Rev. Proc. 86-40

PART A-GENERAL

SECTION 1. PURPOSE AND NATURE OF CHANGES

The purpose of this Revenue Procedure is to update and supersede Rev. Proc. 85-53, 1985-2 C.B. 721, that sets forth the requirements and conditions under which withholding agents, as defined in Section 2.01 below, may file Form 1042S. Foreign Person's U.S. Source Income Subject to Withholding, on magnetic tape.

For Tax Year 1986 the following changes have been included in this revenue procedure:

.01 Part A, Section 2 has been revised to address requirements to report on magnetic tape when 500 or more forms are to be filed, and address requests for waiver of the magnetic tape filing requirement as a result of undue hardship.

.02 Part A, Section 3.05 has been inserted to address consolidation of withholding agent data.

.03 Part A, Section 5.03 has been inserted to address procedures for correcting magnetic tape files.

.04 Part A, Section 7, a new paragraph .06 has been inserted to clarify situations under which more than one record for a recipient is to be submitted.

.05 Part A, Section 8 has been deleted since the information has now been incorporated into the revised Part A, Section 2.

.06 Part B, Section 4, State Code Table. State Code "TT" has been added for the Mariana Islands. This new code value will apply to all state code references: Part B, Section 4, element 8 of the Transmitter "T" record; Part B, Section 5, element 6 of the Recipient "Q" record; Part B, Section 5, element 19 of the Recipient "Q" record; Part B, Section 6, element 7 of the Withholding Agent "W" record.

.07 Part B, Section 5, Country Code (element 11 of the Recipient "Q" record). One new country code has been added:

For Aruba, the Netherlands, Antilles tax treaty rates will apply.

.08 Part B, Section 5, Income Code (element 21 of the Recipient "Q" record). Income Code 20 ("Other Income") has been reassigned a new code number of "50" and a new income category has been added as Income Code 20:

 Income Code                 Meaning

The Meaning of Income Code "14" has been expanded to read "Pensions, annuities, alimony, and / or insurance premiums".

.09 Part B, Section 5, Recipient Type (element 22 of the Recipient "Q" record). A new recipient type code has been added and two other codes have been reassigned new numbers. "Other" recipient type has changed its code value from "09" to "19". "Unknown" recipient type has its code value changed from "10" to "20". Recipient Type "09" represents an "Artist or Athlete". Note that wherever appropriate, recipient type "09" should be used instead of recipient type `01' (Individual), `02' (Corporation), or `03' (Partnership).

.10 Part B, Section 5, Tax Rate (element 26 of the Recipient "Q" record). Tax Rate "08" has been added as a valid rate.

The tax treaty rates have changed on certain types of income for Canada, United Kingdom, and Italy.

Additionally, Barbados and Cyprus now are tax treaty countries.

.11 Effective January 1, 1987, the National Computer Center (NCC) will assume the responsibility for processing Forms 1042S on magnetic tape. Forms 1042S on MAGNETIC TAPE should no longer be sent to Philadelphia Service Center. Forms 1042 and any PAPER document Forms 1042S should continue to be filed at the Philadelphia Service Center.

SEC. 2. APPLICATION FOR TAPE REPORTING AND REQUESTS FOR UNDUE HARDSHIP WAIVERS

.01 A withholding agent is defined as any person or entity, U.S. or foreign, required to withhold U.S. tax on payments of income subject to withholding from sources within the United States as provided for in Chapter 3 of the Internal Revenue Code. A withholding agent may be an individual, partnership, corporation, trust, estate, government agency (Federal, State or local), association, or a tax-exempt foundation or organization.

.02 Withholding agents must use magnetic tape to file 500 or more Forms 1042S with the Internal Revenue Service (IRS) for calendar years beginning before January 1, 1987 (Tax Year 1986); 250 or more Forms 1042S for calendar year beginning on or after January 1, 1987 (Tax Year 1987 and subsequent years).

.03 Withholding agents or their agents are required to complete Form 4419, Application for Magnetic Media Reporting of Information Returns. Applications should be filed with the National Computer Center (NCC) 90 days before the due date of the return. The NCC will act on an application and notify the applicant in writing within 30 days of receipt of the application. Magnetic tape returns may not be filed with IRS until the application has been approved.

