Internal controls should also be reviewed to verify that systems and procedures were in place to meet Chapter 3 and 4 requirements. 

In simple terms, this means they are looking very closely at these filings and if they are not completed in the time and manner required it is more probable than not that an audit will be initiated. And once they are in your records, they will be extremely thorough in identifying any and all inconsistencies.

Where do I go from here?

We get it, this one kind of snuck up on a lot of filers this year. However, there is an easy solution. Sovos has already done the hard part for you and is fully tested, verified and approved by the IRS to handle e-Filing for all of your 1042 forms.