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Text
Bulletin No. 2001–2
January 8, 2001
Internal Revenue
bulletin
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2001–2, page 255.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period October through
December 2000. This ruling announces the monthly bond
factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period October through December 2000. This ruling also
announces errors in bond factor amounts for dispositions of
1987 properties in 1998 and of all properties in 1999 and
January through June 2000, and sets forth summaries for
1998, 1999, and 2000 that contain the corrected bond factor amounts.
Notice 2001–2, page 265.
Research credit suspension periods. This notice provides guidance to help taxpayers compute and report their
credit for increasing research activities (research credit)
under section 41 of the Code for taxable years that include
the research credit suspension periods described in section
502(d)(2) of the Tax Relief Extension Act of 1999, Pub. L.
No. 106-170 (Dec. 17, 1999). This notice also explains how
to take into account any research credits attributable to a
research credit suspension period.
his discretion to except a qualifying taxpayer with average
annual gross receipts of $1,000,000 or less from the
requirements to use an accrual method of accounting and to
account for inventories. Rev. Proc. 2000–22 modified and
superseded. Rev. Proc. 99–49 modified and amplified.
Rev. Proc. 2001–11, page 275.
Penalties; substantial understatement. Guidance is provided concerning when information shown on a return will be
adequate disclosure for purposes of reducing an understatement of income tax under section 6662(d) of the Code
and for purposes of avoiding the preparer penalty under section 6694(a) of the Code.
EMPLOYEE PLANS
Notice 2001–3, page 267.
Weighted average interest rate update. The weighted
average interest rate for December 2000 and the resulting
permissible range of interest rates used to calculate current
liability for purposes of the full funding limitation of section
412 (c)(7) of the Code are set forth.
EMPLOYMENT TAX
Notice 2001–4, page 267.
This notice provides additional guidance to qualified intermediaries and U.S. withholding agents relating to the withholding of income tax under section 1441 of the Code on
certain U.S. source income paid to foreign persons.
Rev. Proc. 2001–10, page 272.
Methods of accounting; inventories; small taxpayers.
This procedure provides that the Commissioner will exercise
T.D. 8910, page 258.
Final regulations under section 6053 of the Code set forth
rules for employers that wish to establish electronic systems
for use by their tipped employees in reporting tips to the
employer. The regulations also provide rules relating to substantiation requirements for tipped employees using the
electronic system.
(Continued on the next page)
Finding Lists begin on page ii.
Department of the Treasury
Internal Revenue Service
Notice 2001–1, page 261.
Announcement 2001–3, page 278.
This notice sets forth the requirements employers must
meet and the procedures for obtaining approval of employer-designed tip reporting alternative commitment (EmTRAC)
programs for the food and beverage industry. Notice
2000–21 superseded.
This announcement updates Publication 1187 (Rev. 8-98),
which provides specifications for the magnetic or electronic filing of Form 1042-S, Foreign Person’s U.S. Source Income
Subject to Withholding. Announcement 99–79 superseded.
Page 258.
This document contains corrections to T.D. 8889, 2000–30
I.R.B. 124, final regulations regarding claims for certain
income tax convention benefits.
Railroad retirement; rate determination; quarterly. The
Railroad Retirement Board has determined that the rate of
tax imposed by section 3221 of the Code shall be 26 cents
for the quarter beginning January 1, 2001.
Announcement 2001–1, page 277.
The Service announces the availability of two new pro forma
voluntary tip reporting agreements for employers of tipped
employees and revisions of three existing pro forma voluntary tip reporting agreements. These documents were published in proposed form as announcements in I.R.B.
2000–19.
Announcement 2001–4, page 286.
Announcement 2001–5, page 286.
This document contains corrections to the Numerical Finding
List, the Finding List of Current Actions on Previously
Published Items, and the Index for Cumulative Bulletin
1998–2. These pages are reprinted here.
ADMINISTRATIVE
Announcement 2001–2, page 277.
An updated edition of Publication 551, Basis of Assets
(revised December 2000), will be available soon.
January 8, 2001
2001–2 I.R.B.
The IRS Mission
Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying
published rulings and procedures, the effect of subsequent
legislation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and others concerned are cautioned against reaching the same
conclusions in other cases unless the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office
of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual
basis, and are published in the first Bulletin of the succeeding semiannual period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2001–2 I.R.B.
January 8, 2001
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 41.—Credit for
Increasing Research Activities
Notice 2001–2 provides guidance to help taxpayers compute and report their credit for increasing research activities (research credit) under section 41 of
the Code for taxable years that include the research
credit suspension periods described in section
502(d)(2) of the Tax Relief Extension Act of 1999,
Pub. L. No. 106-170 (Dec. 17, 1999) (the Act). Further, this notice explains how to take into account
any research credits attributable to a research credit
suspension period. See Notice 2001–2, page 265.
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfactory bond; “bond factor” amounts for
the period October through December
2000. This ruling announces the monthly
bond factor amounts to be use by taxpayers who dispose of qualified low-income
buildings or interests therein during the
period October through December 2000.
This ruling also announces errors in bond
factor amounts for dispositions of 1987
properties in 1998 and of all properties in
1999 and January through June 2000, and
sets forth summaries for 1998, 1999, and
2000 that contain the corrected bond factor amounts.
Rev. Rul. 2001–2
In Rev. Rul. 90–60, 1990–2 C.B. 4, the
Internal Revenue Service provided guidance to taxpayers concerning the general
methodology used by the Treasury Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Internal Revenue Bulletin a table of “bond factor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfactory under § 42(j)(6) for dispositions of
qualified low-income buildings or interests therein during the period October
through December 2000. Table 1 also
provides a summary of the bond factor
amounts for dispositions occurring during
the period January through September
2000. Table 2 provides a summary of
bond factor amounts for dispositions occurring during the period January through
December 1999. Table 3 provides a summary of the bond factor amounts for dispositions occurring during the period January through December 1998.
Due to a miscalculation, Rev. Rul.
98–13, 1998–1 C.B. 686; Rev. Rul.
98–31, 1998–1 C.B. 1269; Rev. Rul.
98–45, 1998–2 C.B. 364; and Rev. Rul.
99–1, 1999–1 C.B. 265, are in error regarding the specific bond factor amounts
for buildings placed in service in calendar
year 1987 and disposed of in calendar
year 1998. Further, Rev. Rul. 99–18,
1999–1 C.B. 868; Rev. Rul. 99–24,
1999–1 C.B. 1096; Rev. Rul. 99–38,
1999–2 C.B. 335; Rev. Rul. 99–54,
1999–2 C.B. 675; Rev. Rul. 2000–22,
2000–16 I.R.B. 880; and Rev. Rul.
2000–31, 2000–26 I.R.B. 1269, are in
error regarding the bond factor amounts
for buildings placed in service in calendar
years 1987 through 2000 and disposed of
in calendar year 1999 and January 2000
through June 2000. The present revenue
ruling provides a complete list of the corrected bond factor amounts.
Under the authority of § 7805(b), taxpayers that posted bonds and taxpayers
that established Treasury Direct Accounts
with the Service pursuant to Rev. Proc.
99–11, 1999–1 C.B. 275, based upon the
above mentioned bond factor amounts
may continue to rely on those figures.
Taxpayers that choose to amend their previously posted bonds by using the corrected bond factor amounts listed in this
revenue ruling may do so by submitting
an amended Form 8693, Low-Income
Housing Tax Credit Disposition Bond, to
the Internal Revenue Service Center,
Philadelphia, PA 19255. The amended
form may be submitted by either the taxpayer or the surety. Taxpayers that choose
to amend the amount of securities pledged
in their previously established Treasury
Direct Accounts with the Service by using
the corrected bond factor amounts listed
in this revenue ruling should contact the
Bureau of the Public Debt, Division of
Customer Service, IRS Collateral Desk at
(304) 480-6158 for further information.
Table 1
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Jan
Feb
Mar
Apr
May
Jun
Jul
37.59
37.59
37.59
39.75
39.75
39.75
39.75
51.81
51.81
51.81
54.78
54.78
54.78
54.78
63.64
63.64
63.64
67.30
67.30
67.30
67.30
73.62
73.62
73.62
77.84
77.84
77.84
77.84
75.52
75.31
75.09
79.96
79.74
79.52
79.31
77.92
77.69
77.47
83.31
83.07
82.84
82.61
80.36
80.12
79.88
86.76
86.51
86.26
86.02
82.70
82.44
82.20
90.16
89.90
89.64
89.38
85.05
84.78
84.53
93.64
93.36
93.09
92.82
87.63
87.35
87.07
97.41
97.12
96.83
96.56
90.38
90.08
89.79
101.43
101.11
100.81
100.53
93.52
93.17
92.85
105.89
105.54
105.22
104.92
96.69 97.21
96.26 97.21
95.88 97.21
110.31 112.52
109.93 112.52
109.59 112.52
109.29 112.52
’00
’00
’00
’00
’00
’00
’00
2001–2 I.R.B.
255
2000
January 8, 2001
Table 1 (cont’d)
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Aug
Sep
Oct
Nov
Dec
39.75
39.75
39.75
39.75
39.75
54.78
54.78
54.78
54.78
54.78
67.30
67.30
67.30
67.30
67.30
77.84
77.84
77.84
77.84
77.84
79.09
78.89
78.68
78.48
78.28
82.39
82.17
81.95
81.74
81.54
85.78
85.55
85.32
85.10
84.88
89.14
88.89
88.66
88.43
88.21
92.57
92.32
92.08
91.84
91.61
96.29 100.25
96.04 99.99
95.79 99.74
95.55 99.50
95.32 99.28
’00
’00
’00
’00
’00
1997
1998
1999
2000
104.64 109.02 112.52
104.37 108.77 112.52
104.12 108.55 112.52
103.89 108.35 112.52
103.66 108.16 112.52
Table 2
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
49.72
49.72
49.72
52.57
52.57
52.57
52.57
52.57
52.57
52.57
52.57
52.57
60.91
60.91
60.91
64.41
64.41
64.41
64.41
64.41
64.41
64.41
64.41
64.41
70.15
70.15
70.15
74.17
74.17
74.17
74.17
74.17
74.17
74.17
74.17
74.17
70.99
70.79
70.60
75.18
74.97
74.77
74.57
74.37
74.18
73.99
73.80
73.62
72.34
72.13
71.93
77.36
77.14
76.93
76.72
76.52
76.32
76.12
75.93
75.74
73.94
73.72
73.51
79.85
79.62
79.39
79.18
78.96
78.75
78.55
78.35
78.15
75.54
75.31
75.09
82.37
82.13
81.89
81.67
81.44
81.23
81.02
80.81
80.61
76.98
76.75
76.52
84.77
84.52
84.28
84.04
83.81
83.59
83.37
83.17
82.96
78.38
78.13
77.90
87.15
86.90
86.65
86.41
86.18
85.95
85.74
85.53
85.33
79.94
79.68
79.44
89.75
89.49
89.23
88.99
88.76
88.54
88.32
88.12
87.93
81.59
81.32
81.07
92.48
92.20
91.95
91.71
91.48
91.27
91.07
90.88
90.71
83.60
83.28
83.00
95.53
95.25
94.99
94.76
94.55
94.37
94.20
94.04
93.90
83.98
83.98
83.98
97.21
97.21
97.21
97.21
97.21
97.21
97.21
97.21
97.21
’99
’99
’99
’99
’99
’99
’99
’99
’99
’99
’99
’99
Table 3
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1997
1998
Jan
Feb
Mar
Apr
May
69.28
69.28
69.28
65.52
65.52
79.57
79.57
79.57
75.25
75.25
81.84
81.59
81.35
75.96
75.75
84.75
84.49
84.24
77.87
77.65
88.14
87.86
87.59
80.16
79.93
91.97
91.67
91.37
82.79
82.55
95.92
95.59
95.27
85.46
85.20
99.75 103.57 107.70 111.85
99.39 103.18 107.25 111.28
99.04 102.80 106.83 110.79
87.97 90.41 93.03 95.60
87.69 90.12 92.74 95.31
112.52
112.52
112.52
97.21
97.21
’98
’98
’98
’98
’98
January 8, 2001
256
1995
1996
2001–2 I.R.B.
Table 3 (cont’d)
Rev. Rul. 2001–2
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Jun
Jul
Aug
Sep
Oct
Nov
Dec
65.52
65.52
65.52
65.52
65.52
65.52
65.52
75.25
75.25
75.25
75.25
75.25
75.25
75.25
75.54
75.33
75.13
74.93
74.73
74.54
74.35
77.44
77.22
77.01
76.81
76.61
76.41
76.22
79.71
79.49
79.27
79.06
78.85
78.65
78.45
82.31
82.08
81.85
81.63
81.41
81.20
80.99
84.95
84.70
84.47
84.23
84.01
83.79
83.58
87.43
87.18
86.93
86.70
86.47
86.25
86.04
89.85
89.60
89.35
89.12
88.89
88.68
88.47
92.46
92.21
91.97
91.74
91.53
91.33
91.14
95.05
94.81
94.61
94.42
94.25
94.09
93.94
97.21
97.21
97.21
97.21
97.21
97.21
97.21
’98
’98
’98
’98
’98
’98
’98
For a list of bond factor amounts applicable to dispositions occurring during
other calendar years, see Rev. Rul. 98–3,
1998–1 C.B. 248.
able items as materials and supplies that are not incidental under §1.162–3 of the regulations. See Rev.
Proc. 2001–10, page 272.
EFFECT ON OTHER REVENUE
RULINGS
Section 263A.—Capitalization
and Inclusion in Inventory Costs
of Certain Expenses
Rev. Rul. 98–13, 1998–1 C.B. 686; Rev.
Rul. 98–31, 1998–1 C.B. 1269; Rev. Rul.
98–45, 1998–2 C.B. 364; Rev. Rul. 99–1,
1999–1 C.B. 265; Rev. Rul. 99–18, 1999–1
C.B. 868; Rev. Rul. 99–24, 1999–1 C.B.
1096; Rev. Rul. 99–38, 1999–36 I.R.B.
335; Rev. Rul. 99–54, 1999–51 I.R.B. 675;
Rev. Rul. 2000–22, 2000–16 I.R.B. 880;
Rev. Rul. 2000–31, 2000–26 I.R.B. 1269;
and Rev. Rul. 2000–48, 2000–42 I.R.B.
349, are revoked.
DRAFTING INFORMATION
The principal author of this revenue ruling
is Gregory N. Doran of the Office of Associate Chief Counsel (Passthroughs and Special
Industries). For further information regarding this revenue ruling, contact Mr. Doran at
(202) 622-3040 (not a toll-free call).
26 CFR 1.263A–1: Uniform capitalization of costs.
Section 263A does not apply to inventoriable
items of qualifying taxpayers with average annual
gross receipts of $1,000,000 or less that are treated
as materials and supplies that are not incidental
under §1.162–3 of the regulations. See Rev. Proc.
2001–10, page 272.
Section 446.—General Rule for
Methods of Accounting
Section 481.—Adjustments
Required for Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
26 CFR 1.481–4: Adjustments taken into account
with consent.
Procedures are provided for qualifying taxpayers with average annual gross receipts of
$1,000,000 or less to obtain automatic consent to
change to the cash receipts and disbursements
method of accounting and to a method of accounting for inventory as materials and supplies that are
not incidental under § 1.162–3 of the regulations.
See Rev. Proc. 2001–10, page 272.
26 CFR 1.446–1: General rule for methods of
accounting.
Qualifying taxpayers with average annual gross
receipts of $1,000,000 or less are excepted from the
requirement to use an accrual method of accounting
under § 446 of the Code and to account for inventories under § 471. See Rev. Proc. 2001–10, page 272.
Section 162.—Trade or Business
Expenses
Section 471.—General Rule for
Inventories
26 CFR 1.162–3: Cost of materials.
26 CFR 1.471–1: Need for inventories.
Qualifying taxpayers with average annual gross
receipts of $1,000,000 or less are excepted from the
requirement under § 471 of the Code to account for
inventories, and instead may account for inventori-
Qualifying taxpayers with average annual
gross receipts of $1,000,000 or less are expected
from the requirement to use an accrual method of
accounting under § 446 of the Code and to ac-
2001–2 I.R.B.
count for inventories under § 471, and may instead treat inventoriable items as materials and
supplies that are not incidental under § 1.162–3 of
the regulations. See Rev. Proc. 2001–10, page
272.
