Media Company Seeks Exemption for Form Under E-Filing Regs

September 20, 2021

Re: Comments on the Electronic-Filing Requirements for Specified Returns and Other Documents, Notice of Proposed Rulemaking, 86 Fed. Reg. 39910 (July 23, 2021) — REG-102951-16

To whom it may concern:

While we understand the need for a reduction in the submission of paper information returns to IRS, we respectfully submit the following concerns regarding the above-referenced proposed regulations.

1) We believe that Form 1042-S, “Foreign Person's U.S. Source Income Subject to Withholding”, should be specifically exempted from all aspects of proposed REG-102951-16. This would, for purposes of Form 1042-S:

• Leave in effect the current non-aggregation rule in § 301.6011-2(c)(1)(iii) and associated provisions;

• Keep the electronic filing threshold at the current level of 250 or more instead of reducing it to 100 (and subsequently to 10);

• Exclude Form 1042-S from the calculation of the aggregate number of covered information returns a withholding agent must take into consideration when determining whether the remaining covered forms must be filed electronically; and

• Continue to allow Amended Forms 1042-S to be submitted to IRS on paper Copy A as long as fewer than 250 amendments were filed by the same withholding agent for the tax year, regardless of whether the number of Original forms exceeded 249 and were required to be filed electronically.

RATIONALE

Existing regulations affecting Form 1042-S already require the vast majority of filers (financial institutions and large partnerships, for example) to submit 1042-S data to IRS electronically regardless of how few Forms 1042-S they file, and these same payers are most likely also filing a sufficient number of other covered information returns to trip the other proposed aggregation thresholds (including with respect to Amendments) even without considering the number of Forms 1042-S they file. The proposed regs will disproportionately affect occasional and lower-volume filers of the very complex Form 1042-S who may not have sufficient human, technical, or financial resources to comply, such as educational and research institutions and other nonprofits. An unintended result could be total noncompliance — for example, former paper filers required under the proposed regs to file electronically deciding to no longer file Form 1042-S and Form 1042 at all, not withhold the appropriate amount of tax (typically 30%), and not report the associated income at all. Other possibilities include improperly reporting 1042-S reportable payments on Form 1099-NEC, 1099-MISC, or W-2 with which the payer is more familiar, and still under- or improperly withholding, to the detriment of the payee and, when income tax returns are completed incorrectly as a result, IRS's already-depleted processing staff. Enforcing these proposed regulations on low-volume, non-financial/non-partnership issuers of Form 1042-S, addressing the increased numbers of waiver requests that will surely follow, and attempting to rectify improper filings could conceivably cost IRS more time and revenue than it saves, while only negligibly contributing to the goal of decreasing the number of information returns filed on paper.

HISTORY

As a result of the Foreign Account Tax Compliance Act (FATCA), Form 1042-S has undergone voluminous complex and ongoing changes since Tax Year 2014. While they have changed due to other legislation, no other information return contemplated by the proposed regulations has been affected as significantly. Major additions and changes have been made to all code types — income, recipient, payer, exemption, etc., and changes continue to be made, including for Tax Year 2021. These changes are extremely challenging for everyone, including software providers, requiring complex cross-referencing, bridge-building, and exhaustive testing to ensure compliance with IRS standards. Particularly difficult are repeated manipulations to existing codes. Implementing these changes is costly (at times nearly impossible), and that cost is of necessity passed on to clients.

In some cases, the same income code has morphed multiple times. See, for example, the numerous changes to income code 50. For TY 2013, it was used for “Other income”, was later given an entirely new, unrelated descriptor, subsequently given an entirely new income code which was re-labeled to something unrelated again, and was ultimately assigned a new income code of 23. The re-mapping difficulties caused by changes such as this, particularly the extensive income code changes introduced for TY 2015 reporting (which also inexplicably involved incrementing by one digit a series of 5 consecutive income codes that had been in place for decades), are numerous and complex from a development point of view, and extremely confusing for withholding agents and their payees, particularly in cases where the IRS Copy A is submitted electronically in compliance with Publication 1187, while recipient paper copies must follow the paper 1042-S instructions, which differ from Pub. 1187 in several respects. While income codes seem to have remained static in recent years, at least 6 Chapter 3 status codes were deleted, added, or re-labeled for Tax Year 2020 alone. For Tax Year 2021, 2 new exemption codes have been introduced.

As Martinsburg does not run parallel systems to accommodate multiple years and the attendant different codes specific to each year, withholding agents submitting Forms 1042-S electronically must use the most recent electronic format and codes that are in production (see Publication 1187) at the time the submission is made. An overlooked original TY 2014 1042-S reporting “Other income” submitted electronically in 2018 would have to be submitted under income code 54 (the current “Other income” code); but the information pages for the 2014 1042-S as issued by IRS (and not updated to reflect 2018 codes) do not contain income code 54 at all; it did not exist in 2014. For 2014, “Other income” was denoted by code 51. A taxpayer receiving paper Copies B, C and D of a 2014 1042-S for income code 54 would have no idea how to handle that income on an amended 2014 tax return, so for practical purposes, the withholding agent would have to reflect income code 51 on the recipient copies, but income code 54 on the electronic submission (Copy A) to IRS. That in turn sets up a potential conflict on the tax return processing side, where a processor attempting to implement data matching to ensure that no attempted fraud was being committed would find a mismatch between the recipient's copies and the withholding agent's electronic submission of Copy A to IRS.

Retaining the existing non-aggregation and electronic threshold rules for Form 1042-S in the face of the seemingly perpetual changes to which this highly-detailed form has become subject is the best way to ensure ongoing compliance, prevent currently-compliant payers from willfully or unintentionally slipping into non-compliance, and ensure that IRS's limited and valuable resources are not misspent.

2) The various proposed applicability dates, including the requirement for Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”, to be submitted electronically, should be reconsidered to allow for at least one entire calendar year after the regulations are adopted as final before they take effect. This would allow withholding agents, software providers, IRS-Martinsburg, and other stakeholders adequate time to implement, code, document, thoroughly test, and publish the various requirements and publications. For example, if the regulations are finalized at any time in 2020, no provision thereunder should take effect for information returns associated with payments made prior to January 1, 2022.

RATIONALE

It is far to late in the year for any of the proposed changes to be implemented for Tax Year 2021 information returns. With respect to Form 1042 in particular, the proposed regs involve an entirely new electronic filing requirement for a form for which no electronic filing option ever existed previously, so there are nor prior-year specifications to use as a model. As of September 20, 2021, there is not even a draft publication of the potential specifications for electronic submission of the form on the IRS website. It is therefore not realistic to expect software providers and withholding agents using own internally-developed solutions to spec, create, code, and test an electronic version of Form 1042 for the 2021 tax year.

Thank you in advance for your consideration.

Sincerely,

Terri Crowl
Content and Compliance Specialist
ONESOURCE Nonresident Alien Taxation
Thomson Reuters