SERVICE REVISES REQUIREMENTS FOR MAGNETIC TAPE FILING OF FEDERAL QUARTERLY WITHHOLDING TAX RETURNS.

Rev. Proc. 88-41

SECTION 1. PURPOSE

.01 The purpose of this revenue procedure is to provide a means whereby reporting agents preparing Form 941, Employer's Quarterly Federal Tax Return and Form 941E, Quarterly Return of Withheld Federal Income Tax, for groups of taxpayers can furnish the required information in the form of magnetic tape instead of paper documents.

.02 This revenue procedure reflects the current changes to the tape specifications.

.03 This revenue procedure supersedes Rev. Proc. 86-27, 1986-1.C.B. 608. If a current reporting agent is unable to comply with the changes in specifications, he/she should contact the local Magnetic Tape Coordinator for Business Tax Returns for further instructions.

SEC. 2. APPLICATION FOR TAPE REPORTING

.01 Agents who desire to file authorized federal tax returns on magnetic tape must first file a letter of application. Although this revenue procedure only covers Forms 941 and 941E filed on magnetic tape, the letter of application may cover Forms 940 Employer's Annual Federal Unemployment (FUTA) TAX Return, as well. In addition, a separate but simultaneous letter may be submitted for permission to submit federal tax deposits (FTDs) on magnetic tape for Forms 940, 941 and 943. Separate revenue procedures cover the filing of Forms 940 and the submission of federal tax deposits on magnetic tape. Contact the Magnetic Tape Coordinator for Business Tax Returns for current copies of the other revenue procedures.

.02 The letter of application should be addressed to the Director, Internal Revenue Service Center, Attention: Magnetic Tape Coordinator for Business Tax Returns, of the service center that serves the primary business address of the reporting agent. Addresses of the service centers are shown in Section 11 of this revenue procedure.

.03 The letter of application must contain the following:

1. Name, address and EIN (Employer Identification Number) of the person, organization, or firm making the application.

2. Name, title, and telephone number of the person to contact regarding the application.

3. The first tax period for which the agent plans to file returns on magnetic tape.

4. The estimated volume of returns the agent plans to file by type of return (e.g., 941, 941E or 940).

5. An agreement by the reporting agent to keep copies of the Reporting Agent Authorization (RAA) on file at the agent's principal place of business for examination by the Service upon request. Such copies must be retained until the statute of limitations for the last return filed under its authority expires.

6. An agreement to fully pay the tax by FTDs.

This revenue procedure does not restrict a non-financial organization who performs a payroll or tax service from being a reporting agent. See Rev. Proc. 86-33, 1986-2 C.B. 760, concerning the requirements under which FTDs can be made by the reporting agent.

7. An agreement to fully pay contributions to state unemployment funds on time and to timely file related state unemployment tax returns (only if Form 940 filing is part of application request).

8. Signature of the agent or agent's employee authorized to prepare federal tax returns for taxpayers.

.04 The letter of application should include two types of attachments as follows:

1. A Reporting Agents List which identifies all taxpayers to be included in the Magnetic Tape Filing System.

2. RAAs for all taxpayers included on the Reporting Agents List. Details of these attachments are described in the current revenue procedure on RAAs.

.05 A reporting agent must submit a separate application to each service center to which he/she intends to file returns.

SEC. 3. REPORTING AGENT AUTHORIZATION

.01 A RAA must be submitted for each filer on the list attached to the letter of application. The RAA may be submitted on Form 8655, Reporting Agent Authorization, which is available on request; or any other instrument which meets the specifications identified in the current revenue procedure on RAAs. The RAA may cover the filing of both Forms 940 and 941 and the magnetic tape submission of FTDs on Forms 940, 941 and 943, if desired.

SEC. 4. APPROVAL OF AGENTS APPLICATION

.01 The Service will return a validated Reporting Agent's List to the agent within 30 days. The validated List provides the reporting agent with the name control for each taxpayer. The name control is a required field when the return is submitted on magnetic tape. See exhibit 9, positions 72-75.