257
Section 1001.—Determination
of Amount of and Recognition
of Gain or Loss
26 CFR 1.1001–1: Computation of gain or loss.
Notwithstanding § 1001 and the regulations
thereunder, qualifying taxpayers that use the cash
receipts and disbursements method of accounting
include amounts in income attributable to open
accounts receivable (i.e., receivables due in 120
days or less) as amounts are actually or constructively received. See Rev. Proc. 2001–10, page
272.
January 8, 2001
Section 3221.—Rate of Tax
ACTION: Final regulations.
Background
Determination of Quarterly Rate
of Excise Tax for Railroad
Retirement Supplemental
Annuity Program
SUMMARY: This document amends the
regulations dealing with the requirement that
tipped employees report their tips to their
employer. These final regulations permit
employers to establish electronic systems for
use by their tipped employees in reporting
tips to the employer. These final regulations
also address substantiation requirements for
employees using the electronic system.
On January 26, 1998, the IRS published in the Federal Register (63 F.R.
3681) a notice of proposed rulemaking
(REG–104691–97, 1998–1 C.B. 695)
under section 6053 of the Internal Revenue Code relating to electronic tip reports. The notice proposed to amend
§31.6053–1 and §31.6053–4 of the employment tax regulations.
No written comments responding to the
notice of proposed rulemaking were received. No public hearing was requested
or held. Accordingly, the proposed regulations are adopted as final regulations.
The final regulations are consistent
with the provisions of the Electronic Signatures in Global and National Commerce Act.
In accordance with directions in section
3221(c) of the Railroad Retirement Tax Act
(26 U.S.C., 3221(c)), the Railroad Retirement Board has determined that the excise
tax imposed by such section 3221(c) on
every employer, with respect to having individuals in his employ, for each work-hour
for which compensation is paid by such
employer for services rendered to him during the quarter beginning January 1, 2001,
shall be at the rate of 26 cents.
In accordance with directions in section
15(a) of the Railroad Retirement Act of
1974, the Railroad Retirement Board has determined that for the quarter beginning January 1, 2001, 39.7 percent of the taxes collected under sections 3221(b) and 3221(c) of
the Railroad Retirement Tax Act shall be
credited to the Railroad Retirement Account
and 60.3 percent of the taxes collected under
such sections 3211(b) and 3221(c) plus 100
percent of the taxes collected under section
3221(d) of the Railroad Retirement Tax Act
shall be credited to the Railroad Retirement
Supplemental Account.
Dated December 1, 2000.
By Authority of the Board.
Beatrice Ezerski,
Secretary to the Board.
(Filed by the Office of the Federal Register on December 12, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 13, 2000,
65 F.R. 77938)
Section 6053.—Reporting of
Tips
26 CFR 31.6053–1: Report of tips by employee to
employer.
T.D. 8910
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 602
Electronic Tip Reports
AGENCY: Internal Revenue Service
(IRS), Treasury.
January 8, 2001
DATES: Effective Date: These regulations are effective December 13, 2000.
Applicability Dates: For dates of applicability, see §31.6053–1(d)(6) of these
regulations.
FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622-6080
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 15451603. Responses to this collection of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number assigned by the Office of
Management and Budget.
The estimated annual burden per respondent varies from 1 hour to 3 hours,
depending on individual circumstances,
with an estimated average of 2 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP,
Washington, DC 20224, and to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
258
Special Analyses
It has been determined that these final
regulations are not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations. Further, it is hereby certified, pursuant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6), that the collection of information contained in these regulations will
not have a significant economic impact on
a substantial number of small entities.
The collection of information in
§31.6053–1 is imposed solely on individuals, not on any small entities, and the
regulations provide flexibility to employees who must provide the information required by statute, thereby reducing burden. With respect to the collection of
information in §31.6053–4, the certification is based on the expectation of the IRS
that most businesses that choose to implement the electronic tip reporting provisions will be larger businesses with many
employees and sophisticated computer
systems. Moreover, because the provision is wholly elective, any small business
that would be adversely impacted may
choose not to use electronic tip reporting.
Finally, the Service expects that for those
small entities that choose to implement
the provision, the use of electronic tip reporting will reduce overall burden by re-
2001–2 I.R.B.
ducing paper collections. Therefore, a
regulatory flexibility analysis under the
Regulatory Flexibility Act is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
small business.
Drafting Information
The principal author of these regulations is Karin Loverud, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). However, other personnel from the IRS and
the Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 31 and 602
are amended as follows:
PART 31–EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 31.6053–1 is amended
as follows:
1. Paragraph (a) is revised.
2. The introductory text of paragraph
(b)(1) is revised.
3. The last sentence of paragraph
(b)(1)(iii) is revised.
4. Paragraph (b)(2) is revised.
5. Paragraph (c) is revised.
6. Paragraph (d) is added.
The revisions and additions read as follows:
§31.6053–1 Report of tips by employee
to employer.
(a) Requirement that tips be reported—
(1) In general.
An employee who
receives, in the course of employment by an
employer, tips that constitute wages as
defined in section 3121(a) or section 3401,
or compensation as defined in section
3231(e), must furnish to the employer a
2001–2 I.R.B.
statement, or statements, disclosing the
total amount of the tips received by the
employee in the course of employment by
the employer. Tips received by an employee in a calendar month in the course of
employment by an employer that are
required to be reported to the employer
must be reported on or before the 10th day
of the following month. For example, tips
received by an employee in January 2000
are required to be reported by the employee
to the employer on or before February 10,
2000.
(2) Cross references. For provisions
relating to the treatment of tips as wages
for purposes of the Federal Insurance
Contributions Act (FICA) tax under sections 3101 and 3111, see sections
3102(c), 3121(a)(12), and 3121(q) and
§§31.3102–3 and 31.3121(a)(12)–1. For
provisions relating to the treatment of tips
as wages for purposes of the tax under
section 3402 (income tax withholding),
see sections 3401(a)(16), 3401(f), and
3402(k)
and
§§31.3401(a)(16)–1,
31.3401(f)–1, and 31.3402(k)–1. For provisions relating to the treatment of tips as
compensation for purposes of the
Railroad Retirement Tax Act (RRTA) tax
under sections 3201 and 3221, see section
3231(e) and §31.3231(e)–1(a).
(b) * * * (1) In general. The statement described in paragraph (a) of this
section can be provided on paper or transmitted electronically. The statement must
be signed by the employee and must disclose:
*****
(iii) * * * If the statement is for a period of less than 1 calendar month, the
beginning and ending dates of the period
must be included (for example, January 1
through January 8, 1998).
*****
(2) Form of statement—(i) In general.
No particular form is prescribed for use in
furnishing the statement required by this
section. The statement may be furnished
on paper or transmitted electronically. An
electronic system and all tip statements
generated by that system must meet the
requirements of paragraph (d) of this section. If the employer does not provide any
other means for the employee to report
tips, the employee may use Form 4070,
“Employee’s Report of Tips to
Employer.”
259
(ii) Single-purpose forms. A statement
may be furnished on an employer-provided form. The form may be on paper or in
electronic form. An employer that provides a paper form must make blank
copies of the form readily available to all
tipped employees. Any form, whether
paper or electronic, provided by an
employer for use by its tipped employees
solely to report tips must meet all the
requirements of paragraph (b)(1) of this
section.
(iii) Regularly used forms. Instead of
requiring that tips be reported as
described in paragraph (b)(2)(ii) of this
section on a special form used solely for
tip reporting, an employer may prescribe
regularly used forms for use by employees in reporting tips. A regularly used
form may be on paper or in electronic
form (such as a time card or report), must
meet the requirements of paragraph
(b)(1)(iii) and (iv) of this section, must
contain identifying information that will
ensure accurate identification of the
employee by the employer, and is permitted to be used only if the employer furnishes the employee a statement suitable
for retention showing the amount of tips
reported by the employee for the period.
The employer statement may be furnished
when the employee reports the tips, when
wages are first paid following the reporting of tips by the employee, or within a
short time after the wages are paid. The
employer may meet this requirement, for
example, through the use of a payroll
check stub or other payroll document regularly furnished (if not less frequent than
monthly) by the employer to the employee showing gross pay and deductions.
(c) Period covered by, and due date of,
tip statement—(1) In general. A tip statement furnished by an employee to an
employer may not cover a period greater
than 1 calendar month. An employer may,
however, require the submission of a statement in respect of a specified period of
time, for example, on a weekly or biweekly
basis, regular payroll period, etc. An
employer may specify, subject to the limitation in paragraph (a) of this section, the
time within which, or the date on which, the
statement for a specified period of time
should be submitted by the employee. For
example, a statement covering a payroll
period may be required to be submitted on
January 8, 2001
the first (or second) day following the close
of the payroll period. A statement submitted by an employee after the date specified
by the employer for its submission nevertheless is a statement furnished pursuant to
section 6053(a) and this section if it is submitted to the employer on or before the 10th
day following the month in which the tips
were received.
(2) Termination of employment. If an
employee’s employment terminates, the
employee must furnish a tip statement to
the employer when the employee ceases
to perform services for the employer. A
statement submitted by an employee after
the date on which the employee ceases to
perform services for the employer is a
statement furnished pursuant to section
6053(a) and this section if the statement is
submitted to the employer on or before
the earlier of the day on which the final
wage payment is made by the employer to
the employee or the 10th day following
the month in which the tips were received.
(d) Requirements for electronic systems—(1) In general. The electronic system must ensure that the information
received is the information transmitted by
the employee and must document all
occasions of access that result in the transmission of a tip statement. In addition,
the design and operation of the electronic
system, including access procedures, must
make it reasonably certain that the person
accessing the system and transmitting the
statement is the employee identified in the
statement transmitted.
(2) Same information as on paper
statement. The electronic tip statement
must provide the employer with all the
information required by paragraph (b)(1)
of this section.
(3) Signature. The electronic tip state-
ment must be signed by the employee.
The electronic signature must identify the
employee transmitting the electronic tip
statement and must authenticate and verify the transmission. For this purpose, the
terms authenticate and verify have the
same meanings as they do when applied
to a written signature on a paper tip statement. Any form of electronic signature
that satisfies the foregoing requirements is
permissible.
(4) Copies of electronic tip statements.
Upon request by the Internal Revenue
Service (IRS), the employer must supply
the IRS with a hard copy of the electronic
tip statement and a statement that, to the
best of the employer’s knowledge, the
electronic tip statement was filed by the
named employee. The hard copy of the
electronic tip statement must provide the
information required by paragraph (b)(1)
of this section, but need not be a facsimile of Form 4070 or any employerdesigned form.
(5) Record retention. The record retention requirements applicable to automatic
data processing systems also apply to
electronic tip reporting systems.
(6) Effective date. The provisions pertaining to electronic systems and electronic
tip reports are applicable as of December
13, 2000. However, employers may apply
these provisions to earlier periods.
Par. 3. Section 31.6053–4 is amended
as follows:
1. A sentence is added to paragraph
(a)(1) after the third sentence.
2. A sentence is added to paragraph
(a)(2) after the fourth sentence.
The additions read as follows:
§31.6053–4 Substantiation requirements
for tipped employees.
(a)(1) * * * The Commissioner may by
revenue ruling, procedure or other guidance of general applicability provide for
other methods of demonstrating evidence
of tip income. * * *
(2) * * * In addition, an electronic system maintained by the employer that collects substantially similar information as
Form 4070A may be used to maintain
such daily record, provided the employee
receives and maintains a paper copy of the
daily record. * * *
*****
PART 602–OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is
amended by revising the entries for
31.6053–1 and 31.6053–4 to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved August 25, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on December 12, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 13, 2000,
65 F.R. 77818)
CFR part or section where
identified and described
Current OMB
control No.
*****
31.6053–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*****
31.6053–4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1545–0029
1545–0062
1545–0064
1545–0065
1545–1603
1545–0065
1545–1603
*****
January 8, 2001
260
2001–2 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous
Employer-Designed Tip
Reporting Program for the Food
and Beverage Industry
Notice 2001–1
I. BACKGROUND
In 1993, the Internal Revenue Service
introduced its Tip Rate Determination/Education Program (TRD/EP), which is designed to enhance tax compliance among
tipped employees through taxpayer education and voluntary advance agreements
instead of traditional audit techniques.
The TRD/EP was developed as a means
of enhancing tax compliance while reducing taxpayer burden. In essence, the
TRD/EP envisions that the Service and
taxpayers in industries in which tipping is
common will work together to improve
tax compliance.
The TRD/EP currently offers employers the opportunity of entering into one of
two types of agreements. The Tip Rate
Determination Agreement (TRDA) requires the determination of tip rates; the
Tip Reporting Alternative Commitment
(TRAC) agreement emphasizes education
and tip reporting procedures. The agreements also set forth an understanding that
both the employer and employees who
comply with the terms of the agreement
will not be subject to challenge by the
Service. The decision to enter into either
a TRDA or a TRAC agreement is entirely
voluntary on the part of the employer.
TRDAs are currently in use in the food
and beverage industry and the gaming industry. TRAC agreements are currently
in use in the food and beverage industry
and the cosmetology and barber industry.
The Service expects to begin making
these agreements available to other industries during 2000.
Taxpayers in the food and beverage industry have expressed interest in designing their own TRAC programs. Notice
2000–21, 2000–19 I.R.B. 967, set forth
proposed requirements and procedures for
obtaining approval of an employer-designed EmTRAC program. Notice
2000–21 also offered interested persons
the opportunity to comment on the proposed program. The Service received no
comments. Even so, several nonsubstan-
2001–2 I.R.B.
tive clarifying changes have been made.
They appear in this document.
II. EmTRAC PROGRAM
The EmTRAC program is available
only to employers in the food and beverage industry that have employees who receive both cash and charged tips. The
employer may have one place of business
or many places of business. For purposes
of the program, each place of business is
called an establishment. If an employer
has more than one establishment, it can
choose which establishments to include in
its EmTRAC program.
The EmTRAC program retains many of
the provisions in the TRAC agreement.
The employer must establish an educational program that trains employees that
the law requires them to report all their
cash and charged tips to their employer.
Education must be furnished for newly
hired employees and quarterly for existing employees.
The employer must establish tip reporting procedures, under which a written or
electronic statement is prepared and
processed on a regular basis (no less frequently than monthly), reflecting all tips
for services attributable to each employee.
The EmTRAC program provides an
employer with considerable latitude in designing its educational program and tip
reporting procedures, which the employer
may combine. For example, a point-ofsale tip reporting system could meet both
of these requirements, because the employee is prompted of the tip reporting requirement at the end of each sale and because the reporting occurs at the end of
each sale.
The employer must agree–
1. to comply with the requirements
for filing all required federal tax returns
and paying and depositing all federal
taxes;
2. to maintain the following records
for at least 4 years after the April 15 following the calendar year to which the
records relate:
a. gross receipts subject to tipping, and
b. charge receipts showing
charged tips; and
3. upon the request of the Service, to
261
make the following quarterly totals available, by establishment, for statistical samplings of its establishments:
a. Gross receipts subject to tipping,
b. Charge receipts showing
charged tips,
c. Total charged tips, and
d. Total tips reported.
The Service agrees–
1. not to initiate any tip examinations of the employer or an establishment
included in the EmTRAC for any period
for which the EmTRAC program is in effect; except in relation to a tip examination of one or more employees or former
employees of the employer or an establishment.
2. to base any section 3121(q) notice
and demand issued to the employer or an
establishment included in the EmTRAC
and relating to any period during which
the EmTRAC program is in effect solely
on amounts reflected on–
a. Form 4137, Social Security and
Medicare Tax on Unreported Tip Income,
filed by an Employee with his or her
Form 1040, or
b. Form 885-T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, prepared at the conclusion of an employee tip examination;
and
3. not to evaluate the employer for
compliance with the provisions of its EmTRAC program for the first two calendar
quarters for which the EmTRAC program
is effective.
