The case
Beginning in filing year 2024, financial institutions must file Forms 1042 with the IRS electronically. On its face, such a requirement does not appear overly burdensome, but key IRS electronic filing systems remain effectively inaccessible to non-US users. The same issue arose last year regarding the IRS FIRE system (as covered in our June k-flash, here). Likewise, for a Form 1042 filing, access to the IRS’s Modernized e-File (MeF) platform necessitates a US taxpayer identification number (TIN). Regrettably, such TINs are neither readily available to non-US users nor swiftly delivered when requested. Accordingly, many affected Swiss financial institutions are waiting for the US Treasury Department to produce a workable solution and currently do not have access to the MeF platform. In the meantime, however, they cannot submit Forms 1042 electronically, which means they cannot file the requisite return for Qualified Intermediaries (QIs) and other withholding agents due annually on 15 March, which further means they are at risk of being non-compliant with their obligations under assorted US tax withholding regimes (26 CFR §301.1474-1(c)). Absent “reasonable cause” (as narrowly interpreted by the IRS), the consequences for such non-compliance include financial penalties (based on a percentage of amounts reported per IRC §6651) and in theory could result in revocation of the entity’s QI and/or FATCA and/or §871(m) status(es).
Source: Paul Foster Millen; SBA and EBF
The commentary
As it all appears a bit shambolic at the moment, deferring the problem looks pretty prudent. The deferral approach consists of two steps: (Step 1) submit a Form 7004 on paper by 15 March to postpone the deadline by six months, and (Step 2) wait for a permanent solution to emerge. Such a passive strategy may naturally be unwelcome to those responsible for the filings, but at this time it seems to be the most viable tactic.
One long-term option is to engage a service provider to submit the Form 1042 on behalf of the Swiss financial institution. Not only does that method generate extra costs, but, currently, there simply are not many service providers approved by the IRS for MeF filings (find the list here). Furthermore, the IRS is evidently curbing the spread of the Form 1042 technical specifications, thereby impeding other service providers from developing their own offerings.
The preferred outcome would, of course, be for the IRS to provide access to their e-filing systems for non-US financial institutions on less onerous terms, so the financial institutions can submit their US tax Forms on their own behalf. In a letter submitted to the IRS in November 2023, the Swiss Bankers Association made the case for a postponement of the e-filing requirement to next year alongside a parallel effort to develop an alternative mode of access for users without US TINs. A similar letter was submitted by the European Banking Federation this month. Hopefully, they will produce positive results, but an outcome of any kind in time for the looming deadline of 15 March 2024 is doubtful.