Magnetic Media Filing Requirements for Information Returns

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 8772]

RIN 1545-AU08

Magnetic Media Filing Requirements for Information Returns

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations

relating to the requirements for filing information returns on magnetic

media or in other machine-readable form under section 6011(e) of the

Internal Revenue Code (Code). These regulations affect persons filing

information returns. These regulations prescribe magnetic media filing

requirements for employers filing wage and tax statements for employees

in Puerto Rico, U.S. Virgin Islands, Guam, and American Samoa. In

addition, these regulations provide taxpayers with the guidance to

comply with the changes made to the Code and to the administrative

practices with respect to filing on magnetic media or in other machine-

readable form.

DATES: Effective date: These regulations are effective June 30, 1998.

Applicability date: These regulations apply to information returns

required to be filed on or after January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Donna Joy Welch, (202) 622-4910 (not a

toll-free call), if the inquiry relates to provisions of these

regulations. For further information, see the telephone numbers listed

at the beginning of SUPPLEMENTARY INFORMATION

SUPPLEMENTARY INFORMATION: If the inquiry relates to magnetic media

filing and magnetic media specifications for Form W-2, Form 499R-2/W-

2PR, Form W-2VI, Form W-2GU, and Form W-2AS, persons residing in the

following locations should contact the corresponding Social Security

Administration office (not a toll-free call):

Alabama (404) 562-1314 (Atlanta),

Alaska (206) 615-2125 (Seattle),

American Samoa (415) 744-4559 (San Francisco),

Arizona (415) 744-4559 (San Francisco),

Arkansas (501) 324-5466 (Little Rock),

California (415) 744-4559 (San Francisco),

Colorado (303) 844-2364 (Denver),

Connecticut (617) 565-2895 (Boston),

Delaware (215) 597-4632 (Philadelphia),

District of Columbia (215) 597-4632 (Philadelphia),

Florida (404) 562-1314 (Atlanta),

Georgia (404) 562-1314 (Atlanta),

Guam (415) 744-4559 (San Francisco),

Hawaii (415) 744-4559 (San Francisco),

Idaho (206) 615-2125 (Seattle),

Illinois (312) 575-4244 (Chicago),

Indiana (312) 575-4244 (Chicago),

Iowa (816) 936-5649 (Kansas City),

Kansas (816) 936-5649 (Kansas City),

Kentucky (404) 562-1314 (Atlanta),

Louisiana (504) 389-0426 (Baton Rouge),

Maine (617) 565-2895 (Boston),

Maryland (215) 597-4632 (Philadelphia),

Massachusetts (617) 565-2895 (Boston),

Michigan (312) 575-4244 (Chicago),

Minnesota (312) 575-4244 (Chicago),

Mississippi (404) 562-1314 (Atlanta),

Missouri (816) 936-5649 (Kansas City),

Montana (303) 844-2364 (Denver),

Nebraska (816) 936-5649 (Kansas City),

Nevada (415) 744-4559 (San Francisco),

New Hampshire (617) 565-2895 (Boston),

New Jersey (212) 264-5643 (New York),

New Mexico (505) 262-6048 (Albuquerque),

New York (212) 264-5643 (New York),

North Carolina (404) 562-1314 (Atlanta),

North Dakota (303) 844-2364 (Denver),

Ohio (312) 575-4244 (Chicago),

Oklahoma (405) 951-3007 (Oklahoma City),

Oregon (206) 615-2125 (Seattle),

Pennsylvania (215) 597-4632 (Philadelphia),

Puerto Rico (787) 766-5574 (San Juan),

Rhode Island (617) 565-2895 (Boston),

South Carolina (404) 562-1314 (Atlanta),

South Dakota (303) 844-2364 (Denver),

Tennessee (404) 562-1314 (Atlanta),

Texas-Central/South (210) 229-6433 (San Antonio),

Texas-Dallas County (214) 767-6777 (Dallas),

Texas-North (817) 978-3123 (Forth Worth),

Texas-Southeast (713) 718-3015 (Houston),

Texas-West (505) 262-6048 (Albuquerque),

Utah (303) 844-2364 (Denver),

Vermont (617) 565-2895 (Boston),

Virgin Islands (787) 766-5574 (San Juan),

Virginia (215) 597-4632 (Philadelphia),

Washington (206) 615-2125 (Seattle),

West Virginia (215) 597-4632 (Philadelphia),

Wisconsin (312) 575-4244 (Chicago), and

Wyoming (303) 844-2364 (Denver).

