Electronic Filing of Form W-4

DEPARTMENT OF THE TREASURY

26 CFR Parts 31 and 602

[TD 8706]

RIN 1545-AR67

Electronic Filing of Form W-4

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to Form W-4,

Employee's Withholding Allowance Certificate. The final regulations

authorize employers to establish electronic systems for use by

employees in filing their Forms W-4. The regulations provide employers

and employees with guidance necessary to comply with the law. The

regulations affect employers that establish electronic systems and

their employees.

EFFECTIVE DATE: These final regulations are effective January 2, 1997.

FOR FURTHER INFORMATION CONTACT: Karin Loverud, (202) 622-6060 (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 1545-1435. 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.

The estimated annual burden per respondent is 20 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, T: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.

Background

On April 15, 1994, a notice of proposed rulemaking [EE-45-93]

containing proposed regulations relating to Form W-4, Employee's

Withholding Allowance Certificate, was published in the Federal

Register (59 FR 18057).

On December 21, 1994, temporary regulations (TD 8577) clarifying

the existing proposed regulations were published in the Federal

Register (59 FR 65712). A notice of proposed rulemaking (EE-45-93)

cross-referencing the temporary regulations was published in the

Federal Register for the same day (59 FR 65740).

Written comments responding to these notices were received. Public

hearings were requested and were held on July 15, 1994, and November 7,

1995.

After consideration of all the comments, the proposed regulations

under section 3402(f) are adopted as revised by this Treasury decision.

The comments and revisions are discussed below.

Explanation of Revisions and Summary of Comments

1. Relationship between paper and electronic Forms W-4

A withholding exemption certificate (Form W-4) may be in either

paper or electronic form. Therefore, an employee will furnish a Form W-

4 to the employer either on paper or electronically. To clarify that an

electronic Form W-4 has the same status as a paper Form W-4, the final

regulations make minor revisions to Sec. 31.3402(f)(5)-1, Form and

contents of withholding exemption certificates. Further, the final

regulations appear as Sec. 31.3402(f)(5)-1(c), rather than in a

separate regulations section limited to electronic forms.

2. Electronic filing by all employees.

The existing proposed and temporary regulations require employers

that establish electronic systems to provide employees with the option

of filing paper or electronic Forms W-4. Several commentators requested

that employers be allowed to adopt systems under which all employees

file Forms W-4 electronically. These commentators stated that a system

under which all employees file electronically would reduce employer

burden in terms of costs and time (for example, eliminate maintenance

of duplicative paper and electronic systems). Similarly, it would

reduce employee burden in terms of time and choosing a filing option.

The IRS and Treasury want to assist in reducing burdens on both

employers and employees and to make it as easy as possible for

employers to adopt less burdensome systems. The final regulations

permit an employer to adopt a system under which all employees file

Forms W-4 electronically. The IRS and Treasury expect, however, that an

employer will make a paper option reasonably available upon request to

any employee who has a serious objection to using the electronic system

or whose access to, or ability to use, the system may be limited (for

example, as a result of a disability). The paper option would be

satisfied, for example, if the employer informs employees how they can

obtain a paper Form W-4 and where they should submit the completed

paper Form W-4. The IRS and Treasury also expect that employers will

comply with all applicable law

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governing the workplace and terms and conditions of employment, such as

the Americans with Disabilities Act (42 U.S.C. 12112(a)). Compliance

with these regulations does not guarantee that a system for filing

Forms W-4 electronically is in compliance with those applicable laws.

3. Electronic Forms W-4

Several commentators recommended that electronic systems be allowed

for all Forms W-4 without exception. The prior proposed and temporary

regulations specifically exclude (1) Forms W-4 required upon

commencement of employment (initial Form W-4), and (2) Forms W-4

required to be furnished to the IRS by employers because more than 10

withholding exemptions are claimed or, if the employee is expected to

earn more than $200 per week, exemption from withholding is claimed.

Initial Form W-4. Section 3402(f)(2)(A) of the Internal Revenue

Code (Code) requires a new employee to furnish the employer with a

signed withholding exemption certificate. Section 6061 requires all

Forms W-4 to be signed. See discussion below under ``5. Signature Under

Penalties of Perjury'' and Sec. 301.6061-1(b), which states that the

Secretary may prescribe in forms, instructions, or other appropriate

guidance the method of signing any return, statement, or other document

required to be made under any provision of the internal revenue laws or

regulations. The final regulations permit electronic systems to include

Forms W-4 required upon commencement of employment.