Both parties agree that, for purposes of
the EmTRAC program, a compliance review is not treated as an examination or
an inspection of books of account or
records, and an inspection of books of account or records pursuant to a tip examination is not an inspection of books or
records for purposes of section 7605(b) of
the Code, and is not a prior audit for purposes of section 530 of the Revenue Act
of 1978.
The effective date of an EmTRAC program is the first day of the quarter beginning on or after the date the Service signs
an approval letter.
An employer may at any time terminate
its EmTRAC program either completely
January 8, 2001
or with respect to one or more establishments. The Service may terminate its approval with respect to the EmTRAC program or a specific establishment or
establishments, only if–
1. the Service determines that the
employer or establishment(s) has failed to
comply with the required provisions; or
2. the Service pursues an administrative or judicial action relating to the
employer, an establishment included in
the EmTRAC, or any other related party
to the employer’s EmTRAC program.
Generally, any termination is effective the
first day of the first calendar quarter after
the terminating party notifies the other
party in writing.
If the employer has an existing TRAC
agreement or TRDA covering one or
more establishments included in the employer’s EmTRAC program, the existing
TRAC agreement or TRDA will terminate
with respect to that establishment or those
establishments upon the approval of the
employer’s EmTRAC program.
III. PROCEDURES FOR
REQUESTING APPROVAL
The employer must request approval of
its EmTRAC program. For this purpose,
the Service has developed a pro forma letter that an employer must use to request
approval of its EmTRAC program. The
letter requests approval of the employer’s
EmTRAC program and states that the employer will comply with the provisions set
forth in the letter (and also set forth in
section II above).
A copy of the approval request letter is
attached to this notice. It can be obtained
by mail by contacting the tip coordinator
in any local IRS office or by calling (202)
622-5532 (not a toll-free call).
The completed approval request letter
and a copy of the employer’s EmTRAC
program should be sent to:
Internal Revenue Service
S:C:CP:ET Room 2404
Attn: EmTRAC Coordinator
1111 Constitution Avenue, N.W.
Washington, DC 20224
January 8, 2001
IV. PROCEDURES FOR APPROVING
REQUESTS
After it receives the approval request
letter, the Service will review the employer’s program. If the program meets
the necessary requirements, the Service
will send the employer an approval letter,
a copy of which is attached to this notice.
The approval letter will specify the effective date of the employer’s EmTRAC program.
If the IRS determines that the employer’s EmTRAC program fails to meet
all the requirements, the IRS will contact
the employer and offer assistance in
working out a program that will meet both
the employer’s needs and the IRS’s requirements.
V. MISCELLANEOUS
Upon request to the local tip coordinator or the EmTRAC Coordinator, the Service will assist any employer in establishing, maintaining, or improving its
educational program or tip reporting procedures.
The Commissioner of Internal Revenue
may terminate all EmTRAC programs at
any time following a significant statutory
change in the FICA taxation of tips. After
December 31, 2005, the Commissioner
may terminate prospectively the Tip Rate
Determination/Education Program and all
EmTRAC programs.
VI. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1716.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number. The collections of information in this document are in sections II
and III. This information is required to
comply with sections 6053(a) and 6001 of
262
the Internal Revenue Code and to assist
the Internal Revenue Service in its compliance efforts. This information will be
used to monitor the Employer’s performance under its EmTRAC program. The
collections of information are required to
obtain the benefits available under the
EmTRAC program. The likely respondents are business or other for-profit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 870 hours.
The estimated annual burden per respondent/recordkeeper varies from 8
hours to 44 hours, depending on individual circumstances, with an estimated average of 13 hours. The estimated number
of respondents and/or recordkeepers is
20.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103 of the Code.
VII. AFFECT ON OTHER
DOCUMENTS
Notice 2000–21 is superseded.
DRAFTING INFORMATION
The principal author of this notice is
Karin Loverud of the Office of the Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this announcement, contact Ida Volz of the Office of Compliance Policy at (202) 6225532 (not a toll-free call).
2001–2 I.R.B.
Letter — Request for EmTRAC approval
Tip Coordinator
Internal Revenue Service
Re: Request for EmTRAC Approval
Dear Internal Revenue Service:
Pursuant to the Employer Tip Reporting Alternative Commitment Program (EmTRAC), I request your approval of the enclosed program for
(name of business), EIN
.
In accordance with Notice 2001–1, 2001–2 I.R.B. 261, if you approve this program_______________________________________
(name of business) agrees to:
(1) comply with the requirements for filing all required federal tax returns and paying and depositing all federal taxes;
(2) maintain the following records for at least 4 years after the April 15 following the calendar year to which the records relate:
a. gross receipts subject to tipping, and
b. charge receipts showing charged tips;
(3) upon your request, make the following quarterly totals available, by establishment, for statistical samplings:
a. gross receipts subject to tipping,
b. charge receipts showing charged tips,
c. total charged tips, and
d. total tips reported;
(4) operate its EmTRAC program as indicated in the program documents attached to this letter; and
(5) comply with the terms of your approval described in Notice 2001–1.
(name of business)
Also in accordance with Notice 2001–1,
agrees that a compliance review will not be treated as an examination or an inspection of its books of account or records and that
your inspection of books of account or records pursuant to a tip examination will not be treated as an inspection of books or records
for purposes of section 7605(b) of the Internal Revenue Code, and will not be treated as a prior audit for purposes of section 530 of
the Revenue Act of 1978.
All correspondence pertaining to this EmTRAC program (including a notice of termination) should be sent to the address indicated below,
unless we notify you in writing of a change of address.
(name
of business) will send correspondence to you in the manner indicated in your approval letter. All correspondence is effective on the date
of the postmark stamped on the envelope or, in the case of a notice sent by certified mail, on the sender’s receipt.
(name
I represent that I have the authority to agree to these terms on behalf of
of business).
If you have any questions, please contact
or
(e-mail address).
at
(telephone number)
Name of Business
\s\
By:
Title:
Date:
Enclosures:
EmTRAC program documents
List of establishments (name, address, and EIN) participating in the program
2001–2 I.R.B.
263
January 8, 2001
Letter – EmTRAC approval
Internal Revenue Service
Service Representative
Department of the Treasury
Person to Contact:
Identification Number:
Contact Telephone Number:
Re: EmTRAC Approval
Dear
(Taxpayer):
Thank you for your letter of
requesting our approval of your EmTRAC program and containing your agreements with respect to that program. We are pleased to inform you that your EmTRAC Program meets the requirements of Notice 2001–1.
Accordingly, we agree as follows:
Your EmTRAC program will be effective on
[insert the first day of the quarter beginning on or after
the date the Service signs the letter]. The Service agrees not to initiate any new tip examinations of you or any of the establishments
included in your letter for any period during which your EmTRAC program is in effect, except in relation to a tip examination of
one or more employees or former employees of you or an establishment.
Any section 3121(q) notice and demand that we issue to you (or an establishment) relating to any period during which your
EmTRAC program is in effect will be based solely on amounts reflected on Form 4137, Social Security and Medicare Tax on
Unreported Tip Income, filed by an employee with his or her Form 1040, or Form 885-T, Adjustment of Social Security Tax on Tip
Income Not Reported to Employer, prepared at the conclusion of an employee tip examination.
[insert the first day of
The Service will not evaluate your EmTRAC program for compliance until
the second calendar quarter following the date on which the EmTRAC program becomes effective]. The Service may, however,
review your progress in implementing your EmTRAC program before then.
Your EmTRAC program will remain in effect until you terminate it or the Service terminates its approval. If you no longer wish
your EmTRAC program to apply to one or more of your establishments, you may terminate the program with respect to any establishment(s) by identifying the establishment(s) in writing to the Service Representative described below. If you want to completely
terminate your EmTRAC program, please say that in your letter to the Service Representative.
The Service may terminate its approval only (1) if you fail to comply with your agreements described in your letter, (2) if the Service
pursues an administrative or judicial action relating to you, an establishment, or any other related party to your EmTRAC program,
(3) following a significant statutory change in the FICA taxation of tips, or (4) after December 31, 2005. If one or more establishments fail to comply with any of your agreements, the Service may choose to terminate its approval with respect to that establishment(s).
Any termination will be effective the first day of the first calendar quarter after the terminating party notifies the other party in writing, unless you (or an establishment) fail to comply with your agreements. In that case, the Service may terminate your EmTRAC
program effective as of the first day of the quarter in which you ceased to comply.
Please send all correspondence relating to your EmTRAC program to
and address), unless we notify you in writing otherwise.
If you have any questions regarding this agreement, please contact
(telephone number) or
(e-mail address).
(name
(ID
) at
Thank you for your participation in the program.
INTERNAL REVENUE SERVICE
By:
ID:
Date:
January 8, 2001
264
2001–2 I.R.B.
Research Credit-Suspension
Period
COMPUTATION OF THE RESEARCH
CREDIT FOR TAXABLE YEARS
INCLUDING SUSPENSION PERIODS
Notice 2001–2
PURPOSE
This notice provides guidance to help
taxpayers compute and report their credit
for increasing research activities (research
credit) under § 41 of the Internal Revenue
Code for taxable years that include the research credit suspension periods described in § 502 (d)(2) of the Tax Relief
Extension Act of 1999, Pub. L. No. 106170 (Dec. 17, 1999) (the Act). Further,
this notice explains how to take into account any research credits attributable to a
research credit suspension period.
SPECIAL RULES RELATING TO THE
RESEARCH CREDIT SUSPENSION
PERIODS
Section 502(d) of the Act provides that,
for purposes of the Code, any research
credit attributable to the period beginning
on July 1, 1999, and ending on September
30, 2000, that is otherwise allowable under
the Code, may not be taken into account
prior to October 1, 2000. Further, any research credit attributable to the period beginning on October 1, 2000, and ending on
September 30, 2001, that is otherwise allowable under the Code, may not be taken
into account prior to October 1, 2001.
On or after the earliest date that an
amount of research credit attributable to a
research credit suspension period may be
taken into account, the amount may be
taken into account through the filing of an
amended return, an application for expedited refund, or an adjustment of estimated taxes.
Because the research credit suspension
periods merely delay the use of research
credits attributable to a research credit
suspension period, the limitations contained in § 38(c), § 39, and § 41(g) on the
amount of research credit allowable to
any person as a credit against tax for any
taxable year remain applicable. Further,
taxpayers not electing to take a reduced
credit under § 280C(c)(3) must continue
to reduce applicable deductions, amounts
chargeable to capital account, and credits
for the taxable year by the full amount of
the research credit as required by
§ 280C(c)(1) and (2).
2001–2 I.R.B.
Section 502(d)(4) of the Act provides
the rule for determining the amount of research credit suspended for taxable years
including research credit suspension periods. To determine the amount of research
credit that is suspended, taxpayers first
must calculate the research credit for the
taxable year. The amount of research
credit that is attributable to a research
credit suspension period under § 502(d)
of the Act is the amount that bears the
same ratio to the amount of research
credit for the taxable year as the number
of months in the research credit suspension period that are during the taxable
year bears to the total number of months
in the taxable year.
Form 6765, Credit for Increasing Research Activities, reflects the required
computation of the research credit and the
determination of the research credit allowed on a current year return and the
suspended research credit attributable to
the current year.
APPLICATION
ORIGINAL RETURNS
Research credits attributable to a research credit suspension period may not
be used as a credit against tax on a timely
filed or late filed original return for a taxable year that includes any part of such
suspension period even if that original return is filed after the expiration of such
suspension period. This rule is necessary
for the Internal Revenue Service to properly administer § 502(d) of the Act.
CARRYBACK AND CARRYFORWARD OF SUSPENDED CREDITS
Any research credit that is not allowed
for the taxable year that is attributable to a
research credit suspension period may not
be claimed as a carryback or carryforward
until the day after the end of the applicable research credit suspension period.
After the end of the applicable research
credit suspension period, however, research credits attributable to a research
credit suspension period that are not used
currently as a credit against tax may be
carried to other taxable years under the
rules of § 39.
265
OVERPAYMENT OF TAX AND INTEREST ON OVERPAYMENTS
Because research credits attributable to
a research credit suspension period may
not be taken into account in determining
any amount required to be paid for any
purpose under the Code until the expiration of the applicable research credit suspension period, research credits attributable to a research credit suspension period
are not available as a credit against tax
until the expiration of the applicable research credit suspension period and may
not be considered in determining any
overpayment of tax until the expiration of
the applicable research credit suspension
period.
In computing interest on any overpayment attributable to any suspended research credit under the rules of § 6611,
the date of the overpayment for purposes
of computing the interest is the later of the
date of the overpayment without regard to
the research credit suspension period
(even though the credit may not be
claimed on an original return that includes
any part of the suspension period) or the
day after the close of the suspension period.
REFUND OF TAX AND EXPEDITED
REFUNDS
If an overpayment of tax for a taxable
year arises as of the expiration of a research credit suspension period, a claim
for refund of the overpayment of tax may
be taken into account by filing an
amended return, an application for tentative refund, or an application for expedited refund on or after the earliest date
that an amount of credit may be taken into
account. A separate claim should be
made for each taxable period.
An application for expedited refund of
suspended research credits is made by filing a Form 1045, Application for Tentative
Refund, or a Form 1139, Corporation Application for Tentative Refund, or by filing
an amended income tax return (Form
1040X , Form 1120X, or other amended return) before the date that is the later of one
year after the close of the research credit
suspension period to which the application
relates or one year after the close of the taxable year to which the suspended research
credit relates. The application for expedited refund shall be filed with the Service
January 8, 2001
Center receiving the original return. The
application for expedited refund shall indicate at the top “Application for Expedited
Refund-Suspended Research Credit”
and include a copy of the Form 6765 filed
with the original return.
If an application for an expedited refund is filed before the date that is the
later of one year after the close of the research credit suspension period to which
the application relates or one year after
the close of the taxable year to which the
suspended research credit relates, the Internal Revenue Service will review the
application, determine the amount of the
overpayment, and apply, credit, or refund
the overpayment, in a manner similar to
the manner provided in § 6411(b), no
later than 90 days after the date on which
an application is filed.
Further, a claim for refund of the overpayment of tax attributable to suspended
research credits may be taken into account by filing an amended income tax return (Form 1040X, Form 1120X, or other
amended return) on or after the date that
is the later of one year after the close of
the research credit suspension period to
which the claim relates or one year after
the close of the taxable year to which the
suspended research credit relates but before the expiration of the period of limitation on filing a claim for credit or refund
under § 6511. An amended income tax
return, filed on or after the date that is the
later of one year after the close of the research credit suspension period to which
the claim relates or one year after the
close of the taxable year to which the suspended research credit relates, claiming a
refund of the overpayment of tax attributable to suspended research credits shall
indicate at the top “Refund-Suspended
Research Credit” and include a copy of
the Form 6765 filed with the original return. Further, an amended income tax return filed on or after the date that is the
later of one year after the close of the research credit suspension period to which
the claim relates or one year after the
close of the taxable year to which the suspended research credit relates and before
the expiration of the period of limitation
on filing a claim for credit or refund under
§ 6511 will be processed under the general rules for processing refund claims in
lieu of the expedited refund procedures
described above.
January 8, 2001
Finally, any claim for refund of an
overpayment of tax attributable to a research credit suspension period should
not be filed before the expiration of the
applicable suspension period or before the
date the original return for the applicable
taxable year is filed.
ESTIMATED TAXES
The prohibition on taking into account
research credits attributable to a research
credit suspension period extends to the
determination of any estimated tax payment. Thus, for example, the research
credit attributable to the period beginning
on July 1, 1999, and ending on September
30, 2000, cannot be used to reduce any estimated tax payments due before October
1, 2000. The research credit attributable
to the period beginning on July 1, 1999,
and ending on September 30, 2000, can
be used to reduce an estimated tax payment due on or after October 1, 2000.
ESTIMATED TAX PENALTIES
In general, additions to tax for failure
to pay estimated tax are made under
§ 6654 or § 6655 for any underpayment of
income tax imposed by the Code even if
the underpayment was created or increased by reason of the suspension of the
research credit under § 502 of the Act.
No additions to tax for failure to pay estimated tax, however, will be made for any
period before July 1, 1999, for any underpayment of income tax imposed by the
Code to the extent the underpayment was
created or increased by reason of the suspension of the research credit under § 502
of the Act.
