The IRS released guidance on Feb. 27 (Notice 2024-26) providing relief from new e-filing requirements that will allow withholding agents to continue to file Form 1042 on paper for 2023 forms due on March 15, 2024, with additional relief extended to foreign withholdings agents for 2024 forms due next year.
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is required for reporting withholding under Chapter 3 or Chapter 4 on certain income of foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates and foreign trusts. Form 1042 must be filed by March 15 of the year following when the income was paid, but a six-month automatic extension of time to file is available by filing Form 7004.
The IRS published final regulations on electronic filing in 2023 that require any withholding agent filing Form 1042 to e-file the form if the total number of information returns of all form types filed by the agent for the year exceeds 10. The effect of the 10-form threshold is that virtually all withholding agents would be required to e-file Form 1042 beginning with the 2024 filing season (the e-file rule generally applies for all information returns; see our previous alert).
The notice indicates that the IRS has received feedback from withholding agents on the procedural challenges with filing Forms 1042 electronically. These challenges include a limited number of approved IRS Modified e-File business providers, difficulties accessing the schema and business rules for filing electronically, and time needed for withholding agents to upgrade their systems to comply with the IRS Modernized e-File platform.
The notice provides relief just two-and-a-half weeks ahead of the statutory due date. Under the relief, withholding agents are not required to electronically file Form 1042 in 2024, and foreign withholding agents (for example, qualified intermediaries and withholding foreign partnerships) are not required to electronically file in either 2024 or 2025. Withholding agents will instead be allowed to file Form 1042 on paper, and a timely filed paper return will not incur failure to file penalties for not satisfying e-filing requirements.
Grant Thornton Insight
The notice is silent on an administrative exemption from e-filing Forms 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, which are also due March 15 and are subject to a similar e-filing requirement threshold. Absent further guidance, it appears that nearly all withholding agents will be required to file Forms 1042-S electronically to the IRS, as referenced in our previous alert on information returns due in 2024. Withholding agents should ensure that Forms 1042-S are properly submitted through an approved IRS Modernized e-File system by a party with the proper e-File capabilities. The deadline for filing Forms 1042-S can be extended 30 days by filing Form 8809.
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