If the inquiry relates to either the waiver procedure for all forms

described

[[Page 35518]]

in these regulations or the magnetic media specifications for Forms

1042-S, 1098, 1099 series, 5498, 8027, or W-2G, persons should contact

the Internal Revenue Service, Martinsburg Computing Center, P.O. Box

1359, Martinsburg, West Virginia 25402-1359; telephone (304) 263-8700

(not a toll-free call).

Background

Section 6011(e) authorizes the Secretary to prescribe regulations

providing the standards for determining which returns must be filed on

magnetic media or in other machine-readable form. Section 6011(e) was

added to the Internal Revenue Code (Code) by section 319 of the Tax

Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat.

610; and was amended by section 109 of the Interest and Dividend Tax

Compliance Act of 1983, Pub. L. 98-67, 97 Stat. 383; and section 7713

of the Revenue Reconciliation Act of 1989 (1989 Act), Pub. L. 101-239,

103 Stat. 2394. As amended by the 1989 Act, section 6011(e)(2)(A)

provides that the Secretary shall not require any person to file

returns on magnetic media unless the person is required to file at

least 250 returns during the calendar year.

On October 10, 1996, final and temporary regulations (TD 8683)

amending the existing regulations relating to the requirements for

filing information returns on magnetic media or in other machine-

readable form under section 6011(e) were published in the Federal

Register (61 FR 53056). A notice of proposed rulemaking (REG-209803-95)

cross-referencing the temporary regulations was published in the

Federal Register for the same day (61 FR 53161). These regulations were

issued at the request of the Social Security Administration (the SSA)

that regulations be issued to require employers required to file 250 or

more Forms 499R-2/W-2PR (Withholding Statement (Puerto Rico)), Forms W-

2VI (U.S. Virgin Islands Wage and Tax Statement), Forms W-2GU (Guam

Wage and Tax Statement), and Forms W-2AS (American Samoa Wage and Tax

Statement) to file these forms with the SSA on magnetic media. Filing

these forms on magnetic media will reduce administrative burdens and

will increase accurate processing of information. These regulations

also reflect the changes made to the Code and to the administrative

practices with respect to filing on magnetic media or in other machine-

readable form.

One written comment responding to this notice was received. No

public hearing was requested or held. After consideration of the

comment, the proposed regulations are adopted as modified and the

corresponding temporary regulations are removed. The comment is

discussed below.

Summary of Comment

The commentator suggests that the definition of magnetic media is

too restrictive and that it does not encompass the use of additional

technology that would facilitate the underlying reporting requirements.

The commentator suggests that the definition is not broad enough to

include the use of digital filing, specifically 2D barcode. Neither the

IRS nor the SSA utilize digital filing technology at this time.

However, the IRS and the SSA are committed to utilizing available

technology that would facilitate the purpose of information reporting.

Therefore, the regulations make clear that the use of other media

may be permitted in the future as provided in applicable regulations,

revenue procedures, or publications.

Relationship to Treasury Decision 8734

Treasury Decision 8734 was published in the Federal Register on

October 14, 1997 (62 FR 53387) and removed Secs. 1.6045-1T and 1.6045-

2T effective January 1, 1999. This document removes Secs. 1.6045-1T and

1.6045-2T effective June 30, 1998. Because this document removes these

sections at an earlier date, a document will be published later to

amend TD 8734 to take this into account.

Special Analyses

It is hereby certified that the regulations in this document will

not have a significant economic impact on a substantial number of small

entities. This certification is based on a determination that these

regulations impose no additional reporting or recordkeeping requirement

and prescribe only the method of filing information returns that are

already required to be filed. Further, these regulations are consistent

with the requirements imposed by statute. Section 6011(e)(2)(A)

provides that, in prescribing regulations providing standards for

determining which returns must be filed on magnetic media or in other

machine-readable form, the Secretary shall not require any person to

file returns on magnetic media unless the person is required to file at

least 250 returns during the calendar year. Consistent with the

statutory provision, these regulations do not require information

returns to be filed on magnetic media unless 250 or more returns are

required to be filed. Further, the economic impact caused by filing on

magnetic media should be minimal. If a taxpayer's operations are

computerized, reporting in accordance with the regulations should be

less costly than filing on paper. If the taxpayer's operations are not

computerized, the incremental cost of magnetic media reporting should

be minimal in most cases because of the availability of computer

service bureaus. In addition, the regulations provide that the IRS may

waive the magnetic media filing requirements upon a showing of

hardship. It is anticipated that the waiver authority will be exercised

so as not to unduly burden taxpayers lacking both the necessary data

processing facilities and access at a reasonable cost to computer

service bureaus. Accordingly, a Regulatory Flexibility Analysis under

the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

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.