EXAMPLE
Assume that taxpayer, a calendar-year
corporation, had 800x dollars of research
credit for 1999 and 800x dollars of research credit for 2000. The amount of research credit attributable to the period
July 1 through December 31, 1999, is
400x dollars (6/12 x 800x dollars), and
the amount of research credit attributable
to the period from January 1 through September 30, 2000 would be 600x dollars
(9/12 x 800x dollars).
On taxpayer’s original return for 1999,
taxpayer may not reduce its 1999 tax liability by the research credit of 400x dollars attributable to the period July 1
266
through December 31, 1999. On or after
October 1, 2000, taxpayer may file an
amended return to claim the benefit of the
400x dollars of research credit attributable
to the period July 1 through December 31,
1999. In lieu of filing an amended return,
on or after October 1, 2000, taxpayer may
file an application for tentative refund of
the 400x dollars of research credit attributable to the period July 1 through
December 31, 1999. An application for
tentative refund of the 400x dollars of
research credit attributable to the period
July 1 through December 31, 1999, must
be filed before October 1, 2001. An
amended return or application for tentative refund filed before October 1, 2001,
claiming the 400x dollars of research
credit attributable to the period July 1
through December 31, 1999, with the designation “Application for Expedited
Refund-Suspended Research Credit”
will be treated as an application for expedited refund.
Taxpayer’s 400x dollars of research
credit attributable to the period July 1
through December 31, 1999, and 600x
dollars of research credit attributable to
the period January 1 through September
30, 2000, may not be taken into account in
determining any of the estimated tax payments that are due before October 1,
2000. If taxpayer makes an estimated tax
payment for its 2000 taxes based on its
prior year tax liability, that liability must
be determined without regard to the 400x
dollars of research credit attributable to
the period July 1 through December 31,
1999. If taxpayer makes an estimated tax
payment for its 2000 taxes based on its
current year tax liability, whether or not
that liability is annualized, that liability
must be determined without regard to the
600x dollars of research credit attributable
to the period January 1 through
September 30, 2000, or any research credit attributable to the second research credit suspension period.
Because taxpayer’s first estimated tax
payment due on or after October 1, 2000,
is the payment due on December 15,
2000, taxpayer may use its 600x dollars of
research credit attributable to the period
January 1 through September 30, 2000,
and available on October 1, 2000, to
reduce the amount of estimated tax payments otherwise required to be paid on
December 15, 2000. In addition, if tax-
2001–2 I.R.B.
payer indicates on its amended return
filed on or after October 1, 2000, that all
or part of the 400x dollars of research
credit attributable to the period July 1
through December 31, 1999, and available
on October 1, 2000, is to be applied to its
estimated tax for the succeeding taxable
year (in lieu of a refund), then the amount
requested will be applied to the taxpayer’s
estimated tax payment due on December
15, 2000.
Alternatively, assume taxpayer files an
amended return on December 1, 2000 to
claim a refund of the 400x dollar overpayment of tax attributable to the period July
1 through December 31, 1999. Taxpayer
is entitled to interest under § 6611 on the
overpayment from October 1, 2000 (the
end of the applicable suspension period)
to December 1, 2000 (the date the amended return was filed). Assuming that the
overpayment is refunded within 45 days
after the amended return is filed, no additional interest is allowed on the refund.
DRAFTING INFORMATION
The principal author of this notice is
Lisa J. Shuman of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information regarding this notice, contact Ms. Shuman
at (202) 622-3120 (not a toll-free call).
Weighted Average Interest Rate
Update
Notice 2001–3
Notice 88–73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current liability for the purpose of the full funding
Month
Year
Weighted
Average
December
2000
5.93
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities Division. For further information regarding
this notice, please call Mr. Newman at
(202) 283-9702 (not a toll-free number).
Clarifications of Qualified
Intermediary Agreement
Provisions and Procedures
90% to 105%
Permissible
Range
90% to 110%
Permissible
Range
5.34 to 6.23
5.34 to 6.52
tion, this notice provides a clarification
regarding the use of the term “know your
customer” in the context of the new
withholding and reporting regulations.
The Department of the Treasury (Treasury) and the Internal Revenue Service
(IRS) will continue to monitor the implementation of the new regulations and the
qualified intermediary agreement and
will provide, as appropriate, other guidance designed to ensure that the implementation process occurs as smoothly as
possible.
II. Background
Notice 2001–4
I. Purpose
Certain issues have arisen regarding
the implementation of the new withholding and reporting regulations (T.D. 8734,
1997–2 C.B.109, and T.D. 8881,
2000–23 I.R.B. 1158) and the qualified
intermediary agreement contained in
Rev. Proc. 2000–12 (2000–4 I.R.B.
387). This notice provides guidance regarding certain transitional and other issues for qualified intermediaries (QIs)
and U.S. withholding agents. In addi-
2001–2 I.R.B.
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987
and as further amended by the Uruguay
Round Agreements Act, Pub. L. 103-465
(GATT).
The average yield on the 30-year Treasury Constant Maturities for November
2000 is 5.78 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
In T.D. 8734, as modified by T.D.
8881, (the “new withholding regulations”), Treasury and the IRS issued comprehensive regulations under chapter 3
(sections 1441-1464) and subpart G of
subchapter A of chapter 61 (sections
6041-6050S) of the Internal Revenue
Code (the “Code”). The regulations are a
significant revision of the procedural rules
regarding the withholding, documentation, and information reporting requirements that apply to payments of income
to foreign persons, particularly as they relate to payments handled by financial in-
267
termediaries. The regulations generally
become effective January 1, 2001.
The provisions relating to QIs are a key
component of the new regulations. Those
provisions are intended to reduce the administrative burdens of both foreign financial institution intermediaries (as well
as foreign branches of U.S. intermediaries) and the U.S. withholding agents
from whom the foreign intermediaries
and foreign branches receive income. To
become a QI, an entity must submit an application and enter into a qualified intermediary withholding agreement (QI
agreement) with the IRS. The application
procedures and terms of the QI agreement
are set forth in Rev. Proc. 2000–12 . Additional guidance has been provided to
qualified intermediaries in Announcement
2000–48 (2000–23 I.R.B. 1243).
III. Transitional Guidance for QIs.
A. Acting as a QI Prior to Execution
of the QI Agreement
1. Provisions Applicable to QIs.
Some potential QIs have expressed
concerns about their ability to act as QIs
on January 1, 2001, if they file an application for a QI agreement before January 1,
January 8, 2001
2001, but do not receive a fully executed
QI agreement by that date. Other potential QIs have expressed concerns about
their treatment if they submit applications
after January 1, 2001. To address these
concerns, the IRS will apply the following
rules to potential QIs.
An applicant for a QI agreement may
represent on a Form W-8IMY that it is a
QI for a limited period after it submits a
complete application for a QI agreement
and before it receives a fully executed
agreement. An application is complete if
it contains all of the information required
by section 3 (Application for QI Status) of
Rev. Proc. 2000–12, including a completed Appendix A (countries in which the
applicant will operate as a QI) and Appendix B (list of auditors that may be used by
the QI and any private arrangement intermediary of the QI to perform external audits). It is not necessary, however, for an
applicant to attach the know-your-customer documentary evidence attachment
for particular countries because the IRS
has standardized those attachments.
An applicant that has submitted a QI
application before January 1, 2001, may
represent on Form W-8IMY that it is a QI
without being in possession of a fully executed QI agreement until June 30, 2001.
An applicant that has submitted a QI application after December 31, 2000, may
represent on Form W-8IMY that it is a QI
until the end of the sixth full month after
the month in which it submits its QI application. An application is submitted on the
date it is post marked. Because of limited
resources, the IRS will not date stamp return copies of applications.
An applicant may not represent that it
is a QI if it receives a notice from the IRS
stating that it may not make the representation unless it receives a fully executed
QI agreement. The IRS will only issue
such notices in cases where an application
is not substantially complete or the IRS
has determined on a preliminary basis that
it will not enter into a QI agreement with
the applicant.
The IRS has instituted procedures to
issue applicants a QI employer identification number (QI-EIN) upon receiving an
application. An applicant should include
the QI-EIN on any Form W-8IMY it provides as a QI after it receives the number.
If an applicant has provided a Form
W-8IMY before it has received a number,
January 8, 2001
it should write “awaiting QI-EIN” on line
6 of Part I of the form. If an applicant
provides an “awaiting QI-EIN” statement
on a Form W-8IMY, or an applicant has
provided a Form W-8IMY before the date
of this notice in anticipation of becoming
a QI, the applicant should provide the QIEIN to its withholding agent as soon as
practicable after it is received. It is not
necessary, however, for the applicant to
provide a newly executed Form W-8IMY
with the QI-EIN after it receives the QIEIN or after it receives a fully executed
QI agreement provided all of the information on the original form remains valid.
The applicant may furnish its QI-EIN to
its withholding agent in any manner
agreed to by the applicant and its withholding agent.
Provided that it submits its application
before July 1, 2001, a potential QI may
apply all of the provisions of the QI
agreement beginning January 1, 2001.
An applicant that submits its application
after June 30, 2001, may represent to a
withholding agent that it is a QI effective
on the date it submits a complete application. Such a QI, however, will not be permitted to apply the reporting provisions of
section 8 of the QI agreement or the collective credit or refund procedures of section 9.04 of the QI agreement to any payments received prior to the effective date
contained in its QI agreement. Thus, a QI
that submits its application after June 30,
2001, must report all payments that it
makes prior to the effective date of its QI
agreement as a nonqualified intermediary.
See e.g., §1.1461–1(c)(4).
The IRS will not assess any penalties
for failure to make a deposit of withheld
amounts prior to the date the QI receives
its QI-EIN provided the QI makes a deposit of any amounts otherwise required
to be made within 3 days of receiving its
QI-EIN. In addition, if a QI applies to enroll in the Electronic Federal Tax Payment
System (EFTPS) within 30 days of receiving a QI-EIN, no penalty will be assessed for failure to deposit withheld
amounts if any deposit otherwise required
to be made before the date that the QI is
enrolled in EFTPS is made within 3 days
of being enrolled in EFTPS.
2. Rules Applicable to Withholding
Agents
A withholding agent that receives a
Form W-8IMY with an “awaiting QI-
268
EIN” statement may treat the person that
provides the form as a QI unless it knows,
or has reason to know, that the provider of
the form cannot validly represent that it is
a QI. A withholding agent that receives a
Form W-8IMY with an EIN, or that receives an EIN with respect to an otherwise valid Form W-8IMY without an
EIN, may treat the provider of the form as
a QI unless it knows, or has reason to
know, that the provider of the Form is not
a QI. A withholding agent is not required
to determine when a QI applied for an
agreement or if it is actually in possession
of a fully executed agreement. A withholding agent is also not required to verify whether the EIN is a QI-EIN.
A withholding agent should report any
payments made prior to receiving a Form
W-8IMY on which a person represents
that it is acting as a QI in accordance with
any other valid documentation that the
withholding agent has for such person or,
in the absence of such documentation, in
accordance with the presumption rules
provided in the withholding agent’s QI
agreement (if the withholding agent is a
QI) or the presumption rules contained in
the new withholding regulations (if the
withholding agent is not a QI).
B. Documentation Transition Rules for
QIs.
Under section 5.01 of the QI agreement, a QI is required to apply the presumption rules of section 5.13(C) to any
payment made to an account holder unless the QI can reliably associate the payment with valid documentation from the
account holder. The presumption rules
may result in withholding at a 30-percent
or 31-percent rate. Under section
11.03(F), failure to obtain documentation
from a significant number of direct account holders constitutes an event of default for which the IRS may terminate a
QI agreement.
Some potential QIs have indicated that
they will be unable to obtain the account
holder documentation required under section 5 of the QI agreement by January 1,
2001, because they have a substantial number of existing accounts for which documentation must be sought. These institutions have requested clarification regarding
the operation of the documentation requirements and, in particular, the audit provisions of the QI agreement. Specifically,
they have asked whether the audit provi-
2001–2 I.R.B.
sions of the QI agreement afford them a
documentation transition period.
Section 10.03 of the QI agreement provides that the QI shall have its external
auditor conduct an audit of the second and
fifth full calendar years that the agreement is in effect. Section 10.06 provides
that, upon review of the external auditor’s
report, the IRS may request, and the QI
must permit, the external auditor to perform additional audit procedures or to expand the external audit to cover some or
all of the calendar years for which the period of limitations for assessment of taxes
has not expired.
The IRS intends to implement the audit
provisions in a manner that will permit a
QI to have a transition period for obtaining
account holder documentation. To effect a
documentation transition period, the IRS
will not request an external auditor to examine the first year of the QI agreement
provided that the IRS determines, based on
the external auditor’s report, that the QI is
in substantial compliance with all of the
provisions of the QI agreement, including
the documentation requirements, by the
end of the second full year of its agreement. In addition, the IRS will not impose
failure to deposit penalties to the extent
that the under-deposit is attributable solely
to the failure to apply the presumption
rules in the second full year of the agreement. The IRS will, however, require a QI
to pay the tax due from the second full year
of the agreement if the amount actually
withheld from an account holder is less
than the amount supported by valid documentation on file by the end of the second
full year of the agreement or, if there is no
documentation on file, the amount withheld was less than required under the presumption rules. No penalties will be assessed on underpaid tax; however, interest
will be charged on any tax due that is paid
after the due date of the Form 1042 for the
second full calendar year of the agreement.
The following example illustrates the
documentation transition rule. Assume
that after the audit of the second year of
its QI agreement, a QI is found to be in
substantial compliance with the QI agreement and all but an insignificant number
of its accounts have valid documentation.
The external auditor determines that payments of dividends were received by a
particular individual account holder, B,
prior to B furnishing the QI with any doc-
2001–2 I.R.B.
umentation. The QI applied withholding
on dividends received by B in year 2 at
the rate of 15 percent. By the end of year
2, B does provide the QI with documentation that supports the 15 percent rate. No
penalties will be asserted against the QI
even though 30 percent was not withheld
from the dividends as required under the
presumption rules. If, however, B did not
provide valid documentation supporting
the 15-percent treaty rate by the end of the
second full calendar year of the agreement, the QI would be liable for the tax
equal to the difference between the 15percent rate of withholding actually applied and the 30-percent rate that should
have applied under the presumption rules.
Because the QI is in substantial compliance with the QI agreement and has valid
documentation for all but an insignificant
number of its accounts, however, the underpayment will be computed only with
respect to dividends paid in the second
year of the agreement.
The IRS will not apply the transition
approach to any QI that is found not to be
in substantial compliance with the QI
agreement by the end of the second full
year of the agreement. In that case, the
IRS may, in accordance with the terms of
the QI agreement, request the external auditor to audit the first year of the QI
agreement, and the IRS may assess the
appropriate penalties for both the first and
second years of the agreement. The provisions of this section III. B. shall not
apply for years after 2002.
C. Documentation and Reporting Relief for Simple and Grantor Trusts.
Under section 5.07 of the QI agreement, a QI is generally required to obtain
a Form W-8IMY from a flow-through entity, which includes a foreign simple or
foreign grantor trust, together with appropriate documentation from the interest
holders in the flow through entity. Section 8.02(B) of the QI agreement provides
that a QI must file separate Forms 1042-S
for each interest holder in a flow-through
entity that is not itself a nonqualified intermediary or flow-through entity. Thus,
the pool basis reporting provisions of section 8.03 of the QI agreement do not
apply to payments made to beneficiaries
or owners of foreign simple trusts and foreign grantor trusts.
Commentators have requested that the
IRS consider treating beneficiaries of for-
269
eign simple trusts and owners of foreign
grantor trusts as direct account holders of
a QI in appropriate circumstances. They
argue that where local “know-your-customer” rules (i.e., the rules that require a
person to obtain documentation confirming the identity of a customer or account
holder) require a QI to identify the beneficiaries or owners of such trusts, plus certain additional precautions are taken, it is
appropriate to treat the beneficiaries or
owners as direct account holders. In addition, they argue that a company providing
fiduciary services as a trustee should be
able to become a QI if it is subject to
know-your-customer rules, even though it
is not a financial institution or a clearing
organization described in §1.1441–
1(e)(5)(ii)(A) and (B).