.04 Generally withholding agents using equipment compatible with IRS's equipment can presume that their application will be approved. Compatible tape characteristics are shown in PART "B", Section 1.01. Where the capability to prepare several types of tapes exists, IRS prefers that compatible tapes be prepared.

.05 If withholding agents propose to submit convertible tapes, IRS will attempt to find conversion facilities. Generally, an application to file on magnetic tape will be disapproved only when IRS is unable to obtain facilities to convert a withholding agent's file to a compatible form.

.06 IRS will assist new filers with their initial magnetic tape submission by reviewing "test" files submitted in advance of the filing season. Approved withholding agents or their agents should submit "test" files to the Magnetic Media Specialist at the National Computer Center. As a guideline, IRS prefers that all Form 1042S "test" files be submitted between January 1 and February 15. Clearly mark the tape as "TEST DATA", and include identification information such as name, address, and telephone number of someone familiar with the "test" tape who may be contacted to discuss its acceptability.

.07 Withholding agents required to file Forms 1042S on magnetic tape may receive a waiver from such requirements in appropriate circumstances upon showing a hardship. Requests for a waiver generally must be filed at least 90 days before the filing of the first return for which the waiver is requested. Withholding agents may not apply for a waiver for more than one year at a time. The waiver request must be a written statement containing the following identifying information:

(a) The withholding agent's name;

(b) The withholding agent's address;

(c) The withholding agent's Employer Identification Number (EIN) ;

(d) The date to which the waiver is requested;

(e) The name and telephone number of a person to contact regarding the information contained in the waiver;

(f) A statement regarding the cost which is causing the undue hardship condition; and

(g) A statement explaining any other reasonable attempts the withholding agent has made to comply with this magnetic media filing requirement.

Magnetic tape is the only permissible magnetic media for filing Forms 1042S and shall be filed in accordance with the applicable revenue procedures. Diskette and cassette reporting of Forms 1042S can not be accepted at this time. Withholding agents should also be aware of current revenue procedures relating to magnetic tape, diskette, and cassette reporting for wage and other information documents. Copies of these other revenue procedures, as well as all requests for filing Forms 1042S on magnetic tape (Form 4419), applicable revenue procedures, waiver requests (pertaining to magnetic media filing only), and any other questions you may have regarding Forms 1042S should be directed to:

     Magnetic Media Reporting

The address for filing Forms 1042 or for filing any PAPER document Forms 1042S will be:

     Internal Revenue Service

.01 Packaging, shipping, and mailing instructions will be provided in the authorizing letter issued by IRS in response to an application for tape reporting.

.02 Withholding agents submitting a portion of their statements on magnetic tape and the remainder on paper forms, should file magnetic tape records at the National Computer Center and paper documents at the Philadelphia Service Center, in separate shipments (see Part A, Section 2.07, for addresses).

.03 The withholding agent's Form 1042 tax return is used to verify the number of Forms 1042S filed on paper and / or magnetic tape. For transmitters of Service Bureaus filing Form 1042S information on tape for several withholding agents, separate Forms 1042 must be filed by each withholding agent included in the transmittal. Since the required Form 1042 is a tax return (with or without a remittance attached), it must be filed separately from the shipment of magnetic tape. Any additional paper documents required to be submitted should accompany Form 1042. (See instructions for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.)

.04 Magnetic tape reporting to IRS for Forms 1042S must be on a calendar year basis. The dates prescribed for filing paper documents with IRS will also apply to magnetic tape filing. Files must be submitted to the National Computer Center by March 15. Copies of the Form 1042S information must be furnished to the income recipient by January 31. Requests for extensions of time for filing on magnetic media and related matters should be made to the National Computer Center (requests for extension of time for filing Forms 1042 and / or Forms 1042S on paper should be made to the Director, Philadelphia Service Center). If an extension has been granted by IRS, a copy of the letter granting the extension must be attached to the transmittal Form 4804 when the file is submitted.

