1042-S Adds Complexity to Tax Season for Banks and Corporates

It’s March — and for many corporations and government agencies, the race is on to file a complete accounting, particularly with Form 1042-S, with the IRS.

Wendy Walker, solution principal at Sovos, told PYMNTS that companies operating on an international basis grapple with ongoing challenges of reporting and reconciliation.

As she explained, Form 1042-S reports payments of U.S. income that was paid to non-resident taxpayers.

“All kinds of businesses, governments, trusts and states are reporting on this Form 1042-S for a variety of different types of payments,” she told PYMNTS.

The same accounts payable operations at these entities and enterprises that issue 1099-NECs for payments tied to services performed by non-employees must issue the 1042-S, Walker said. Payment processors must do the same for card transactions that were paid to merchants.

The collecting and reconciliation of all the data has some additional requirements, Walker noted.

“Any payer that issues and files those 1042-S forms also must issue and file a Form 1042,” she said.

That latter filing consolidates income and withholding taxes into certain categories for the IRS — and everything must reconcile between the 1042 and the 1042-S.

That’s easier said than done, given that there are more than 30 types of returns that report income paid by U.S. taxpayers, and the 1042 is meant to be a “catch all” form that reports all types of income, including interest payments, dividends and royalties. Issuers of the form must navigate 400 different codes to identify the types of income paid and the taxes that have been withheld.

“Payers have to keep track of those details throughout the year when these payments are being made and collate them together for annual reporting,” Walker said. “It’s very complicated — and among the most complicated information returns that payers have to issue.”

The processes are made all the more complex given the fact that so much data is entered manually, via Excel spreadsheets and other back-office functions.

Starting for tax year 2023, Form 1042-S must be electronically filed following the 10+ information return threshold. The form should be filed in the IRS’ File Information Returns Electronically (FIRE) system by March 15.

As for Form 1042, the IRS announced in Notice 2024-26 that they will delay the eFile threshold, allowing both U.S. and non-U.S. withholding agents to file the form via paper for 2023 returns. However, Form 1042 is still due to the IRS by March 15, regardless of filing method. Starting for 2024 returns, all U.S. withholding agents must file Form 1042 through the IRS’ Modernized eFile portal, which is separate from other digital filing channels with the government.

Filers can request an extension, but that requires jumping through some hurdles. The request for an extension must be faxed to the IRS, along with detailed reasons why the extension should be granted.

The Penalties

The IRS enforces the reporting just as it does any other filing, and the penalties can be onerous.

The penalties are adjusted every year for inflation, Walker said, and can reach hundreds of thousands of dollars for enterprises that may have thousands of 1042-S filings on an annual basis. If filing past the due date, the penalties can be hundreds of dollars per return, which means that the fines can accrue to the millions of dollars.

Among the best ways to keep in sync with the IRS requirements and reconciliation is to leverage the benefits of automated solutions, on offer from providers including Sovos, Walker said.

The advantages lie with the fact that in “consuming the transactional data, consuming that 1042-S data, you can easily pull back out the information that you need to ‘land’ on your 1042.”