The Internal Revenue Service issued a notice Tuesday granting an administrative exemption from the electronic filing requirements for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
The notice also said withholding agents that are foreign persons will be administratively exempt from the requirements to electronically file Forms 1042 required to be filed in 2025 for tax year 2024.
The administrative exemption from the electronic filing requirements for Form 1042 is automatic, and withholding agents aren't required to file a waiver request to use this exemption.
Section1 1.1461-1(b) of the Tax Code requires a withholding agent to file Form 1042 for income paid during the preceding calendar year. A withholding agent typically needs to file Form 1042 on or before March 15. Section 6011(e)(1) of the Tax Code allows the Treasury to prescribe regulations providing standards for determining which returns need to be filed electronically. Prior to 2021, the number of returns allowed to be filed on paper before someone was required to file electronically was 250. But the Taxpayer First Act of 2019 lowered that threshold to 10 returns.
Last February, the Treasury and the IRS published final regulations on electronic filing, include a provision for the e-filing Forms 1042, requiring a withholding agent, except an individual, estate or trust, to electronically file Form 1042 if the withholding agent is required to file 10 or more returns of any type during the same calendar year in which Form 1042 is required to be filed. However, the final regulations also authorized the IRS to provide exemptions from the e-filing requirements to promote effective and efficient tax administration. The final regulations required withholding agents to apply the requirements beginning with Forms 1042 due on or after March 15, 2024.
However, since publication of the final regs, the IRS received feedback from withholding agents pointing to challenges in transitioning to the procedures needed for filing Forms 1042 electronically. Among the concerns they cited were the limited number of approved IRS Modernized e-File business providers for Form 1042, along with difficulties accessing the schema and business rules for e-filing Form 1042. Withholding agents that don't rely on Modernized e-File business providers for their e-filing requirements asked for extra time to upgrade their own systems for filing Forms 1042 on the IRS's MeF platform and requested a deferral of the Form 1042 electronic-filing requirements in light of these concerns. Withholding agents also pointed to challenges specific to foreign persons filing Forms 1042 with respect to implementing the authentication requirements needed for accessing the IRS's MeF platform.