.05 Forms 1042S (Recipient "Q" records) from different branches of the withholding agent's business activity should be consolidated under one withholding agent's "W" record, especially when one common name and Employer Identification Number (EIN) would be used for each of the branches. For example, Bank X has branch offices in two different states. It would be acceptable for Branch Y of Bank X to report Recipient "Q" records and associated "W" record as "Bank X, Branch Y" when Branch Y has its own EIN, and for Branch Z of Bank X to report separately its Recipient "Q" records and associated "W" record as "Bank X, Branch Z" using its own EIN. Branches should not report separately when those branches are using a common EIN (and name). Branches filing separately should not use a common address (for example the address of the parent bank) when that common address is not normally used for filing other types of returns with IRS. It is assumed that for each "W" record (which represents a unique withholding agent), there will be a corresponding Form 1042 submitted which will reflect the accumulation of the associated Recipient "Q" records.

.06 Enclose a transmittal in duplicate, in the first box of the tape shipment, with the following information:

(a) The complete name, address, and EIN of the transmitter of the tape file.

(b) Name, address, title, and telephone number of the person to contact regarding any tape file problem.

(c) The complete name and address to be used in returning the tape file.

(d) The manufacturer and model of the main frame and tape drives, the tape width, the density in characters per inch, and the recording code (BCD, Excess 3, Octal, etc.).

(e) The type of document being reported-i.e. Form 1042S.

(f) Total number of tape reels in the file.

.07 Standard mail shipments should be addressed to:

     Magnetic Media Reporting

     Magnetic Media Reporting

"EXPEDITE FORM 1042S STATEMENTS ON MAGNETIC TAPE, DELIVER UNOPENED TO TAPE LIBRARY."

.08 The magnetic tape specifications contained in PART "B" of this revenue procedure must be strictly adhered to. Deviations will not be permitted under any circumstances. All magnetic tape filings will be scanned for completeness of required fields, mathematical verification, and proper format. Tapes failing to meet specifications will not be processed, but will be returned to the transmitter for correction (See also Part A, Section 5.03, below). Corrected files must be filed with the National Computer Center within 15 days from receipt of the returned file.

SEC. 4. PROCESSING OF TAPE STATEMENTS

.01 Normally, tapes will be returned to the transmitters by September 15 of the year in which submitted. However, if the tapes submitted are unprocessable, and must be returned for correction prior to processing, they will be returned within six months of the receipt of acceptable tapes. We suggest that the withholding agent retain the original tape until the expiration of the statute of limitations for assessment.

.02 IRS will prepare the appropriate statements for transmittal to treaty countries.

SEC. 5. CORRECTED STATEMENTS

.01 The appropriate paper forms will normally be used if it is necessary to correct Recipient "Q" records in the magnetic tape files. Since corrected statements supersede information previously supplied, all required data fields must be completed. Annotate each form "Corrected" at the top. Corrected documents should be bundled separately from other paper documents. When corrected documents are shipped separately, an amended Form 1042 must be filed, also suitably annotated.

.02 If the withholding agent discovers that a large volume of records submitted have to be corrected, the NCC magnetic tape coordinator should be contacted. He / She should ask that the original tape be returned so that the corrections can be made to it. If the NCC has already processed the tape, paper documents must be prepared for the ones needing corrections.

.03 When magnetic tape files are returned to the transmitter for data correction, a listing of the type of errors and frequency of such errors will be provided. The transmitter should correct the problems and submit a replacement tape file to the magnetic tape coordinator. Certain problems noted may not require any corrective action. For example, certain recipient "Q" records should have had their tax withheld at a particular tax rate, but the withholding agent, for whatever reason, withheld at a different tax rate. The transmitter (in conjunction with the withholding agent if necessary) should first verify that the tax rates in question are in fact the rates at which tax was withheld. Once verified, a letter should accompany the tape file stipulating that the tax rates are accurate as submitted.

SEC. 6. EFFECT ON PAPER DOCUMENTS

.01 Magnetic tape reporting to IRS eliminates the need for submission of paper Forms 1042S. However, withholding agents must continue to provide recipients with requisite information, although this need not be on a copy of Form 1042S.