Forms W-4 claiming more than 10 exemptions or exemption from

withholding. Section 31.3402(f)(2)-1(g) requires employers to submit to

the IRS copies of certain Forms W-4 furnished to them by their

employees. The Forms W-4 required to be submitted are those on which

the employee claims either (1) more than 10 withholding exemptions, or

(2) exemption from withholding (and the employee is expected to earn

more than $200 per week).

Under Sec. 31.3402(f)(2)-1(g)(5), if the IRS determines that a Form

W-4, a copy of which was submitted to the IRS, is defective, the IRS

will notify in writing both the employer and the employee. (The notice

is referred to as a ``lock-in letter.'') A Form W-4 is defective if (1)

the IRS determines that the Form W-4 contains a materially incorrect

statement, or (2) following communication with the employee, the IRS

lacks sufficient information to determine whether the certificate is

correct. The lock-in letter issued by the IRS advises the employer that

the employee either is not entitled to claim exemption from withholding

or is not entitled to claim more withholding exemptions than the number

specified by the IRS in the notice, or both. If the employee

subsequently files a new Form W-4, the employer may withhold on the

basis of that new Form W-4 only if the new Form W-4 is consistent with

the lock-in letter. The employer must continue to withhold on the basis

of that advice until the IRS revokes in writing its lock-in letter.

The final regulations permit electronic systems to include Forms W-

4 on which employees claim more than 10 withholding exemptions or

exemption from withholding. However, the IRS and Treasury expect that

electronic systems, alone or in conjunction with the rest of an

employer's payroll system, will ensure compliance with the advice

contained in a lock-in letter. For instance, an electronic system can

ensure compliance with a lock-in letter by prohibiting an employee for

whom a lock-in letter was issued from filing any electronic Form W-4 or

prohibiting the employee from claiming more withholding exemptions than

the number specified in the IRS notice. Additionally, an employer may

choose to require any employee to file a paper Form W-4 if the employee

wishes to claim more than 10 withholding exemptions or exemption from

withholding.

4. Submission of Certain Forms W-4 to IRS

Section 31.3402(f)(2)-1(g) requires employers to submit to the IRS

copies of Forms W-4 on which the employee claims either more than 10

withholding exemptions or exemption from withholding (and the employee

is expected to earn more than $200 per week). Generally, the copies are

sent quarterly to the IRS along with the employer's Form 941,

Employer's Quarterly Federal Tax Return. Copies can also be submitted

earlier and more often to the employer's IRS service center.

Employers that establish electronic systems will satisfy the

requirement of Sec. 31.3402(f)(2)-1(g) if they furnish the Form W-4

information on magnetic media. Before using magnetic media, employers

must submit Form 4419, Application for Filing Information Returns

Magnetically/Electronically, to request authorization. Rev. Proc. 92-80

(1992-2 C.B. 465) contains specifications for filing Forms W-4 on

magnetic tape and on 5\1/4\- and 3\1/2\-inch magnetic diskettes.

Electronic transmission of Form W-4 information to the IRS is not yet

available.

5. Signature Under Penalties of Perjury

Section 6061 of the Code requires that any return, statement, or

other document required to be made under any provision of the Code or

regulations be signed. Section 6065 requires that any such document

contain or be verified by a written declaration that it is made under

the penalties of perjury. These requirements apply to all Forms W-4,

including those filed electronically, and are reflected in

Sec. 31.3402(f)(5)-1(c)(iii) of the final regulations.

Although sections 6061 and 6065 apply to all Forms W-4, the IRS and

Treasury are concerned that some electronic systems established under

the temporary regulations may not include a signature under penalties

of perjury. The final regulations, therefore, include guidance on the

perjury statement and the electronic signature.

For certain Forms W-4, the final regulations treat the signature-

under-penalties-of-perjury-statement requirement as satisfied until

January 1, 1999. This special rule applies only if the system precludes

the electronic filing of Forms W-4 required upon commencement of

employment and Forms W-4 claiming more than 10 withholding exemptions

or exemption from withholding. Moreover, the special rule applies only

to Forms W-4 filed electronically before the earlier of (1) January 1,

1999, or (2) the first date on which the employer's electronic system

permits the filing of Forms W-4 required upon commencement of

employment or Forms W-4 claiming more than 10 withholding exemptions or

exemption from withholding.

The IRS and Treasury will consider written comments pertaining to

the provisions relating to signatures under penalties of perjury.

Submissions should be sent to: CC:DOM:CORP:R (TD 8706), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. Alternatively, taxpayers may submit comments electronically

via the Internet by selecting the ``Tax Regs'' option on the IRS Home

Page, or by submitting comments directly to the IRS Internet site at

http://www.irs.ustreas.gov/prod/tax__regs/comments.html. Submissions

may be hand delivered between the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (TD 8706), Courier's Desk, Internal Revenue Service, 1111

Constitution Avenue NW, Washington, DC.

