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In a move aimed at easing the burden on taxpayers grappling with the shift to electronic filing, the Internal Revenue Service (IRS) has announced a delay in the e-filing requirement for Form 1042. This form, the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, has posed challenges for many withholding agents in transitioning to digital submission.

The IRS revealed in Notice 2024-26 that U.S. withholding agents will be exempt from the e-filing requirement for Form 1042, due in the calendar year 2024. Additionally, foreign withholding agents will enjoy an exemption for the calendar years 2024 and 2025. This administrative reprieve comes as a response to feedback from withholding agents who have encountered difficulties navigating the electronic filing process.

The decision to delay the e-filing requirement follows the IRS’s final regulations on e-filing rules, which were introduced in February 2023 and implemented provisions of the Taxpayer First Act. These regulations, affecting Form 1042, due on or after March 15, 2024, were met with concerns from stakeholders, tiny businesses, and self-employed individuals.

Withholding agents voiced their struggles with the limited availability of IRS-approved e-file providers for Form 1042, coupled with challenges accessing the necessary filing schema and business rules. Moreover, many cited the additional time required to upgrade their systems for IRS platform compatibility, exacerbating the already daunting compliance task.

Among the challenges highlighted were those faced by foreign persons filing Forms 1042, particularly regarding the authentication requirements for accessing the IRS platform. These authentication hurdles added a layer of complexity to an already intricate process, prompting calls for leniency from affected parties.

The IRS’s decision to postpone the e-filing requirement reflects a response to earlier feedback while drafting the final regulations. Commenters had urged a delay in implementing the changes to allow ample time for adjustments across the board. Small businesses and self-employed individuals, in particular, highlighted the need for additional time to adapt their processes and software systems to comply with the new requirements.

In light of these challenges, the IRS has granted withholding agents an automatic exemption from the e-filing requirements, offering a temporary respite from the digital transition. This move underscores the agency’s commitment to balancing compliance with the practical realities faced by taxpayers, particularly those in the small business and self-employed sectors.

As stakeholders navigate this transitional period, the IRS has signaled its willingness to listen to feedback and adapt its approach to ensure a smoother transition to electronic filing for all parties involved.

Source ( Journal of Accountancy News).