The IRS announced, in Notice 2024-26, that withholding agents (both U.S. and foreign) will be administratively exempt from the requirement to electronically file Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, in 2024 for tax year 2023.

In that notice, the IRS also announced that withholding agents who are foreign persons will be administratively exempt from the requirements to electronically file Forms 1042 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, Accounting Today reported.

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. Prior to 2021, the number of returns allowed to be filed on paper before someone was required to file electronically was 250, according to Accounting Today. 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, including a provision for the e-filing of Forms 1042. Since the publication of those regulations, the IRS received feedback from withholding agents noting challenges in transitioning to the procedures necessary for filing Forms 1042 electronically.

Some cited the limited number of approved IRS Modernized e-File business providers for Form 1042, and difficulties accessing the schema and business rules for e-filing Form 1042, according to the notice. 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  Modernized e-File 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 Modernized e-File  platform.