The IRS will permit a QI to treat the
beneficiaries of a foreign simple trust or
the owners of a foreign grantor trust as direct account holders for purposes of the
QI agreement if the following criteria are
met. First, the QI must be required, pursuant to the applicable know-your-customer rules, to determine the identity of
the beneficiaries or owners of foreign
simple or foreign grantor trusts. Second,
the QI must obtain the type of know-yourcustomer documentation set forth in paragraph 4 of the appropriate know-yourcustomer attachment to the QI agreement.
This second requirement cannot be satisfied by obtaining a Form W-8. Third, the
QI must obtain a valid Form W-8 from the
beneficiary or owner of the trust. The IRS
will apply the documentation transition
approach described in section III. B. of
this notice to these documentation requirements. The documentation may be
provided to the QI directly rather than
being attached to a Form W-8IMY, or it
may be attached to a Form W-8IMY on
which the trust represents that it is a foreign simple or foreign grantor trust. If a
Form W-8IMY is provided, it is not necessary for the trust to provide a withholding statement. In addition, if a Form
W-8IMY is provided and the trust has 5 or
fewer owners, the IRS will not require the
trust to provide the QI with a taxpayer
identification
number
despite
§1.1441–1(e)(4)(vii)(G).
The IRS will also permit a company
that is in the business of providing fiduciary services as a trustee (i.e., a trust
company) and that is subject to know-
January 8, 2001
your-customer rules that have been approved by the IRS for purposes of the QI
agreement to become a QI provided that
the trust company agrees to the provisions
of the QI agreement as set forth in Rev.
Proc. 2000–12. Such a QI must treat the
trusts and trust beneficiaries or owners as
account holders for purposes of applying
the QI agreement. Such a QI may also
treat beneficiaries and owners of foreign
simple trusts and foreign grantor trusts as
direct account holders provided they meet
the conditions of this section III. C.
Treasury and the IRS will monitor
whether the rules of this notice applicable
to grantor and simple trusts are appropriate and may provide further guidance as
necessary.
D. Proprietary Accounts of Qualified
Intermediaries
Section 1.01 of the QI agreement provides that a QI must act as a qualified intermediary for those accounts which it designates as QI accounts with a withholding
agent. Clearing organizations have argued
that the language that requires a QI to act as
a QI with respect to an account prohibits
the QI from including assets for which the
QI is the beneficial owner in the same account as one containing assets for which
the QI acts as a QI. Separating proprietary
and intermediary assets into separate accounts would, they argue, erode the efficiencies that clearing organizations provide
their financial institution members and
shareholders.
Notwithstanding Section 1.01, the IRS
will permit a QI that maintains an account
with a clearing organization in which it is a
member or shareholder to include the assets
for which the QI is the beneficial owner in
the same account with those assets for
which it acts as a qualified intermediary if
the QI timely and accurately reports the income for which it is the beneficial owner by
filing the appropriate Forms 1042-S for
each year showing itself as the recipient of
the income for which it is the beneficial
owner. For purposes of this exception to
section 1.01 of the QI agreement, a clearing
organization is an entity which is in the
business of holding obligations for member
organizations or shareholders and transferring those obligations among the members
or shareholders by credit or debit to the account of the member or shareholder without the necessity of physical delivery of the
obligation. Under no circumstances, how-
January 8, 2001
ever, may a QI maintain assets for which it
acts as a QI in the same account as assets
for which it acts as a nonqualified intermediary.
E. Assumption of Primary Form 1099
Reporting and Backup Withholding Responsibility
Section 3.07 of the QI agreement contains the terms for those QIs assuming
primary Form 1099 reporting and backup
withholding responsibilities. The introductory language to that section provides
that QIs that are not U.S. payors must obtain IRS approval to assume primary
Form 1099 reporting and backup withholding responsibility. The IRS evidences its approval by inserting the Commissioner’s, or his delegate’s, signature in
the margin of section 3.07 of the QI
agreement.
The IRS will no longer require QIs that
are not U.S. payors to obtain IRS approval before assuming primary Form
1099 reporting and backup withholding
responsibility. A non-U.S. payor QI may,
therefore, assume such responsibilities by
making the appropriate representations on
Form W-8IMY, or the associated withholding statement, provided to a withholding agent.
IV. Transition Relief for Foreign Partnerships
Under the regulations as well as the QI
agreement, foreign partnerships are generally treated as flow-through entities. As
such, they should provide withholding
agents, including QIs, with a Form
W-8IMY together with documentation
from each partner and a withholding
statement that, among other things, allocates the payment made to each of the
partners in the partnership.
To achieve a smoother transition period
for foreign partnerships and their withholding agents, the IRS will permit for
calendar year 2001 a foreign partnership
to provide a withholding agent, including
a QI, with a Form W-8IMY together with
a withholding statement that provides the
withholding agent with information regarding withholding rate pools. The foreign partnership must associate the documentation from each of its partners with
the Form W-8IMY. However, if a partner
is a foreign person or a U.S. exempt recipient (e.g., a corporation), that documentation may be provided to the withholding
270
agent at any time during calendar year
2001. A Form W-9 must be provided,
however, with respect to any U.S. nonexempt recipient before a payment is
made to a partnership.
A withholding rate pool is a payment of
a single type of income, determined in accordance with the categories of income
reported on Form 1042-S or Form 1099,
as applicable, that is subject to a single
rate of withholding. The foreign partnership, must provide a separate withholding
rate pool for each U.S. non-exempt recipient partner (e.g., a U.S. individual, U.S.
partnership, U.S. trust, or U.S. estate).
A withholding agent, including a QI,
may withhold in accordance with the
withholding rate pool information provided by the foreign partnership. In addition, a withholding agent that is not a QI
should report payments allocated to withholding rate pools, other than a withholding rate pool attributable to a U.S. non-exempt recipient, on Form 1042-S as if the
payment were made to the foreign partnership as a recipient. A QI should report
such payments as if it were made to its
general withholding rate pool. A withholding agent that is not a QI must report
payments to U.S. non-exempt recipients
in accordance with the regulations under
chapter 61 of the Code. A withholding
agent that is a QI must treat U.S. non-exempt recipients in accordance with the
provisions of the QI agreement. Withholding agents that cannot allocate a payment to a withholding rate pool must
apply the appropriate presumption rules.
V. Transition Relief for U.S. Withholding Agents
A. Documentation Transition Rules.
Some U.S. withholding agents that are financial institutions have stated that despite
the extensive period they have been given to
obtain Forms W-8BEN, W-8ECI, W-8EXP,
and W-8IMY, they have nevertheless had
difficulties re-documenting the large number of accounts they must handle. In addition, they have stated that the rule in
§1.1441–1(e)(2)(ii), which prohibits the use
of a P.O. box as a permanent residence address on a Form W-8, presents an insurmountable difficulty for Forms W-8 provided by residents of foreign countries that
do not have street addresses and instead use
P.O. boxes as permanent residence addresses. Finally, some commentators have
2001–2 I.R.B.
noted that T.D. 8881, issued on May 15,
2000, made certain changes to the rules regarding when a withholding certificate may
be treated as reliable that are more restrictive than the rules promulgated under T.D.
8734. In particular, they note that under
T.D. 8881, a withholding agent cannot rely
on a Form W-8 if the form has a U.S. mailing address or the withholding agent has a
U.S. mailing address as part of its account
information, unless the withholding agent
obtains both documentary evidence that is
less than three years old and a written explanation from the account holder that substantiates the account holder’s foreign status.
To address these concerns, the IRS will
permit a U.S. withholding agent during
calendar year 2001 to rely on old Form
W-8 (i.e., Form W-8 as revised November
1992), Form 1001, Form 1078, Form
4224, and Form 8709 obtained under the
regulations in effect prior to January 1,
2001 (see 26 CFR parts 1 and 35a, revised
April 1, 1992), even if the validity period
of those forms has expired, provided that
the U.S. withholding agent can demonstrate on audit that it has made good faith
efforts to obtain Forms W-8BEN,
W-8ECI, W-8EXP, W-8IMY, and W-9
from account holders required to provide
those forms. In addition, and until further notice, the IRS will permit Forms
W-8 that contain a P.O. box as a permanent residence address to be relied upon
provided that the withholding agent does
not know, or have reason to know, that the
person providing the form is a U.S. person and provided that the withholding
agent does not know, or have reason to
know, that a street address is available.
Finally, the IRS will permit a withholding
agent to rely on Forms W-8 for which
there is a U.S. mailing address provided
the Form was received prior to December
31, 2001, without applying the provisions
of 1.1441–7(b) regarding the presence of
a U.S. mailing address on the Form W-8
or as part of the withholding agent’s account information.
Under no circumstances, however, may
a U.S. withholding agent apply the socalled address rule contained in
§§1.1441–3(b)(3) and 35a.9999–3 Q&A
36 for dividends paid after December 31,
2000. Thus, a withholding agent may not
treat dividends as paid to a foreign person,
or as subject to a reduced rate of withholding under an income tax treaty, based
2001–2 I.R.B.
solely on the address of the person to
whom the dividends are paid. The withholding agent may treat the payee of dividends as a foreign person, and as a resident of a treaty country, if applicable, in
the absence of a Form W-8BEN if it is in
possession of a Form W-8 (revised November 1992) or a Form 1001 for the
same payee and it does not know, nor
have reason to know, that the payee is not
entitled to treaty benefits.
Notwithstanding the provisions of this
section V. A., a withholding agent may
not rely on an old Form W-8 (revised November 1992) to treat a foreign financial
institution as the beneficial owner of income if the withholding agent knows, or
has reason to know, that the foreign financial institution is acting as an intermediary on behalf of others.
B. Year 2001 as Transition Year for
U.S. Withholding Agents
In Notice 98–16 (1998–1 C.B. 847) and
Notice 99–25 (1999–1 C.B. 979), the IRS
stated that it would regard the calendar
years 1999 and 2000 as transition years.
Calendar year 2001 will similarly be regarded as a transition year for U.S. withholding agents by the IRS in enforcing
compliance for the administration of the
withholding tax system. Accordingly, the
IRS will take into account in performing
audits of the year 2001, the extent to which
a U.S. withholding agent has made good
faith efforts in 1999, 2000, and 2001 to
transform its business practices and information systems to comply with the new
withholding regulations. Thus, the IRS will
take into account whether a U.S. withholding agent has made reasonable efforts during 1999, 2000, and 2001 to modify its account opening practices to conform to the
new documentation requirements, obtain
new withholding certificates on existing accounts, and make appropriate systems
changes to comply with the new withholding regulations. The IRS will also take into
account whether or not a U.S. withholding
agent has effectively implemented the new
withholding regulations by January 1,
2002.
C. Reporting Relief for U.S. Payors in
U.S. Possessions.
Under the new withholding regulations,
U.S. payors that pay foreign source income outside the United States to U.S.
non-exempt recipients must generally report such payments on Form 1099 and, if
271
appropriate, apply backup withholding. A
commentator has noted that the new withholding regulations will require reporting
of income from sources within a possession of the United States, including
Puerto Rico, on Form 1099 if that income
is paid to persons that are U.S. citizens,
even though that income may be exempt
from Federal income taxation under section 931 section 932, section 933, or section 935.
The IRS intends to revise the new withholding regulations so that income from
sources within a possession of the United
States that is exempt from taxation under
section 931, section 932, section 933, or
section 935 and that a payor reasonably
believes to be paid to a resident of a possession of the United States is not required to be reported on Form 1099. U.S.
payors will not be required to report such
income pursuant to the authority of this
notice until the regulations are amended.
D. Use of the Documentary Evidence
Rule in U.S. Possessions
Section 1.6049–5(c)(1), effective January 1, 2001, states that a payor may rely
on documentary evidence instead of a
beneficial owner withholding certificate
(i.e., a Form W-8) for a payment made to
an offshore account, or, in the case of broker proceeds, for the sales effected outside the United States. For this purpose,
the term offshore account means an account maintained at an office or branch of
a U.S. or foreign bank or other financial
institution at any location outside the
United States and outside of U.S. possessions. The IRS intends to amend section
1.6049–5(c)(1) so as to permit the use of
documentary evidence in lieu of a Form
W-8 in the U.S. possessions. U.S. payors
will be permitted to rely on documentary
evidence in lieu of a Form W-8 in a U.S.
possession pursuant to the authority of
this notice until the regulations are
amended.
E. Foreign Source Services Income
Under section 6041, a U.S. payor must
report payments of foreign source income
paid for services performed outside the
United States unless the U.S. payor has a
Form W-8 from the payee stating that the
payee is not a U.S. person. Under the presumption rules of §§1.6049–5(d)(2) and
1.14441–1(b)(3)(iii), a U.S. payor must
presume that the payee of income for services is a U.S. payee and subject to Form
January 8, 2001
1099 reporting, and potentially backup
withholding, if the payee is an individual.
U.S. payors, which include controlled foreign corporations, contend that the rule
contained in the regulations is overly burdensome in that it requires them to ask all
persons to whom they make payments for
services performed outside the United
States to represent that they are not U.S.
persons.
Until further notice, the IRS will not require a U.S. payor to report, under section
6041, income paid for services if (1) the
payee of the income is an individual, (2)
the U.S. payor does not know that the
payee is a U.S. citizen or resident, (3) the
payor does not know, and has no reason to
know, that the income is (or may be) effectively connected with the conduct of a
U.S. trade or business, and (4) all of the
services for which payment is made were
performed by the payee outside the
United States.
VI. Issuance of New Forms W-8.
The IRS has released new versions of
Forms W-8BEN, W-8ECI, W-8EXP, and
W-8IMY, all of which were revised in December 2000. Withholding agents have
asked for clarification regarding whether
the prior versions of those forms (Forms
W-8 as revised October 1998) may be relied upon now that new versions of those
forms have been released.
Withholding agents, including QIs,
may rely on the October 1998 versions of
Forms W-8BEN, W-8ECI, W-8EXP,
W-8IMY that they receive prior to January 1, 2002, for the normal validity period
applicable to those forms. Withholding
agents are advised, however, to use the
newer versions of the forms in all mailings they make after December 2000.
VII. Clarification Regarding Use of the
Term “Know Your Customer”
Treasury and the IRS have recently become aware that some confusion may
have arisen concerning the use of the term
“know your customer” in relation to the
QI agreement. Accordingly, Treasury
and the IRS wish to clarify the meaning of
“know your customer” in that context, to
avoid any misunderstanding by foreign financial institutions or officials in other
countries.
Use of the term “know your customer”
in the QI context should not be confused
January 8, 2001
with the use of that term in other contexts,
specifically including the use of the term
in the area of international standards relating to money laundering control. As used
in the QI context, the term “know your
customer” generally relates to the capacity of financial institutions to determine
whether their customers are U.S. persons
and, if their customers are non-U.S. persons claiming the benefits of an income
tax treaty, whether these customers are
residents of the applicable treaty country.
The term “know your customer” in the
context of international money laundering
control efforts, for example in recommendations of the Financial Action Task Force
(FATF), refer to a broad range of rules and
practices designed to ensure that financial
institutions properly identify their customers and understand enough about their
customers’ customary banking activities
to be able to comply with applicable suspicious activity reporting rules and other
obligations that may apply under antimoney laundering regimes. Although the
meaning of the term “know your customer” in the QI context is often closely
related to the meaning of the term in the
broader context of money laundering control, the concepts are nevertheless distinct
and should not be regarded as having the
same meaning or scope.
Contact Information
The principal author of this Notice is
Laurie Hatten-Boyd of the Office of the
Associate Chief Counsel (International),
Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C.
20224. For further information regarding
this Notice contact Ms. Hatten-Boyd at
202-622-3840 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part 1 , §§ 162, 263A, 446, 471, 481, 1001;
1.162–3, 1.263A–1, 1.446–1, 1.471–1, 1.481–1,
1.481–4, 1.1001–1.)