.02 Having secured a name control for each taxpayer, the reporting agent must submit a test tape. The test tape submitted in support of an initial application must be submitted with paper returns that report the same tax information that is on the tape. The paper returns must be arranged in the same order that the returns are reported on the tape. Once the Magnetic Tape Coordinator for Business Tax Returns has approved the reporting agents application, paper returns should no longer be submitted.

.03 Reporting agents are encouraged to submit the initial test tape well in advance (90 days is suggested) of the end of the tax period for which the first returns will be filed on magnetic tape. This will allow sufficient time to work out problems and eliminate the necessity of filing redundant paper returns for the first time filing.

.04 The Magnetic Tape Coordinator for Business Tax Returns will notify prospective and current reporting agents in writing on the decisions of approval, denial and revocation of magnetic tape filing privileges. Generally, failure to submit magnetic tapes which can be read on the Service's computers without a "job abort" and with error rate on the returns of 5% or less is required for approval of a reporting agent's application and continuation of filing privileges.

.05 Once authorization to file tax data on magnetic tape has been granted to a reporting agent, such approval will continue to effect in succeeding tax periods as long as the requirements of the most recent revenue procedure are met, and there are no equipment changes by the reporting agent.

.06 If a revenue procedure is revised significantly in terms of its computer specifications, current reporting agents will normally be required to submit test tapes prior to their first usage of the new specifications. If the changes are minor, the Magnetic Tape Coordinator may waive the requirement.

.07 Test tapes prepared because of agent equipment changes, or changes in magnetic tape specifications based on revenue procedure changes, must be submitted initially at least ninety days before the last month of the tax period for which the return is filed using the new format.

.08 If a reporting agent submits a bad test tape, the Magnetic tape Coordinator will notify the agent of that fact. The prospective reporting agent must supply a new test tape within thirty days of the coordinator's notification.

SEC. 5. EFFECT ON PAPER DOCUMENTS

.01 Authorization to file on magnetic tape does not prohibit the filing of paper tax returns, but merely permits filing of such returns through the Magnetic Tape Filing system. If for some reason (e.g., late receipt of records), an agent prefers to file a paper return for a given taxpayer, the agent may do so even after having been given authorization to file that taxpayer's returns on magnetic tape.

.02 Paper and magnetic tape returns for the same tax period at the same time must never be filed by a reporting agent for a taxpayer unless the returns are filed during the trial period for the reporting agent described in section 4.

.03 Form 941/941E filers are required to transmit with their return, copies of any W-4's claiming 14 or more exemptions. If the reporting agent files magnetic tape 941/941E for a taxpayer, but does not report W-4 information on magnetic tape, the paper W-4's should be submitted to the service center with a cover letter.

SEC. 6. FILING TAPE RETURNS

.01 Packaging, shipping, and mailing instructions will be provided in the letter granting initial approval issued by the Service in response to the letter of application for magnetic tape filing.

.02 The Service will allow a tape return to be submitted for those individually approved magnetic tape filers until the reporting agent formally notifies the Service that specific employers are being deleted from their current magnetic tape filing inventory.

.03 Section 6091(b) of the Internal Revenue Code requires that tax returns be filed at the Internal Revenue District (or service center serving that district) that services the legal residence or principal business address of the taxpayer. Thus, reporting agents must normally file taxpayer's returns at the appropriate service center as described above even if it means submitting magnetic tapes to more than one service center. This rule may not be violated unless a reporting agent has applied for and received permission from the Service to do so. Contact your Magnetic Tape Coordinator for Business Tax Returns for details.

.04 Approval by the Service of a letter of application allows a reporting agent to file at any service center that services his/her clients. If a reporting agent wishes to file at additional service centers, he/she should notify the Magnetic Tape Coordinator for Business Tax Returns of the service center where he/she originally applied at least 90 days prior to the initial transmittal to the new service center.

.05 The reporting agent will be provided with a validated copy of the agent's listing for taxpayers authorized to file on magnetic tape. This authorization will contain each taxpayer's EIN and a four position alpha Name Control. This authorization will be the source of the EIN and Name Control to be used on magnetic tape by the reporting agent as an identification of each taxpayer.

It is imperative that this Name Control be retained in the agent's records and be used in each taxpayer's Tax Data "B" Record (positions 72-75). It is used by the Service to ensure the correct recording of the taxpayer's return. Failure to use the correct Name Control can result in delays in processing the return and notices of delinquent filing being sent to the taxpayer.

