Written by: Gautam Chopra & Rita M. Ryan
E-Filing Mandate
In 2023, the Internal Revenue Service (IRS) finalized regulations which required mandatory e-filing of Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for the following categories of withholding agents:
- A withholding agent which filed 10 or more returns of any type during the year;
- A withholding agent that is a financial institution (including investment entities); and
- A withholding agent that is a partnership with more than 100 partners.
The e-file mandate applied to filings made in 2024 for payments made in calendar year 2023.
The regulations did, however, authorize the Commissioner of Internal Revenue to provide exemptions from e-filing requirements.
February E-Filing Update
The IRS had received feedback from withholding agents that there were challenges in transitioning from current paper filing to e-filing due to the limited number of approved e-file providers.
On February 28, 2024, the IRS issued Notice 2024-26, administratively exempting the above categories of withholding agents from mandatory e-filing of Form 1042 for payments made in the 2023 calendar year. The IRS also confirmed that there will be no requirement to file an e-filing waiver request.
As a result, withholding agents can take a moment to regroup and continue to paper file Form 1042 in 2024 without issue.
Wolf’s Insight
While it was not a surprise that the IRS mandated e-filing of Form 1042, it was a difficult transition since Form 1042 was not an approved form for submission through the IRS’ File Information Return Electronically (FIRE) system. Instead, Form 1042 had to be filed through the IRS Modernized e-File (MeF) System and to complicate matters further, required an ID.me login which could only be obtained through registration on the IRS e-Services system. The limited number of third-party e-file providers only caused more headaches.
It is encouraging to see that the IRS recognized the difficulties that withholding agents were facing in e-filing Form 1042 due to the limited number of e-file providers and made the switch back to paper in a very seamless way.
Need Assistance?
The International Tax Services team at Wolf can help with all of your Form 1042 and 1042-S filing needs. We specialize in international reporting, non-resident withholding, and can guide you on the right path for compliance – reach out today to learn how we assist you!