Rev. Proc. 2001–10
SECTION 1. PURPOSE
This revenue procedure modifies and
supersedes Rev. Proc. 2000–22, 2000–20
I.R.B. 1008, and provides that the Commissioner of Internal Revenue will exercise his discretion to except a qualifying
taxpayer with average annual gross re-
272
ceipts of $1,000,000 or less from the requirements to use an accrual method of
accounting under § 446 of the Internal
Revenue Code and to account for inventories under § 471. This revenue procedure
also provides the procedures by which a
qualifying taxpayer (as defined in section
3 of this revenue procedure) may obtain
automatic consent to change to the cash
receipts and disbursements method of accounting (the cash method) and to a
method of accounting for inventory as
materials and supplies that are not incidental under § 1.162–3 of the Income Tax
Regulations.
SECTION 2. BACKGROUND AND
CHANGES
.01 Section 446(a) provides that taxable
income must be computed under the
method of accounting on the basis of
which the taxpayer regularly computes income in keeping the taxpayer’s books.
.02 Section 446(c) generally allows a
taxpayer to select the method of accounting
it will use to compute its taxable income. A
taxpayer is entitled to adopt any one of the
permissible methods for each separate trade
or business, including the cash method and
an accrual method, subject to certain restrictions. For example, § 446(b) provides
that the selected method must clearly reflect income. In addition, § 1.446–
1(c)(2)(i) requires that a taxpayer use an accrual method of accounting with regard to
purchases and sales of merchandise whenever § 471 requires the taxpayer to account
for inventories, unless otherwise authorized
by the Commissioner under §1.446–
1(c)(2)(ii). Under § 1.446–1(c)(2)(ii), the
Commissioner has the authority to permit a
taxpayer to use a method of accounting that
clearly reflects income even though the
method is not specifically authorized by the
regulations.
.03 The cash method generally requires
an item to be included in income when actually or constructively received and permits a deduction for an expense when
paid. § 1.446–1(c)(1)(i).
.04 Section 471 provides that whenever, in the opinion of the Secretary, the
use of inventories is necessary to clearly
determine the income of the taxpayer, inventories must be taken by the taxpayer.
Section 1.471–1 requires a taxpayer to account for inventories when the production, purchase, or sale of merchandise is
2001–2 I.R.B.
an income-producing factor in the taxpayer’s business.
.05 Section 1.162–3 requires taxpayers
carrying materials and supplies (other
than incidental materials and supplies) on
hand to deduct the cost of materials and
supplies only in the amount that they are
actually consumed and used in operations
during the tax year.
.06 Section 263A generally requires
direct costs and an allocable portion of indirect costs of certain property produced
or acquired for resale by a taxpayer to be
included in inventory costs, in the case of
property that is inventory, or to be capitalized, in the case of other property. However, resellers with gross receipts of
$10,000,000 or less and producers with
$200,000 or less of indirect costs are not
required to capitalize costs under § 263A.
See §§ 263A(b)(2)(B) and 1.263A–
2(b)(3)(iv).
.07 Sections 446(e) and 1.446–1(e)
state that, except as otherwise provided, a
taxpayer must secure the consent of the
Commissioner before changing a method
of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the
limitations, terms, and conditions deemed
necessary to permit a taxpayer to obtain
consent to change a method of accounting
in accordance with § 446(e).
.08 Section 481(a) requires those adjustments necessary to prevent amounts
from being duplicated or omitted to be
taken into account when the taxpayer’s
taxable income is computed under a
method of accounting different from the
method used to compute taxable income
for the preceding tax year.
.09 Rev. Proc. 2000–22 is modified in
the following respects:
(1) Section 3 is modified to make
clear that this revenue procedure does not
apply to taxpayers described in
§ 448(a)(3) (tax shelters).
(2) Section 4.02 is added to clarify
the proper time to take into account the
cost of inventoriable items (i.e., merchandise purchased for resale and raw materials purchased for use in producing finished goods) that are treated as materials
and supplies that are not incidental under
§ 1.162–3;
(3) The conformity requirement of
section 5.07 has been removed. Taxpay-
2001–2 I.R.B.
ers are reminded that they must comply
with the requirements under § 446(a) and
the regulations thereunder to maintain adequate books and records, which may include a reconciliation of any differences
between such books and records and their
return. See § 1.446–1(a)(4);
(4) Section 6.02(1) is modified to
provide that qualifying taxpayers using an
accrual method of accounting that are not
required under § 471 to account for inventories may use the automatic consent provisions of this revenue procedure to
change to the cash method;
(5) Section 6.02(2) is modified to
provide that qualifying taxpayers (including taxpayers not currently accounting for
inventories) may use the automatic consent provisions of this revenue procedure
to change to the method of accounting for
inventoriable items as materials and supplies that are not incidental under
§ 1.162–3;
(6) Section 6.03 is added to provide
guidance on the computation of the adjustment required under § 481(a) in connection with the automatic changes in
method of accounting under this revenue
procedure; and
(7) Section 8 is modified in accordance with the removal of the conformity
requirement of section 5.07.
SECTION 3. SCOPE
This revenue procedure applies to taxpayers (other than a taxpayer described in
§ 448(a)(3)) with “average annual gross
receipts” of $1,000,000 or less (as defined
in section 5.01 of this revenue procedure)
(“qualifying taxpayers”).
SECTION 4. SMALL TAXPAYER
EXCEPTION
.01 Pursuant to the discretion under
§§ 446(b) and 471, and to simplify bookkeeping requirements for small taxpayers,
the Commissioner, as a matter of administrative convenience, will except qualifying taxpayers from the requirements to
use an accrual method under § 446 and to
account for inventories under § 471. For
purposes of this revenue procedure,
notwithstanding § 1001 and the regulations thereunder, qualifying taxpayers that
use the cash method include amounts in
income attributable to open accounts receivable (i.e., receivables due in 120 days
or less) as amounts are actually or con-
273
structively received. However, § 1001
may be applicable to other transactions.
Qualifying taxpayers that do not want to
account for inventories must treat inventoriable items (i.e., merchandise purchased
for resale and raw materials purchased for
use in producing finished goods) in the
same manner as materials and supplies
that are not incidental under § 1.162–3.
Section 263A does not apply to inventoriable items that are treated as materials and
supplies that are not incidental.
.02 Under § 1.162–3, materials and
supplies that are not incidental are deductible only in the year in which they are
actually consumed and used in the taxpayer’s business. For purposes of this
revenue procedure, inventoriable items
that are treated as materials and supplies
that are not incidental are consumed and
used in the year in which the taxpayer
sells the merchandise or finished goods.
Thus, under the cash method, the cost of
such inventoriable items are deductible
only in that year, or in the year in which
the taxpayer actually pays for the inventoriable items, whichever is later. Producers may use any reasonable method of estimating the amount of raw materials in
their year-end work-in-process and finished goods inventory to determine the
amount of raw materials that were used to
produce finished goods that are sold during the tax year, provided that method is
used consistently.
.03 The Service and Treasury expect to
provide further guidance on when items
may be treated as incidental materials and
supplies (the cost of which may be deducted currently under § 1.162–3) and
when items are inventoriable items (the
cost of which, under this revenue procedure, may be deducted no earlier than the
year in which the items are consumed and
used).
SECTION 5. DEFINITIONS
.01 Average annual gross receipts defined. A taxpayer has average annual
gross receipts of $1,000,000 or less if, for
each prior tax year ending on or after December 17, 1998, the taxpayer’s average
annual gross receipts for the 3-tax-year
period ending with the applicable prior
tax year does not exceed $1,000,000.
.02 Gross receipts defined. Gross receipts is defined consistent with
§ 1.448–1T(f)(2)(iv) of the temporary
January 8, 2001
regulations. Thus, gross receipts for a tax
year equal all receipts derived from all of
the taxpayer’s trades or businesses that
must be recognized under the method of
accounting actually used by the taxpayer
for that tax year for federal income tax
purposes. For example, gross receipts include total sales (net of returns and allowances), all amounts received from services, interest, dividends, and rents.
However, gross receipts do not include
amounts received by the taxpayer with respect to sales tax or other similar state and
local taxes if, under the applicable state or
local law, the tax is legally imposed on the
purchaser of the good or service, and the
taxpayer merely collects and remits the
tax to the taxing authority.
.03 Aggregation of gross receipts. For
purposes of computing gross receipts, all
taxpayers treated as a single employer
under subsection (a) or (b) of § 52 or subsection (m) or (o) of § 414 (or that would
be treated as a single employer under
these sections if the taxpayers had employees) will be treated as a single taxpayer. However, when transactions occur
between taxpayers that are treated as a
single taxpayer by the previous sentence,
gross receipts arising from these transactions will not be treated as gross receipts
for purposes of the average annual gross
receipts limitation. See § 1.448–
1T(f)(2)(ii).
.04 Taxpayer not in existence for 3 tax
years. If a taxpayer has been in existence
for less than the 3-tax-year period referred
to in section 5.01 of this revenue procedure, the taxpayer must determine its average annual gross receipts for the number of years (including short tax years)
that the taxpayer has been in existence.
.05 Treatment of short tax years. In the
case of a short tax year, the taxpayer’s
gross receipts must be annualized by multiplying the gross receipts of the short tax
year by 12 and then dividing the product
by the number of months in the short tax
year. See § 1.448–1T(f)(2)(iii).
.06 Treatment of predecessors. Any
reference to taxpayer in this section 5 includes a reference to any predecessor of
such taxpayer.
.07 Example. Taxpayer A, a calendar
year taxpayer, manufactures and sells widgets. For federal income tax purposes, Taxpayer A uses an overall accrual method of
accounting. Further, Taxpayer A complies
January 8, 2001
with the requirements of § 1.471–1 to use
inventory accounts and § 263A to capitalize
direct and indirect costs.
Taxpayer A has gross receipts (as
defined in section 5.02 of this revenue
procedure) of $200,000 in 1996, $800,000
in 1997 and $1,100,000 in 1998.
To determine whether it qualifies for
the small taxpayer exception set forth in
section 4 of this revenue procedure beginning with the 1999 tax year, Taxpayer A
computes its average annual gross receipts
for each prior tax year ending on or after
December 17, 1998, that is, its 1998 tax
year. Taxpayer A’s average annual gross
receipts for 1998 is $700,000 ($200,000
(1996) + $800,000 (1997) + $1,100,000
(1998) = $2,100,000/3).
Taxpayer A’s average annual gross
receipts for each prior tax year ending
after December 17, 1998, does not exceed
$1,000,000. Therefore, Taxpayer A qualifies for the small taxpayer exception for
its 1999 tax year. By following the procedures set forth in section 6.02 of this revenue procedure, Taxpayer A may change
to the cash method and a method of treating inventoriable items in the same manner as materials and supplies that are not
incidental under § 1.162–3 for the tax year
ending December 31, 1999.
Taxpayer A must determine its applicability for the small taxpayer exception set
forth in section 4 of this revenue procedure each year. Thus, to qualify for the
exception for its 2000 tax year, Taxpayer
A’s average annual gross receipts for 1999
(i.e., the average of A’s gross receipts for
1999, 1998, and 1997) also must be
$1,000,000 or less. If, in any later year,
Taxpayer A ceases to qualify for the small
taxpayer exception set forth in section 4 of
this revenue procedure, it must change to
an inventory method and an accrual
method with respect to the production and
sale of widgets in accordance with section
6.04 of this revenue procedure.
SECTION 6. CHANGE IN
ACCOUNTING METHOD
.01 In general. Any change in a taxpayer’s method of accounting pursuant to
this revenue procedure is a change in
method of accounting to which the provisions of §§ 446 and 481 and the regulations thereunder apply.
.02 Automatic change for taxpayers within the scope of this revenue procedure.
274
(1) Automatic change to the cash
method. A qualifying taxpayer that
wants to change to the cash method must
follow the automatic change in accounting method provisions of Rev. Proc.
99–49, 1999–52 I.R.B. 725 (or its successor) with the following modifications:
(a) The scope limitations in section 4.02 of Rev. Proc. 99–49 do not
apply. However, if the taxpayer is under
examination, before an appeals office, or
before a federal court with respect to any
income tax issue, the taxpayer must provide a copy of the Form 3115, Application
for Change in Accounting Method, to the
examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that it files the copy
of the Form 3115 with the national office.
The Form 3115 must contain the name(s)
and telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate;
(b) A taxpayer making a change
under section 6.02 of this revenue procedure for its first tax year ending on or after
December 17, 1999, that, on or before
January 16, 2001, files or filed its original
federal income tax return for such year, is
not required to comply with the filing
requirement in section 6.02(2)(a) of Rev.
Proc. 99–49, provided the taxpayer complies with the following filing requirement. The taxpayer must complete and
file a Form 3115 in duplicate. The original must be attached to the taxpayer’s
amended federal income tax return for the
taxpayer’s first tax year ending on or after
December 17, 1999. This amended return
must be filed no later than June 15, 2001.
A copy of the Form 3115 must be filed
with the national office (see section
6.02(5) of Rev. Proc. 99–49 for the
address) no later than when the taxpayer’s
amended return is filed;
(c) For a change in method of
accounting within the scope of this revenue procedure, the provisions of Rev.
Proc. 99–49 are effective for tax years
ending on or after December 17, 1999;
and
(d) Taxpayers filing Form 3115 for
a change in method of accounting under
section 6.02 of this revenue procedure are
reminded to complete all applicable parts
of the form, including Part II, line 17
(regarding information on gross receipts
in previous years) and Part III (regarding
2001–2 I.R.B.
the § 481(a) adjustment). Such taxpayers
must also complete Part I of Schedule A
of Form 3115, but need not complete Part
II. Taxpayers should write “Filed under
Rev. Proc. 2001–10” at the top of the
form.
(2) Automatic change to § 1.162–3.
A qualifying taxpayer that does not want
to account for inventories must make any
necessary change from the taxpayer’s current method of accounting for inventoriable items (including, if applicable, from
the method of capitalizing costs under
§ 263A) to treat inventoriable items in the
same manner as materials and supplies
that are not incidental under § 1.162–3.
For purposes of such a change, the rules
of section 6.02(1) of this revenue procedure apply. Taxpayers may file a single
Form 3115 for both changes described in
sections 6.02(1) and (2).
.03 Section 481(a) adjustment. The net
amount of the § 481(a) adjustment computed under this revenue procedure must
take into account both increases and
decreases in the applicable account balances such as accounts receivable,
accounts payable, and inventory. For
example, a taxpayer that wants to treat
inventory as materials and supplies that
are not incidental under § 1.162–3 must
take into account the difference resulting
from this recharacterization in determining the § 481(a) adjustment.
.04 Taxpayers not within the scope of
this revenue procedure. A taxpayer that
ceases to qualify for the small taxpayer
exception described in section 4 of this
revenue procedure and otherwise is
required to use an accrual method (e.g., a
taxpayer otherwise required to account for
inventories) must change to an accrual
method and, if applicable, an inventory
method that complies with §§ 263A and
471 using either the automatic change in
accounting method provisions of section
5.01 of the APPENDIX to Rev. Proc.
99–49, if applicable, or the advance consent provisions of Rev. Proc. 97–27,
1997–1 C.B. 680 (or its successor).
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2000–22 is modified and, as
modified, is superseded. Rev. Proc.
99–49 is modified and amplified to
include this automatic change in section 5
of the APPENDIX.
2001–2 I.R.B.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for
tax years ending on or after December 17,
1999. However, the Service will not challenge a taxpayer’s use of the cash method
under § 446 (or a taxpayer’s failure to
account for inventories under § 471) in an
earlier year if the taxpayer would satisfy
the 3-tax-year-period gross receipts test of
section 5.01 of this revenue procedure
(applied by testing the 3-tax-year period
ending prior to such earlier year).
DRAFTING INFORMATION
The principal author of this revenue
procedure is Cheryl Lynn Oseekey of the
Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information regarding this revenue procedure, contact Ms. Oseekey at (202) 6224970 (not a toll-free call).
26 CFR 601.105: Examination of returns and
claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, § 6662.)
Rev. Proc. 2001–11
SECTION 1. PURPOSE
.01 This revenue procedure updates Rev.
Proc. 99–41, 1999–2 C.B. 566, and identifies circumstances under which the disclosure on a taxpayer’s return of a position
with respect to an item is adequate for the
purpose of reducing the understatement of
income tax under § 6662(d) of the Internal
Revenue Code (relating to the substantial
understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the preparer penalty under § 6694(a)
(relating to understatements due to unrealistic positions). This revenue procedure
does not apply with respect to any other
penalty provision (including the negligence
or disregard provisions of the § 6662 accuracy-related penalty).