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6. Employer Retention of Forms W-4 and Predecessor and Successor

Employers

One commentator requested guidance concerning the period for which

paper Forms W-4 are required to be retained under Sec. 31.6001-1(e)

after the employer establishes an electronic system and in predecessor-

employer/successor-employer situations. Electronic Forms W-4 have the

same status as paper Forms W-4. Therefore, guidance that applies to

paper Forms W-4 also applies to electronic Forms W-4. For further

information, see Rev. Proc. 91-59 (1991-2 C.B. 841) (information

regarding the retention of records using a variety of automatic data

processing systems); and section 5 of Rev. Proc. 96-60 (1996-53 I.R.B.)

(predecessor/successor situations).

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 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, and, because the notice of

proposed rulemaking preceding the regulations was issued prior to March

29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Code, the notice of proposed

rulemaking preceding these regulations was submitted to 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 the Associate Chief Counsel (Employee Benefits and Exempt

Organizations), IRS. However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social Security,

Unemployment compensation.

26 CFR Part 602

Reporting and recordkeeping requirements.

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 is amended by

adding an entry for section 31.3402(f)(5)-1 to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 31.3402(f)(5)-1 also

issued under 26 U.S.C. 3402 (i) and (m). * * *

Par. 2. Section 31.3402(f)(5)-1 is amended as follows:

1. Headings are added to paragraphs (a) and (b).

2. The fourth sentence of paragraph (a) is revised.

3. Paragraph (c) is added.

4. The authority citation which follows the end of the section is

removed.

The revisions and additions read as follows:

Sec. 31.3402(f)(5)-1 Form and contents of withholding exemption

certificates.

(a) Form W-4. * * * Blank copies of paper Forms W-4 will be

supplied to employers upon request to the Internal Revenue Service. * *

*

(b) Invalid Form W-4. * * *

(c) Electronic Form W-4--(1) In general. An employer may establish

a system for its employees to file withholding exemption certificates

electronically.

(2) Requirements--(i) In general. The electronic system must ensure

that the information received is the information sent, and must

document all occasions of employee access that result in the filing of

a Form W-4. 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 filing the Form W-4 is the

employee identified in the form.

(ii) Same information as paper Form W-4. The electronic filing must

provide the employer with exactly the same information as the paper

Form W-4.

(iii) Jurat and signature requirements. The electronic filing must

be signed by the employee under penalties of perjury.

(A) Jurat. The jurat (perjury statement) must contain the language

that appears on the paper Form W-4. The electronic program must inform

the employee that he or she must make the declaration contained in the

jurat and that the declaration is made by signing the Form W-4. The

instructions and the language of the jurat must immediately follow the

employee's income tax withholding selections and immediately precede

the employee's electronic signature.

(B) Electronic signature. The electronic signature must identify

the employee filing the electronic Form W-4 and authenticate and verify

the filing. For this purpose, the terms ``authenticate'' and ``verify''

have the same meanings as they do when applied to a written signature

on a paper Form W-4. An electronic signature can be in any form that

satisfies the foregoing requirements. The electronic signature must be

the final entry in the employee's Form W-4 submission.

(iv) Copies of electronic Forms W-4. Upon request by the Internal

Revenue Service, the employer must supply a hardcopy of the electronic

Form W-4 and a statement that, to the best of the employer's knowledge,

the electronic Form W-4 was filed by the named employee. The hardcopy

of the electronic Form W-4 must provide exactly the same information

as, but need not be a facsimile of, the paper Form W-4.

(3) Effective date--(i) In general. This paragraph applies to all

withholding exemption certificates filed electronically by employees on

or after January 2, 1997.

(ii) Special rule for certain Forms W-4. In the case of an

electronic system that precludes the filing of Forms W-4 required on

commencement of employment and Forms W-4 claiming more than 10

withholding exemptions or exemption from withholding, the requirements

of paragraph (c)(2)(iii) of this section will be treated as satisfied

if the Form W-4 is filed electronically before January 1, 1999.

Sec. 31.3402(f)(5)-2T [Removed]

Par. 3. Section 31.3402(f)(5)-2T is removed.

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 Sec. 602.101, paragraph (c) is amended by:

1. Removing the entry for 31.3402(f)(5)-2T from the table.

2. Revising the entry for 31.3402(f)(5)-1 to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

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Current OMB

CFR part or section where identified and described Control No.

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* * * * *

31.3402(f)(5)-1............................................ 1545-0010

1545-1435

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Approved: December 12, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 96-32669 Filed 12-31-96; 8:45 am]

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