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

Donna Joy Welch, Office of Assistant Chief Counsel (Income Tax and

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

Department participated in the development of the regulations.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, income

taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

[[Page 35519]]

Secs. 1.6045-1T and 1.6045-2T [Removed]

Par. 2. Sections 1.6045-1T and 1.6045-2T, currently in effect, are

removed.

Par. 3. Section 1.6045-1, currently in effect, is amended by:

1. Revising paragraph (l).

2. Removing the language ``Sec. 1.6045-1T(l)'' and adding

``paragraph (l) of this section'' in its place in paragraph (q).

The revision reads as follows:

Sec. 1.6045-1 Returns of information of brokers and barter exchanges.

* * * * *

(l) Use of magnetic media. For information returns filed after

December 31, 1996, see Sec. 301.6011-2 of this chapter for rules

relating to filing information returns on magnetic media and for rules

relating to waivers granted for undue hardship. A broker or barter

exchange that fails to file a Form 1099 on magnetic media, when

required, may be subject to a penalty under section 6721 for each such

failure. See paragraph (j) of this section.

* * * * *

Par. 4. Section 1.6045-2, currently in effect, is amended by:

1. Revising paragraph (g)(2).

2. Removing the language ``Sec. 1.6045-2T(g)(2)'' and adding

``paragraph (g)(2) of this section'' in its place in paragraph (i).

The revision reads as follows:

Sec. 1.6045-2 Furnishing statement required with respect to certain

substitute payments.

* * * * *

(g) * * *

(2) Use of magnetic media. For information returns filed after

December 31, 1996, see Sec. 301.6011-2 of this chapter for rules

relating to filing information returns on magnetic media and for rules

relating to waivers granted for undue hardship. A broker or barter

exchange that fails to file a Form 1099 on magnetic media, when

required, may be subject to a penalty under section 6721 for each such

failure. See paragraph (g)(4) of this section.

* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

Par. 5. The authority citation for part 301 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 6. Section 301.6011-2 is amended by:

1. Revising paragraphs (a)(1), (b)(1), (b)(2), (c)(1) heading,

(c)(1)(i), (c)(1)(iii), (c)(2), (d), (f), (g) heading, and (g)(2).

2. Adding paragraph (c)(1)(iv).

3. Removing paragraphs (c)(3) and (c)(4) and the last sentence of

paragraph (e).

The revisions and addition read as follows:

Sec. 301.6011-2 Required use of magnetic media.

(a) * * *

(1) Magnetic media. The term magnetic media means any media

permitted under applicable regulations, revenue procedures or

publications, or, in the case of returns filed with the Social Security

Administration, Social Security Administration publications. These

generally include magnetic tape, tape cartridge, and diskette, as well

as other media (such as electronic filing) specifically permitted under

the applicable regulations, procedures, or publications.

* * * * *

(b) Returns required on magnetic media. (1) If the use of Form

1042-S, 1098, 1099 series, 5498, 8027, W-2G , or other form treated as

a form specified in this paragraph (b)(1) is required by the applicable

regulations or revenue procedures for the purpose of making an

information return, the information required by the form must be

submitted on magnetic media, except as otherwise provided in paragraph

(c) of this section. Returns on magnetic media must be made in

accordance with applicable revenue procedures or publications (see

Sec. 601.601(d)(2)(ii)(b) of this chapter). Pursuant to these

procedures, the consent of the Commissioner of Internal Revenue (or

other authorized officer or employee of the Internal Revenue Service)

to a magnetic medium must be obtained by submitting Form 4419

(Application for Filing Information Returns Magnetically/

Electronically) prior to submitting a return described in this

paragraph (b)(1) on the magnetic medium.

(2) If the use of Form W-2 (Wage and Tax Statement), Form 499R-2/W-

2PR (Withholding Statement (Puerto Rico)), Form W-2VI (U.S. Virgin

Islands Wage and Tax Statement), Form W-2GU (Guam Wage and Tax

Statement), Form W-2AS (American Samoa Wage and Tax Statement), or

other form treated as a form specified in this paragraph (b)(2) is

required for the purpose of making an information return, the

information required by the form must be submitted on magnetic media,

except as otherwise provided in paragraph (c) of this section. Returns

described in this paragraph (b)(2) must be made in accordance with

applicable Social Security Administration procedures or publications

(which may be obtained from the local office of the Social Security

Administration).