.02 If only a portion of the statements are reported on magnetic tape and the remainder are reported on paper forms, those paper statements must be filed on the prescribed forms.

SEC. 7. DATA ENTRIES

.01 Since taxpayer identifying numbers are not required on all Forms 1042S (see specific Instructions for Withholding Agents, Copy C of the official Form 1042S), the specifications in PART "B" of this revenue procedure permit omission of such identifying numbers. Although identifying numbers are not always required for nonresident alien income recipients, IRS appreciates their being furnished when available.

.02 Recipient surnames are used to computer-generate Sort Names. Use an asterisk to indicate the beginning of the surname for this purpose. If the surname is the first name on the line, as may be the case for nationals of Asian countries, the asterisk is to be omitted. In the case of a partnership or joint ownership, or some other case where more than one individual is listed, asterisk only the first surname. A blank will always precede the asterisk when it is used, but no asterisk may be followed by a blank. Do not use an asterisk with corporate or any other business entity or governmental organization name, except partnerships or sole proprietorships. Never have more than one blank separating portions of a name line or an address field.

.03 In case of multiple recipients, the name of the person whose identifying number has been provided should be placed before all other names.

.04 Sometimes the recipient identification recorded on the withholding agent's records is lengthy, and exceeds the 105 characters allotted in the Recipient Name Line and Supplemental Name Lines on the magnetic tape records. This is most common in the case of trusts or other types of fiduciary accounts. The first 105 characters of the recipient identification normally provide sufficient descriptive data for IRS's purposes. IRS encourages all agents to truncate or abbreviate lengthy recipient descriptions.

.05 All monetary amount fields must show dollars and cents (omit the decimal point). For example, $135.72 must be shown as 13572, and $100 must be shown as 10000. All money amount fields are positive and must not be signed in any fashion. All money amounts must be right-justified and zero filled. Do not truncate any money amount fields. If the amount is more than the allowed space, prepare a second "Q" record to show the difference.

.06 There are several circumstances where more than one "Q" record is expected for a recipient. These situations include:

1) Different sources of income. For example, Recipient X derived income from Capital Gains (Income Code 09) and Industrial Royalties (Income Code 10). One "Q" record must be provided listing Income Code "09", and the Gross Income Paid and Tax Withheld pertaining solely to that type of income. A separate "Q" record must document the Income Code "10" information.

2) Change in Country Code during the year, for example, on July 1, the withholding agent received notification via Form 1001 that the recipient changed his official country for which tax treaty benefits apply from country X to country Y. One "Q" record must be provided reflecting Gross Income Paid, Tax Rate, and Tax Withheld for country X (reflecting income and withholding from January 1 through June 30). A second "Q" record must be provided reflecting Income, Tax Rate, and Tax Withheld for country Y (covering income and withholding from July 1 through December 31).

3) Change in a country's tax treaty rate during the year. For example, effective April 1, country X changed its tax treaty rate for a particular type of income from 10%to 20%. One "Q" record must be provided reflecting Gross Income Paid and Tax Withheld at the 10%rate (covering January 1 through March 31). A second "Q" record must also be provided reflecting Gross Income Paid and Tax Withheld at the 20%rate (covering April 1 through December 31).

Note that these three situations are NOT mutually exclusive. Therefore, if a recipient has two sources of income, each of which is derived from a country whose corresponding tax treaty rates changed during the year, and the recipient submitted a Form 1001 to the Withholding Agent changing his country code for tax purposes, as many as six (6) separate "Q" records must be provided.

Part "B"-Magnetic Tape Specifications

SECTION 1. GENERAL

.01 These specifications prescribe the required format and content of the records to be included in the file, but not the methods or equipment to be used in their preparation. Usually, IRS will be able to process, without translation, any compatible tape file. To be compatible, a tape file must meet all of the following:

Type of Tape-1 / 2 inch Mylar base, oxide coated

Interrecord Gap-.75 inch for 556 or 800 bpi density 7 track.

.6 inch for 800 bpi density 9 track.

.6 inch for 1600 bpi density.

