IRS Grants Withholding Agents Temporary Exemption from Form 1042 e-File Requirement

The IRS has announced (Notice 2024-26) temporary relief for both U.S. and foreign withholding agents,  exempting them from new electronic filing (e-filing) requirements applicable to Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.” 

The exemption applies to Forms 1042 required to be filed in 2024 with respect to tax year 2023. In addition, withholding agents that are foreign persons get an additional year exemption applicable to Forms 1042 required to be filed in 2025 for tax year 2024. 

Form 1042 e-File Requirement

Withholding agents generally must file by March 15 withholding tax returns on Form 1042 for income paid during the preceding calendar year that is subject to applicable withholding requirements. 

The IRS in February 2023 issued final regulations implementing new electronic filing requirements for various types of returns, including Forms 1042. The rules decrease the threshold number of return filings that triggers mandatory electronic filing. Under the new rules, withholding agents (other than individuals, estate, or trusts) are required to electronically file Form 1042 if the withholding agent is required to file 10 or more information returns during the same calendar year in which Form 1042 is required to be filed.

The regulations specify that the electronic-filing requirements apply to Forms 1042 required to be filed for tax years ending on or after December 31, 2023. Thus, under the final rules, the new e-file requirement would first apply to Forms 1042 due March 15, 2024. 

Transitional Issues

In the year since the publication of the final regulations implementing the Form 1042 e-file requirement, withholding agents have expressed concerns to the IRS with respect to issues in transitioning to the new requirement in time. 

Filing Form 1042 electronically requires access to the IRS Modernized e-File (MeF) system. Agents relying on approved IRS MeF providers for Form 1042 expressed concerns about the limited number of providers, while those not relying on providers said they need more time to upgrade their system to file on the MeF platform. Withholding agents also highlighted additional implementation issues specific to foreign persons filing Forms 1042.

Administrative Exemption

In response to the withholding agents’ feedback and requests for additional time, the IRS is granting: (1) an exemption from the requirement for withholding agents to file Forms 1042 electronically during calendar year 2024, and (2) an additional exemption for foreign withholding agents for calendar year 2025. 

The 2024 filing exemption applies to withholding agents that are both U.S. and foreign persons, including: 

  • Withholding agents required to file Form 1042 that are not a financial institution and are required to file at least 10 returns in 2024,
  • Partnership required to file Form 1042 that have more than 100 partners, and
  • Financial institutions required to file Form 1042.

Accordingly, timely filing Forms 1042 in 2024 on paper, instead of electronically, for applicable filers will not be treated as a failure to file or result in the application of additions to tax. 

With respect to withholding agents that are foreign persons, the exemption will apply for an additional year, to Forms 1042 required to be filed in 2025 as well as those required to be filed in 2024. 

BDO Insight

The new e-filing requirement has been a concern specifically for qualified intermediaries, experiencing issues with getting access to the MeF system. It is important to note that the exemption is only temporary, and most U.S. withholding agents should get ready to e-file their Forms 1042 for the year 2024.