* * * * *

(c) Exceptions--(1) Low-volume filers/250-threshold--(i) In

general. No person is required to file information returns on magnetic

media unless the person is required to file 250 or more returns during

the calendar year. Persons filing fewer than 250 returns during the

calendar year may make the returns on the prescribed paper form, or,

alternatively, such persons may make returns on magnetic media in

accordance with paragraph (b) of this section.

* * * * *

(iii) No aggregation. Each type of information return described in

paragraphs (b)(1) and (2) of this section is considered a separate

return for purposes of this paragraph (c)(1). Therefore, the 250-

threshold applies separately to each type of form required to be filed.

(iv) Examples. The provisions of paragraph (c)(1)(iii) of this

section are illustrated by the following examples:

Example 1. For the calendar year ending December 31, 1998,

Company X is required to file 200 returns on Form 1099-INT and 350

returns on Form 1099-MISC. Company X is not required to file Forms

1099-INT on magnetic media but is required to file Forms 1099-MISC

on magnetic media.

Example 2. During the calendar year ending December 31, 1998,

Company Y has 275 employees in Puerto Rico and 50 employees in

American Samoa. Company Y is required to file Forms 499R-2/W-2PR on

magnetic media but is not required to file Forms W-2AS on magnetic

media.

Example 3. For the calendar year ending December 31, 1998,

Company Z files 300 original returns on Form 1099-DIV and later

files 70 corrected returns on Form 1099-DIV. Company Z is required

to file the original returns on magnetic media. However, Company Z

is not required to file the corrected returns on magnetic media

because the corrected returns fall under the 250-threshold. See

Sec. 301.6721-1(a)(2)(ii).

(2) Waiver. (i) The Commissioner may waive the requirements of this

section if hardship is shown in a request for waiver filed in

accordance with this paragraph (c)(2)(i). The principal factor in

determining hardship will be the amount, if any, by which the cost of

filing the information returns in accordance with this section exceeds

the cost of filing the returns on other media. Notwithstanding the

foregoing, if an employer is required to make a final return on Form

941, or a variation thereof, and expedited filing of Forms W-2, Forms

499R-2/W-2PR, Forms W-2VI, Forms W-2GU, or Form W-2AS is required, the

unavailability of the specifications for magnetic media filing will be

treated as creating a hardship (see Sec. 31.6071(a)-1(a)(3)(ii) of this

chapter). A request for waiver must be

[[Page 35520]]

made in accordance with applicable revenue procedures or publications

(see Sec. 601.601(d)(2)(ii)(b) of this chapter). Pursuant to these

procedures, a request for waiver should be filed at least 45 days

before the due date of the information return in order for the Service

to have adequate time to respond to the request for waiver. The waiver

will specify the type of information return and the period to which it

applies and will be subject to such terms and conditions regarding the

method of reporting as may be prescribed by the Commissioner.

(ii) The Commissioner may prescribe rules that supplement the

provisions of paragraph (c)(2)(i) of this section.

(d) Paper form returns. Returns submitted on paper forms (whether

or not machine-readable) permitted under paragraph (c) of this section

shall be in accordance with applicable Internal Revenue Service or

Social Security Administration procedures.

* * * * *

(f) Failure to file. If a person fails to file an information

return on magnetic media when required to do so by this section, the

person is deemed to have failed to file the return. In addition, if a

person making returns on a paper form under paragraph (c) of this

section fails to file a return on machine-readable paper form when

required to do so by this section, the person is deemed to have failed

to file the return. See sections 6652, 6693, and 6721 for penalties for

failure to file certain returns. See also section 6724 and the

regulations under section 6721 for the specific rules and limitations

regarding the penalty imposed under section 6721 for failure to file on

magnetic media.

(g) Effective dates. * * *

(2) Paragraphs (a)(1), (b)(1), (b)(2), (c)(1)(i), (c)(1)(iii),

(c)(1)(iv), (c)(2), (d), (e), and (f) of this section are effective for

information returns required to be filed after December 31, 1996. For

information returns required to be filed after December 31, 1989, and

before January 1, 1997, see section 6011(e).

Sec. 301.6011-2T [Removed].

Par. 7. Section 301.6011-2T is removed.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: May 22, 1998.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 98-16411 Filed 6-29-98; 8:45 am]

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