.02 This revenue procedure applies to
any return filed on 2000 tax forms for a
taxable year beginning in 2000, and to
any return filed on 2000 tax forms in 2001
for short taxable years beginning in 2001.
SEC. 2. CHANGES FROM REV. PROC.
99–41
The following will no longer constitute
adequate disclosure for purposes of re-
275
ducing the understatement of income tax
under § 6662(d) and avoiding the preparer
penalty under § 6694(a): The completion
of Schedule M (Form 5471), Transactions
Between Controlled Foreign Corporation
and Shareholders or Other Related Persons, lines 19 and 20, and Form 5472,
Part IV, Monetary Transactions Between
Reporting Corporations and Foreign Related Party, lines 7 and 18. Additionally,
minor editorial changes have been made
in updating Rev. Proc. 99–41.
SEC. 3. BACKGROUND
.01 If § 6662 applies to any portion of
an underpayment of tax required to be
shown on a return, an amount equal to 20
percent of the portion of the underpayment to which the section applies is added
to the tax. (The penalty rate is 40 percent
in the case of certain gross valuation misstatements.) Under § 6662(b)(2), § 6662
applies to the portion of an underpayment
that is attributable to a substantial understatement of income tax.
.02 Section 6662(d)(1) provides that
there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of
the amount of tax required to be shown on
the return for the taxable year or $5,000
($10,000 in the case of a corporation
other than an S corporation or a personal
holding company). Section 6662(d)(2)
defines an understatement as the excess of
the amount of tax required to be shown on
the return for the taxable year over the
amount of the tax that is shown on the return reduced by any rebate (within the
meaning of § 6211(b)(2)).
.03 In the case of an item not attributable to a tax shelter, § 6662(d)(2)(B)(ii)
provides that the amount of the understatement is reduced by the portion of the
understatement attributable to any item
with respect to which the relevant facts affecting the item’s tax treatment are adequately disclosed on the return or on a
statement attached to the return, and there
is a reasonable basis for the tax treatment
of such item by the taxpayer.
.04 In general, this revenue procedure
provides guidance in determining when
disclosure is adequate for purposes of
§ 6662(d). For purposes of this revenue
procedure, the taxpayer must furnish all
required information in accordance with
the applicable forms and instructions, and
January 8, 2001
the money amounts entered on these
forms must be verifiable. Guidance under
§ 6662(d) for returns filed for 1999, 1998,
and 1997 is provided in Rev. Proc.
99–41; Rev. Proc. 98–62, 1998–2 C.B.
816; and Rev. Proc. 97–56, 1997–2 C.B.
582, respectively.
SEC. 4. PROCEDURE
.01 Additional disclosure of facts relevant to, or positions taken with respect to,
issues involving any of the items set forth
below is unnecessary for purposes of reducing any understatement of income tax
under § 6662(d) provided that the forms
and attachments are completed in a clear
manner and in accordance with their instructions. The money amounts entered
on the forms must be verifiable, and the
information on the return must be disclosed in the manner described below.
For purposes of this revenue procedure, a
number is verifiable if, on audit, the taxpayer can demonstrate the origin of the
number (even if that number is not ultimately accepted by the Internal Revenue
Service) and the taxpayer can show good
faith in entering that number on the applicable form.
(1) Form 1040, Schedule A, Itemized
Deductions:
(a) Medical and Dental Expenses:
Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through
9, supplying all required information.
Line 8 must list each type of tax and the
amount paid.
(c) Interest Expense: Complete
lines 10 through 14, supplying all required information. This section
4.01(1)(c) does not apply to (i) amounts
disallowed under § 163(d) unless Form
4952, Investment Interest Expense Deduction, is completed, or (ii) amounts disallowed under § 265.
(d) Contributions: Complete lines
15 through 18, supplying all required information. Merely entering the amount of
the donation on Schedule A, however, will
not constitute adequate disclosure if the
taxpayer receives a substantial benefit
from the donation shown. If a contribution of property other than cash is made
January 8, 2001
and the amount claimed as a deduction
exceeds $500, a properly completed Form
8283, Noncash Charitable Contributions,
must be attached to the return. This section 4.01(1)(d) will not apply to any contribution of $250 or more unless the contemporaneous written acknowledgment
requirement of § 170(f)(8) is satisfied.
(e) Casualty and Theft Losses:
Complete Form 4684, Casualties and
Thefts, and attach to the return. Each item
or article for which a casualty or theft loss
is claimed must be listed on Form 4684.
(2) Certain Trade or Business Expenses
(including, for purposes of this section
4.01(2), the following six expenses as
they relate to the rental of property):
(a) Casualty and Theft Losses: The
procedure outlined in section 4.01(1)(e)
above must be followed.
(b) Legal Expenses: The amount
claimed must be stated. This section
4.01(2)(b) does not apply, however, to
amounts properly characterized as capital
expenditures, personal expenses, or nondeductible lobbying or political expenditures,
including amounts that are required to be (or
that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off:
The amount written off must be stated.
(d) Reasonableness of Officers’ Compensation: Form 1120, Schedule E, Compensation of Officers, must be completed
when required by its instructions. The time
devoted to business must be expressed as a
percentage as opposed to “part” or “as
needed.” This section 4.01(2)(d) does not
apply to “golden parachute” payments, as
defined under § 280G. This section
4.01(2)(d) will not apply to the extent that
remuneration paid or incurred exceeds the
$1 million-employee-remuneration limitation, if applicable.
(e) Repair Expenses: The amount
claimed must be stated. This section
4.01(2)(e) does not apply, however, to
any repair expenses properly characterized as capital expenditures or personal
expenses.
(f) Taxes (other than foreign taxes):
The amount claimed must be stated.
(3) Form 1120, Schedule M-1, Reconciliation of Income (Loss) per Books With
Income per Return, provided:
276
(a) The amount of the deviation
from the financial books and records is
not the result of a computation that includes the netting of items; and
(b) The information provided reasonably may be expected to apprise the
Internal Revenue Service of the nature of
the potential controversy concerning the
tax treatment of the item.
(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form
5713, International Boycott Report.
(b) Treaty-Based Return Position:
Transactions and amounts under § 6114
or § 7701(b) as disclosed on Form 8833,
Treaty-Based Return Position Disclosure.
(5) Other:
(a) Moving Expenses: Complete
Form 3903, Moving Expenses, and attach
to the return.
(b) Employee Business Expenses:
Complete Form 2106, Employee Business
Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and
attach to the return. This section
4.01(5)(b) does not apply to club dues, or
to travel expenses for any non-employee
accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form
4136, Credit for Federal Tax Paid on
Fuels, and attach to the return.
(d) Investment Credit: Complete
Form 3468, Investment Credit, and attach
to the return.
SEC. 5. EFFECTIVE DATE
This revenue procedure applies to
any return filed on 2000 tax forms for a
taxable year beginning in 2000, and to
any return filed on 2000 tax forms in 2001
for short taxable years beginning in 2001.
SEC. 6. DRAFTING INFORMATION
The principal author of this revenue
procedure is Willie Armstrong, Jr. of the
Office of Associate Chief Counsel (Procedure & Administration), Administrative
Provisions & Judicial Practice Division.
For further information regarding this revenue procedure, contact Mr. Armstrong at
(202) 622-7920 (not a toll-free call).
2001–2 I.R.B.
Part IV. Items of General Interest
Voluntary Tip Agreements for
Employers of Tipped Employees
Announcement 2001–1
The Internal Revenue Service has finalized pro forma Tip Rate Determination
Agreements (TRDA) and Tip Reporting
Alternative Commitment (TRAC) agreements for use in its Tip Rate Determination/Education Program (TRD/EP). The
TRD/EP is designed to enhance tax compliance among tipped employees through
taxpayer education and voluntary advance
agreements instead of traditional audit
techniques.
The Service published five voluntary
agreements in proposed form on May 8,
2000 (see 2000–19 I.R.B.): (1) a revised
TRAC agreement for use in the cosmetology and barber industry (Announcement
2000–21, 2000–19 I.R.B. 983), (2) a revised TRAC agreement for use in the food
and beverage industry (Announcement
2000–22, 2000–19 I.R.B. 987), (3) a revised TRDA for use in the food and beverage industry (Announcement 2000–23,
2000–19 I.R.B. 992), (4) a new TRAC
agreement for use in industries other than
the food and beverage industry and the
cosmetology and barber industry in which
tipped employees receive both cash and
charged tips (Announcement 2000–19,
2000–19 I.R.B. 973), and (5) a new
TRDA for use in industries other than the
food and beverage industry and the gaming industry (Announcement 2000–20,
2000–19 I.R.B. 977).
Final versions of these agreements are
available on the IRS website at http://
www.irs.gov/bus_info/msu-info.html.
They can also be obtained from any IRS
office. The substance of the revised
agreements has not changed.
The Service received comments from
interested persons and has incorporated
most of the comments in the final ver-
2001–2 I.R.B.
sions. Two commentators expressed concern about the employer that has already
entered into an agreement and that may be
interested in replacing its existing agreement with the new updated agreement.
One commentator suggested that the updated provisions of the revised agreements automatically be extended to employers that have an existing agreement.
The Service wants to offer employers the
broadest choice of voluntary compliance
agreements and recognizes that some employers may choose to continue to be
bound by their existing agreements.
Another commentator suggested notifying employers who have existing agreements of the availability of the new updated agreement. These employers would
be advised that, if they choose to enter
into a new agreement, the old agreement
will automatically terminate. In response
to this comment, the Service has added a
new Termination of prior agreement section to the termination provisions of the
first three agreements listed above. The
new provision states:
Termination of prior agreements. Any
prior [TRAC agreement or TRDA] relating to an Establishment covered by
this Agreement shall terminate on the
day preceding the effective date of this
Agreement with respect to the Establishment.
Some commentators requested clarification of certain provisions. They wondered, for example, whether the Service
intends to terminate a TRAC agreement if
only one establishment fails to meet a requirement, or whether the Service will invoke the termination provision under the
administrative or judicial action provision
by instituting an examination of a tax return. These kinds of issues will be addressed in the IRS manual, Handbook
104.6.7.12.1, entitled TRDA/TRAC
Agreements. This section of the manual
is currently being revised to reflect these
277
new provisions and address these issues.
The appropriate manual provision will be
available on the IRS website at
http://www.irs.gov/bus_info/tax_pro/irmpart/part04.html. The Service expects to
make these provisions available soon.
Taxpayers interested in learning more
about these agreements should contact their
local tip coordinator. A list of tip coordinators is available at http://www.irs.gov/
bus_info/tip-coord.html.
DRAFTING INFORMATION
The principal author of this announcement is Karin Loverud of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding
this announcement or any of the voluntary
agreements, contact Ida Volz of the Office
of Compliance Policy at (202) 622-5532.
Announcement 2001–2
New Revision of Publication
551, Basis of Assets
Publication 551, revised December
2000, will be available soon from the Internal Revenue Service. It replaces the
April 1999 revision.
This publication provides information
on how to figure your basis in property in
order to compute depreciation, amortization, depletion, and casualty loss deductions, as well as gain or loss on sales or
other dispositions of property.
You can get a copy of this publication
by calling 1-800-TAX-FORM (1-800829-3676). You can also write to the IRS
Forms Distribution Center nearest you.
Check your income tax package for the
address. The publication is also available
on the IRS Internet web site at
www.irs.gov.
January 8, 2001
Magnetic Media Specifications for Form 1042-S
Announcement 2001–3
Revenue Procedure 98–44, IR Bulletin 1998–32, dated August 10, 1998, Specifications for Filing Form 1042-S, Foreign Person’s
U.S. Source Income Subject to Withholding, Magnetically or Electronically, reprinted as Publication 1187 (Rev. 8–98), will be used
to prepare Forms 1042-S for Tax Year (TY) 2000 filed in Calendar Year (CY) 2001.
Please use the 2000 Instructions for paper Forms 1042-S and other appropriate publications listed in Part A, Sec. 1.04, in the
preparation of 2000 Forms 1042-S.
Please make note of the following changes to the Publication 1187 (Rev. 8–98). These changes need to be adhered to in order for
your Forms 1042-S to be filed correctly both magnetically/electronically with the Internal Revenue Service at the Martinsburg Computing Center.
1. The Tax Year reported in the Transmitter “T” Record, Recipient “Q” Record, and Withholding Agent “W” Record will be 2000,
unless filing for a prior tax year.
2. The addresses for the Martinsburg Computing Center have changed.
A. The new address for filing Form 1042-S magnetically/electronically to the Martinsburg Computing Center is:
If by Postal Service, truck, or air freight:
IRS-Martinsburg Computing Center
Information Reporting Program
230 Murall Drive
Kearneysville, WV 25430
B. All requests for an extension of time filed on Form 8809 or filed magnetically on tape, tape cartridge, or 3 1/2 inch diskette,
requests for undue hardship waivers filed on Form 8508, and requests for extension of time to furnish the statements to recipients
should be sent using the following address:
If by Postal Service, truck or air freight:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn: Extension of Time Coordinator
240 Murall Drive
Kearneysville, WV 25430
NOTE: Due to security regulations at MCC, the Internal Revenue police officers will not accept media from Private Delivery Services
(PDSs) or couriers between the hours of 3:00 p.m. to 11:00 p.m. seven days a week, and 11:00 p.m. to 7:00 a.m., Saturday and Sunday.
3. The following types of media are no longer accepted by IRS/MCC:
1. 5 1/4-inch diskettes
2. 3 1/2-inch diskettes created on a non-MS-DOS system
3. 3 1/2-inch diskettes created on a System 36 or AS400
NOTE: Beginning in calendar year 2003 for Tax Year 2002, 9 track magnetic tape will no longer be an acceptable method for submitting Information Returns to IRS/MCC.
4. The acceptable sizes of Quarter Inch Cartridges (QIC) have changed. Part B, Section 4.08(b) delete Quarter Inch Cartridges
with a size of QIC-11, QIC-320, and QIC-1350.
5. Beginning in Calendar Year 2002 for Tax Year 2001, IRS/MCC will no longer return problem media in need of replacement. Filers will continue to receive a tracking form, listing and letter detailing the reason(s) their media could not be processed.
Filers will be expected to send in replacement media within the prescribed time frame. This makes it imperative that filers maintain
backup copies and/or recreate capabilities for their information return files.
6. Part C, Bisynchronous (Mainframe) Electronic Filing Specifications, and Part D, Asynchronous (IRP-BBS) Electronic Filing
Specifications, contained in Publication 1187 (Rev. 8–98) will no longer be used for electronic filing of Forms 1042-S. A revised
Part C, Electronic Filing Specifications, included below, must be used for submitting all electronic files to the Martinsburg Computing Center beginning November 1, 1999. The new telephone number for electronic filing is 304-262-2400.
Part C. Electronic Filing Specifications
Sec. 1 Background
01. All electronic filing of information returns are received at IRS/MCC via the FIRE (Filing Information Returns Electronically)
System. The FIRE System can be accessed via analog and ISDN BRI connections. The system is designed to support the electronic filing of information returns only. The telephone number for electronic filing is (1-304-262-2400). Publications and
January 8, 2001
278
2001–2 I.R.B.
forms are no longer available electronically from MCC. Users needing the publications and forms will need to download them
from the IRS’s Internet Web Site at www.irs.gov or order them by calling 1-800-TAX-FORM (1-800-829-3676).
Sec. 2. Advantages of Filing Electronically
Some of the advantages of filing electronically are as follows:
(1) Acknowledgment of files received.
(2) Results available within 20 workdays as to the acceptability of the data transmitted. (30 days for replacement transmissions).
(3) Better customer service due to on-line availability of transmitters files for research purposes.
Sec. 3. General
.01 Electronic filing of Forms 1042-S originals, corrections, and replacements of information returns is offered as an alternative to
magnetic media (tape, tape cartridge, or diskette) or paper filing, but is not a requirement. Transmitters filing electronically will fulfill the magnetic media requirements for those payers who are required to file magnetically. It may also be used by payers who are
under the filing threshold requirement, but would prefer to file their information returns this way. If the original file was sent magnetically, but was returned for replacement, the replacement may be transmitted electronically. Also, if the original file was submitted via magnetic media, any corrections may be transmitted electronically.
