In a late breaking change, the IRS released Notice 2024-26 this week that announced a delay in the new requirement to electronically file Form 1042 (the Annual Withholding Tax Return for U.S. Source Income paid to foreign payees) for 2023 transactions with the IRS’s Modernized e-File (MeF) system.
Specifically, the notice indicates that organizations managing payment and withholding to foreign payees, including U.S. and non-U.S. Financial Institutions, are exempted from the electronic filing requirement for information due on March 15, 2024. Additionally, non-U.S. or foreign Withholding Agents were granted an additional year of relief and are also not required to file the Form 1042 electronically for 2024 transactions.
The exemption does NOT impact e-file requirements applicable to Forms 1042-S
An important distinction to be aware of is that the delays provided in Notice 2024-26 do not impact the new e-file requirements for Forms 1042-S. Forms 1042-S are required to be issued to the recipient and filed electronically in the IRS’s Filing Information Returns Electronically (FIRE) system no later than March 15, 2024.
Businesses are still required to file Forms 1042-S electronically following the new 10-form threshold finalized in the broader e-file regulations that were released on February 1, 2023.
Why you may still want to file the 1042 electronically for 2023
Although the IRS provided an exemption for tax year 2023, e-Filing of the 1042 with the IRS should still be the preferred method for a number of reasons:
- Paper filing processes are prone to errors for Filers, Recipients, and the IRS. Electronic filing ensures fewer manual errors in transferring data to IRS systems and automates the paper processes associated with preparing, issuing, and retaining all details associated with Form 1042 for each calendar year.
- Obtaining physical signatures for Form 1042 can be challenging in a virtual work environment. Filing with an approved provider eliminates the need for people to physically sign IRS forms.
- Electronic filings improve compliance. Instant validation that the form information has been accepted by the due date minimizes the risk of unnecessary or erroneous penalties.
- Form 1042 and 1042-S compliance is a Tier 1 audit focus for the IRS. Electronically filing Form 1042 information when not required demonstrates good faith and more importantly, a dedication to a compliant information reporting program.
Take Action
As we have previously indicated, while eFileMyForms continues to support electronic filing of the 1042-S form to foreign based payees, the service does not directly support the electronic filing of the associated 1042 withholding return for tax year 2023. If you are interested in the benefits of proactively efiling form 1042 for tax year 2023, our parent company, Sovos has completed the rigorous approval process and is one of the few IRS approved Modernized e-File (MeF) Business Providers for 1042 returns.
If your organization would benefit from electronically filing the 1042 tax return, we encourage you to learn more about this turnkey service by visiting the 1042 e-filing solution page.