.3 inch for 6250 bpi density 9 track

(a) When the Recording Mode is EBCDIC (Extended Binary Coded Decimal Interchange Code):

(1) Parity-Odd Parity

(2) Recording Density-800, 1600, or 6250 Densities

(3) 9 Channel

(b) When the Recording Mode is ASCII (American Standard Coded Information Interchange):

(1) Parity-Odd Parity

(2) Recording Density-800, 1600, or 6250 Densities

(3) 9 Channel

(c) When the Recording Mode is BCD (Binary Coded Decimal):

(1) Parity-Odd or Even Parity

(2) Recording Density-556 or 800 Densities

(3) 7 Channel or 9 Channel

.02 An acceptable tape file for each withholding agent will contain data records as follows:

(a) Single reel:

(1) a Transmitter "T" record; then

(2) one or more Recipient "Q" records followed by a specific Withholding Agent "W" record; then

(3) additional "Q" and "W" record sequences for other withholding agents as needed; then

(4) an End of Transmission "Y" record.

(b) Multiple Reels:

(1) a Transmitter "T" record at the beginning of each reel; then

(2) sequences of Recipient "Q" records followed with corresponding Withholding Agent "W" records; then

(3) an End of Reel "Z" record on every reel except that last; and

(4) an End of Transmission "Y" record ending the last reel.

(c) Notes:

(1) a sequence of Recipient "Q" records may be continued from one reel to the next if they apply to the same withholding agent, without the necessity of repeating the "W" record. The sequence might be, for example, QQQQZ (end of one reel); TQQQQW (beginning of next reel).

(2) the End of Reel "Z" record is identical to the Withholding Agent "W" record, except that it indicates the end of the reel, but not necessarily the end of a withholding agent's "Q" records. For example, when end of reel will be reached before the end of an agent's "Q" records, the "Z" record will be used in lieu of a "W" record. The next tape reel will begin with a "T" record, followed by the remaining "Q" records for the withholding agent.

.03 Affix an external label to each tape with the following information:

(1) Name of Transmitter.

(2) Number of "Q" records on that reel.

(3) Density (556, 800, 1600 CPI, etc.).

(4) Channel (7 or 9).

(5) Recording Mode (EBCDIC, ASCII, etc.).

(6) Parity (odd or even).

(7) Manufacturer and model of main-frame and tape drives

(8) Sequence number of reel, and total reels in the file (i.e. 1 of 3, 2 of 4, etc.).

.04 All records, including Header and Trailer Labels (if used) must be transmitted at the same density.

SEC. 2. CONVENTIONS AND DEFINITIONS

.01 Header Labels, Trailer Labels, Record Marks and Tape Marks are all optional. They may be used as required by the transmitter's equipment or programming. If used, they must conform to the following standards:

(a) Header Labels must begin VOL1, VOL2, HDR1, HDR2, or 1HDR. If used, they must be first record(s) on the reel immediately before the Transmitter "T" record. Header labels may not exceed 80 characters in length.

(b) Trailer Labels must begin 1EOR, 1EOF, EOF1, or EOR1. If used, they must be the last record(s) on the reel, after the "Z" or "Y" record and Tape Mark (if a Tape Mark is used). Trailer Labels may not exceed 80 characters in length.

(c) Record Marks, if used, may only follow the data portion of a record or block. All records are of uniform length, and record marks are not needed.

(d) Tape Marks, if used, must be IBM 001111 (Octal 17) in even parity. They always appear immediately after the "Z" or "Y" record. If Header and Trailer Labels are also used, the tape mark must follow the Header Label and must precede and / or follow the Trailer Label(s).

      .02 Definitions:

.01 Tape records prescribed in the specifications may be blocked or unblocked, subject to the following:

(a) All data records are of a fixed length (450 positions).

(b) All records may be blocked, except Header and Trailer Labels.

(c) A block may not exceed 15,000 characters, although shorter blocks may be written as desired. If records are being blocked, but sufficient records are not available to fill a complete block, the block may either be "padded" with 9's to fill all unused positions or truncated after the last data record ("short block"). Do not pad the block with blanks, or create blank records (for example, Q followed by 449 blanks, etc.).