.02 The electronic filing of information returns is not affiliated with the Form 1040 electronic filing program. These two programs are totally independent, and filers must obtain separate approval to participate in each of them. All inquiries concerning the
electronic filing of information returns should be directed to IRS/MCC. IRS/MCC personnel cannot answer questions or assist taxpayers in the filing of Form 1040 tax returns. Filers with questions of this nature will be directed to the Customer Service toll-free
number (1-800-829-1040) for assistance.
.03 Files submitted to IRS/MCC electronically must be in standard ASCII code. No magnetic media or paper forms are to be
submitted with the same information as the electronically submitted file.
.04 If`a request for extension is approved, transmitters who file electronically will be granted an extension of time to file. Part
A, Sec. 11, explains procedures for requesting extensions of time. Filers are encouraged to file their data as soon as possible.
.05 The formats of the “T”, “Q”, “W”, and “Y” Records are the same for electronically filed records as they are for 3 1/2-inch
diskettes, tapes, and tape cartridges, and must be in standard ASCII code. For electronically filed documents, each transmission is
considered a separate file; therefore, each transmission must begin with a Transmitter “T” Record and end with an End of
Transmission (EOT) “Y” Record.
Sec. 4. Electronic Filing Approval Procedure
.01 Filers must obtain, or already have, a Transmitter Control Code (TCC) assigned prior to submitting their files electronically.
(Filers who currently have a TCC for magnetic media filing of Form 1042-S, beginning with “22”, do not have to request a second
TCC for electronic filing.) Refer to Part A, Sec. 7, for information on how to obtain a TCC.
.02 Once a TCC is obtained, electronic filers assign their own passwords and do not need prior or special approval.
.03 With all passwords, it is the user’s responsibility to remember the password and not allow the password to be compromised.
Passwords are user assigned at first logon and are up to 8 alpha/numerics, which are case sensitive. However, if filers do forget their
password, call 304-263-8700 for assistance.
Note: Passwords are case sensitive.
Sec. 5. Test Files
.01 Filers are not required to submit a test file; however, the submission of a test file is encouraged for all electronic filers because
of the new hardware and software. If filers wish to submit an electronic test file for Tax Year 2000 (returns to be filed in 2001), it
must be submitted to IRS/MCC no earlier than December 1, 2000, and no later than February 15, 2001.
.02 If a filer encounters problems while transmitting the electronic test files, contact IRS/MCC for assistance.
.03 Filers can verify the status of their transmitted test data by dialing the FIRE System phone number (1-304-262-2400). This
information will be available within 20 workdays (30 workdays for replacements) after their transmission is received by IRS/MCC.
Sec. 6. Electronic Submissions
.01 Electronically filed information may be submitted to IRS/MCC 24 hours a day, 7 days a week. Technical assistance will be
available Monday through Friday between 8:30 a.m. and 4:30 p.m. Eastern Time by calling 304-263-8700.
.02 The FIRE System will be down from December 29, 2000, through January 7, 2001. This will allow time for IRS/MCC
to update their system to reflect current year changes.
.03 Data compression is encouraged when submitting information returns electronically. WinZip and PKZip are acceptable compression packages. UNIX COMPRESS may be acceptable; however, a test file is recommended to verify compatibility. IRS/MCC
cannot accept self-extracting zip files or compressed files containing multiple files.
The time required to transmit information returns electronically will vary depending on the modem speed and the type of data
2001–2 I.R.B.
279
January 8, 2001
compression used, if any. The time required to transmit a file can be reduced by as much as 95 percent by using software
compression and hardware compression.
The following are actual transmission rates achieved in test uploads at MCC using compressed files. The actual transmission rates
will vary depending on the modem speeds.
Transmission Speed
In bps
1000 Records
10,000 Records
100,000 Records
19.2K
34 Sec.
6 Min.
60 Min.
56K
20 Sec.
3 1/2 Min.
33 Min.
128K (ISDN)
8 Sec.
1 Min.
10 Min.
.04 Files submitted electronically will be assigned a unique filename by the IRS system (the users may name files anything they choose
from their end). The IRS assigned filename will consist of, submission type [TEST, ORIG (original), CORR (correction), and REPL
(replacement)] the filer’s TCC and a four digit number sequence. The sequence number will be incremented for every file sent. For example, if it is your first original file for the calendar year and your TCC is 22000, the IRS assigned filename would be ORIG.22000.0001.
Record the filename. This information will be needed by MCC in order to identify the file, if assistance is required, and to complete Form
4804.
.05 If a file was submitted timely and is bad, the filer will have up to 45 days to transmit the first replacement, and 30 days thereafter, if additional replacements are necessary.
.06 Filers are advised not to resubmit an entire file if records were omitted from the original transmission. This will result
in duplicate filing. A new file should be sent consisting of the records that had not previously been submitted.
.07 The TCC (beginning with the numbers “22”) in the Transmitter “T” Record must be the TCC used to transmit the file; otherwise, the file will be considered in error.
Sec. 7. Transmittal Requirements
.01 The results of the electronic transmission will be available in the File Status area of the FIRE System within 20 workdays (30
workdays for replacements) after the signed Form 4804 is received. The Form 4804 must be postmarked by the due date of the
return. No return is considered filed until a Form 4804 is received by IRS/MCC. The Form 4804 may be faxed to 304-264-5602.
.02 Form 4804 can be ordered by calling the IRS toll-free forms and publication order number 1-800-TAX-FORM (1-800-8293676), or it may be computer-generated. It may also be obtained from the IRS’s Internet Web Site at www.irs.gov. If a filer chooses to computer-generate Form 4804, all of the information contained on the original form, including the affidavit, must also be contained on the computer-generated form.
.03 The TCC used in the Transmitter “T” Record (beginning with numbers “22”) is the TCC which must appear on the transmittal Form 4804.
.04 Forms 4804 may be mailed to the following address:
If by Postal Service, air or truck freight:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn: Special Projects Coordinator
230 Murall Drive
Kearneysville, WV 25430
Please indicate on the envelope the following message:
CONTAINS FORM 4804 INFORMATION - NO MAGNETIC MEDIA
Sec. 8. Electronic Filing Specifications
.01 The FIRE System is designed exclusively for the filing of Forms 1042-S, 1099, 1098, 5498, 8027, W2-G and W-4.
.02 A transmitter must have a TCC before a file can be transmitted. If you have a TCC for magnetic media filing which begins
with the numbers “22’, that TCC can also be used for electronic filing .
.03 Filers can determine the acceptability of files submitted by checking the file status area of the system. These reports will be
available on the electronic system within 20 workdays (30 workdays for replacements) after the Form 4804 is received by IRS/MCC.
January 8, 2001
280
2001–2 I.R.B.
.04 Contact the FIRE System by dialing 304-262-2400. This number supports analog connections from 1200bps to 56Kbps or
ISDN BRI 128Kbps connections. The system can be accessed via Dial-up network/web browser or communications software. The
Dial-up network/web browser provides an Internet-like look without going through the Internet (point to point). If you do not have
this capability, a text interface is provided that can be accessed via typical communications software such as Hyperterminal,
Procomm, PCAnywhere, etc.
Sec. 9. Dial-up Network/Browser Specifications (Web Interface)
.01 The following are some general instructions (many of these settings may already be set by default in your software:
Dial-up network settings:
(a) Set dial-up server type to PPP
(b) Set network protocol to TCP/IP
Browser settings:
(a) Set to receive ‘cookies’
(b) Enable JavaScript or Jscript
(c) Browser must be capable of file uploads (i.e., Internet Explorer 4.0, Netscape 2.0 or higher)
(d) Enter the URL address of http://10.225.224.2 (Remember, this is a point-to-point connection, not the Internet.)
.02 Due to the large number of communication products available, it is impossible to provide specific information on all software/hardware configurations. However, since most of our filers use Windows 95, 98, or NT software, the following instructions are
geared toward those products:
UPLOADING FILES WITH DIAL-UP NETWORKING/WEB BROWSER IN WINDOWS 95/98
Tips
(1) This is a point-to-point connection – not the Internet.
(2) Your browser must be capable of file uploads, i.e., Internet Explorer 4.0 or Netscape Navigator 2.0 or higher.
(3) If you currently access the Internet via a LAN or a PROXY server, you will need to disable those options in your browser and enable ‘Connect to the Internet using a modem’.
Select
Programs
Accessories
Communications (Windows 98)
Dial-Up Networking
First time connecting with Dial-Up Network (If you have logged on previously, skip to Subsequent Dial-up Network
Connections.)
The first time you dial-in, you will need to configure your Dial-Up Networking.
Select ‘Make new connection’.
Type a descriptive name for the system you are calling.
Select your modem.
Click ‘Next’.
Enter area code 304 and telephone number 262-2400.
Click ‘Next’.
When you receive a message that you have successfully created a new Dial-Up Networking connection, click ‘Finish’.
Click ‘Connect’ to dial. If you are prompted for a user name and password,
complete according to local procedures; otherwise, click ‘OK’.
When you receive the message that you have connected to our system, click on your Web Browser (remember, you are not
connecting via the Internet – this is a point-to-point connection).
In the URL Address enter http://10.225.224.2 and press ENTER.
Subsequent Dial-Up Network connections
Click ‘Connect’.
If prompted for user name and password, complete according to local procedures; otherwise, click ‘OK’.
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When you receive ‘Connection Complete’, click ‘OK’.
Click on your Web Browser (remember, you are not connecting via the Internet).
In the URL Address enter http://10.225.224.2 and press ENTER.
First time connection to The FIRE System (If you have logged on previously, skip to Subsequent Connections to the FIRE
System.)
Click ‘Create New Account’.
Fill out the registration form and click ‘Create’.
Enter your logon name (most users logon with their first and last name).
Enter your password (the password is user assigned and is case sensitive).
Click ‘Create’.
If you receive the message ‘account created’, click ‘OK’.
Click ‘Start the Fire Application’
Subsequent connections to The FIRE System
Click ‘Log On’.
Enter your logon name (most users logon with their first and last name).
Enter your password (the password is user assigned and is case sensitive).
At Menu Options:
Click ‘Information Returns’
Enter your TCC:
Enter your EIN:
Click ‘Submit’.
The system will then display the company name, address, city, state, ZIP code and phone number. This information will be
used to contact or send any correspondence regarding this transmission. Update as appropriate and/or click ‘Accept’.
Click one of the following:
Original File
Correction File
Test File
Replacement File (if you select this option, select one of the following):
FIRE Replacement (file was originally transmitted on this system)
Click file to be replaced
Magnetic Media Replacement File
Enter the alpha character from Form 9267, Media Tracking Slip, that was returned with your magnetic media shipment.
Click ‘Submit’.
Enter the drive/path/filename of the file you want to upload or click ‘Browse’ to locate the file.
Click ‘Upload’.
When the upload is complete, the screen will display the total bytes received and the file
name to be recorded on your Form 4804, Box 7b.
If you have more files to upload for that TCC:
Click ‘File Another’; otherwise,
Click ‘Back to Main Menu’.
It is your responsibility to check the acceptability of your file; therefore, be sure to dial back into the system in 20 business
days.
At the Main Menu:
Click ‘File Stats’.
Enter your TCC:
Enter your EIN:
Click ‘Search’.
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If ‘Results’ indicate:
‘File Good’ and you agree with the ‘Count of Payees’ and have mailed your Form 4804, you are finished with this file. (Form
4804 is not needed on a replacement file unless the number of payees has changed from the original/correction file.)
‘File Bad’ - Correct the errors and resubmit the file as a ‘replacement’.
‘Not Yet Processed’ - File has been received, but we do not have results available yet. Please check back in a few days.
Click on the desired file for a detailed report of your transmission.
When finished viewing your files, click on ‘Main Menu’.
Click ‘Log Off’.
Close your Web Browser.
IMPORTANT
Go back into your Dial-Up Network and click ‘hang-up’; otherwise, you may stay connected and incur unnecessary phone
charges.
Sec. 10. Communication Software Specifications (Text Interface)
.01 Communications software settings must be:
- No parity
- Eight data bits
- One stop bit
.02 Terminal Emulation must be VT100.
.03 Due to the large number of communication products available, it is impossible to provide specific information on all software/hardware configurations. However, since most of our filers use Windows 95, 98 or NT software, the following instructions are geared toward those products (Procomm, PCAnywhere and many other communications packages are also acceptable and the product does not necessarily need to be Windows based.):
UPLOADING FILES USING HYPERTERMINAL IN WINDOWS 95, 98 OR NT
Select
Programs
Accessories
Communications (Windows 98)
Hyperterminal
The first time you log on, select Hyperterminal, Hyperterm or Hyperterm.exe, whichever is available on your system.
Thereafter, you can just select the icon that you have saved.
A box will appear titled ‘Connection Description’.
Enter a name and choose an icon for the connection:
Country Code: United States of America
Area Code: 304
Phone Number: 262-2400
Connect Using: (default)
(If you need to modify the phone number, select File, then Properties to enter defaults for the area code,
phone numbers and/or special access codes.)
Click on Dial.
A ‘Connect’ box will appear to show the status.
Once you have connected to The FIRE System, if you do not get a menu within a few seconds, press the ENTER key
one time.
First Time Logon
When you have connected to the system, enter ‘new’ to create your logon name and password.
Complete the registration information and enter ‘y’ to create account.
Logon Name and Password
Logon Name: Enter a logon name. Most users enter their first and last name as the logon name.
Password: Enter a password of your choosing (1-8 alpha/numerics - case sensitive).
After entering the password, you will go to the Main Menu.
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Transferring Your Electronic File
Enter ‘A’ for Electronic Filing.
After reading Information Notice, press ENTER.
Enter ‘A’ for Forms 1098, 1099, 5498, W-2G, 1042-S, 8027 and Questionable Forms W-4.
Press the Tab key to advance to TCC box; otherwise, enter ‘E’ to exit.
Enter your TCC:
Enter your EIN:
The system will then display the company name, address, city, state, ZIP code, and phone number. This information
will be used to contact or send correspondence (if necessary) regarding this transmission. If you need to update, enter
‘n’ to change information; otherwise, enter ‘y’ to accept.
Select one of the following:
‘A’ for an Original file
‘B’ for a Replacement file
‘C’ for a Correction file
‘D’ for a Test file
If you selected ‘B’ for a replacement file, select one of the following:
‘A’ Replacement Files For This System
This option is to replace an original/correction file that was submitted electronically on this system but was
bad and needs to be replaced. Select the file needing replaced.
‘B’ Magnetic media replacement files
Enter the alpha character from Form 9267, Media Tracking Slip, that was returned with your magnetic
media shipment.
Choose one of the following protocols (Hyperterminal is normally set to Zmodem by default):
X - Xmodem
Y - Ymodem
Z - Zmodem (Zmodem will normally give you the fastest transfer rate.)
At this point, you must start the upload from your PC.
To send a file:
Go to the hyperterminal menu bar.
Click on Transfer.
Click on Send file.
A box will appear titled ‘Send File’.
Enter the drive/path/filename or click on Browse to locate your file.
Click on Send.
When the upload is complete, the screen will display the total bytes received and the file name to be
recorded on your Form 4804, Box 7b.
Press ENTER to continue.
If you have more files to send for the same TCC/EIN, enter ‘y’; otherwise, enter ‘n’.
It is your responsibility to check the acceptability of your file; therefore, be sure to dial back into the system in 20 workdays.
At the Main Menu:
Enter ‘B’ for file status.
Press the Tab key to advance to TCC box; otherwise, enter ‘E’ to exit.
Enter your TCC:
Enter your EIN:
Tab to the file you want to look at and press ENTER.
If ‘Results’ indicate:
‘File Good’ and you agree with the ‘Count of Payees’ and have mailed your Form 4804, you are finished with this file. (Form
4804 is not needed on a replacement file unless the number of payees changes from the original/correction file.)
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‘File Bad’ - Correct the errors and resubmit the file as a repl
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.