(d) Two forms of blocking are acceptable:

(1) Only "Q" Records are blocked; all other records are unblocked.

(2) All records, except Header and Trailer Labels, if used, are blocked. In this case, a "T" Record may only be the first record in the first block on the reel (first reel only); a "W" Record must follow all associated "Q" Records; and, "Y" or "Z" Records may only be the last record in the last block on the reel (only block padding (all 9's) could follow).

.02 The first position of each record indicates the record type:

      Transmitter                T

SEC. 4. THE TRANSMITTER "T" RECORD

This record identifies the entity who prepares and transmits the magnetic tape file. The Transmitter and one of the withholding agents may be the same, but they need not be. The Transmitter "T" Record must be the first data record on a reel (preceded only by header labels, if any), and must appear on each reel in the file sent by the Transmitter. On multiple reel files the reel number must be incremented by 1 (one) for each tape reel after the first reel. Each "T" Record has a fixed length of 450 positions. The elements of data prescribed for each "T" Record are as follows:

 Element   Positions        Title     Description

This Record contains complete name and address data for both Withholding Agent and Recipient of Income, together with all the particulars of the income paid and tax withheld. Complete Withholding Agent data is required because each Recipient "Q" Record is treated as if it were a separate Form 1042S, and is processed independently of other records. Since the "Q" Record is restricted to one type of income only, it may be necessary to write more than one "Q" Record for any given individual income recipient, who may have received income of more than one type (see Part A, Section 7.06). All recipient "Q" Records for a particular Withholding Agent must be written before the corresponding Withholding Agent "W" Record, and before "Q" Records for another Withholding Agent may be used (for example, they may be sorted alphabetically by surname, or by country code, or by country of the mailing address, etc.) at the convenience of the Transmitter or Withholding Agent, since the "Q" Records are fully independent. All "Q" Records have a fixed length of 450 positions. All Elements are required unless otherwise stated.

 Element   Positions  Title           Description

Enter a "W" record after the last "Q" record submitted for a particular Withholding Agent. The "W" record serves as a summary of the preceding "Q" record data, and enables the Service to double-check the correctness of information received. Several "W" records for different withholding agents may appear on the same Transmitter's file. Also, the "W" record may refer to "Q" records on more than one reel, provided all of the preceding "Q" records are for the same withholding agent. A "W" record may only be followed by new Recipient "Q" records for the next Withholding Agent, if any, or by a tape mark and / or trailer label when more reels follow this reel, or by an End of Transmission "Y" record, when this is the last reel of the file. The "W" record cannot be the last record on the file. Each "W" record has a fixed length of 450 positions. All elements of data in the "W" record are required as follows:

 Element   Positions  Title           Description

End every reel of a file, except the last reel, with an End of Reel "Z" record. If the last record of that reel would otherwise be a "W" record, then do not use the "Z" record, but use the "W" record instead. A "Z" record may only appear as the last data record of a reel. If records are blocked, the "Z" record must be the last data record in the last block on the reel, but padding records (all 9's) may follow to fill the block. The "Z" record is identical in format to the "W" record.

The "Z" record may only be preceded immediately by a "Q" record, and may only be followed by Trailer labels, if any, or a tape mark. Elements of the "Z" record differ from the same elements of the "W" record as follows: (1) Element 1 Record Type, will be a "Z" instead of "W"; (2) Element 9, Total Number of "Q" records, will include a count of all "Q" records since the last preceding "W" record or "T" record; (3) Elements 10 and 11 will likewise total corresponding amounts on "Q" records since the preceding "W" or "T" record.

SEC. 8. END OF TRANSMISSION "Y" RECORD

End the last reel on a file with an End of Transmission "Y" record. The "Y" record may only be preceded by a "W" record. It may only be followed by a tape mark or tape mark and a Trailer Label (if Trailer Labels are used), or a Trailer Label. The "Y" record will count the total number of withholding agents in the transmission, and the total number of tape reels in the file. The "Y" record has a fixed length of 450 positions, and all elements listed are required.

 Element   Positions  Title           Description

Revenue Procedure 85-53 is superseded.