.06 Enclose in the first box of the tape shipment to the service center the following:

1. A letter of transmittal containing the information described below. File the letter of transmittal in duplicate.

2. The letter of transmittal should include:

a. Name and address of reporting agent

b. Type of tax return filed on the magnetic tape

c. Tax period

d. Number of tax returns filed on accompanying tape

e. Total taxes reported

f. Total taxes deposited

g. Number of revenue procedures used as basis for magnetic tape preparation (e.g., 86-27).

h. Total Forms 941c and other attachments to support adjustments included in this shipment.

i. Signature of transmitter, title and date.

3. A control listing identifying actual taxpayers previously approved by the Service for magnetic tape filing that are contained on the current tape file being submitted. List the taxpayers in EIN sequence with each taxpayer's name and address (address optional).

4. The reporting agent must notify the Magnetic Tape Coordinator for Business Tax Returns if the agent does not receive notification of the receipt of the transmittal within 15 days from the date he/she sent the transmittal.

5. The reporting agent must notify the Magnetic Tape Coordinator for Business Tax Returns when the tape is received back from the Service. This can be done by phone or by returning a receipted copy of the tape charge-out. We require this confirmation to ensure the confidentiality of taxpayer data.

SEC. 7. ADDING AND DELETING FILERS FROM MAGNETIC TAPE FILING SYSTEM

.01 After a reporting agent has been notified by the Service that his/her application has been approved, he/she will generally need to add and delete taxpayers from the Magnetic Tape Filing System.

.02 Specific instructions for adding and deleting taxpayers from the Magnetic Tape Filing System are contained in the current revenue procedure on RAAs. Contact the Magnetic Tape Coordinator for Business Tax Returns to secure the current version.

.03 Returns may not be filed for a taxpayer until an RAA has been submitted for him/her and his/her identifying information has been included on a Reporting Agents List which in turn has been subsequently validated by the Service. Until the reporting agent has received the validated list, he/she is unable to submit a valid tax return through the Magnetic Tape Filing System because he/she does not have a valid name control for the taxpayer and he/she cannot be certain that the Service has a valid RAA.

SEC. 8. DUE DATES

.01 The due dates prescribed for filing paper returns with the Service will also apply to magnetic tape filing of federal business tax returns.

.02 In no case may returns with more than one due date be included on one tape file.

SEC. 9. ADJUSTMENTS TO 941 AND 941E RETURNS

.01 Adjustments may be made on returns submitted on magnetic tape.

.02 Positions 329-338 of Tax Data "B" Record are used to report adjustment of social security (FICA) taxes reported. These positions must be used in conjunction with the FICA Adjustment Indicator (position 155) of the Tax Data "B" Record. If there is no adjustment of FICA taxes, the adjustment indicator should be zero. If there is an adjustment of FICA taxes, the adjustment indicator must be set to 1, 2, 3 or 4 depending on the circumstances explained as follows:

The FICA Adjustment Indicator must be set to 1 if the adjustment to FICA taxes consists only of the difference between the total social security taxes (positions 318-327) of the Tax Data "B" Record and the amount actually collected from your employees wages consists only of fractions of cents added or dropped due to rounding.

The FICA Adjustment Indicator must be set to 3 if the Adjustment To FICA Taxes consists only of total uncollected employee social security tax on tips (i.e. employee previously reached maximum limitation through combination of wages and tips).

The FICA Adjustment Indicator should be set to 4 if the Adjustment To FICA Taxes consists only of FICA tax on third-party sick pay for which the employer is not responsible.

If the description for the adjustment to FICA taxes listed above is not applicable or the adjustment to FICA taxes is significant for more than one reason, the FICA Adjustment Indicator must be set to 2, and a statement or Form 941c must be submitted with the tape identifying the taxpayer and explaining the adjustment to FICA tax. If the second reason for a FICA adjustment is "FRACTIONS ONLY," then it may be ignored and either "FICA TIP" or "sick pay" values may be used.

.03 Adjustments to preceding quarters (income tax withholding adjustments) must be reported in positions 201-210 of the Tax Data "B" Record. Any magnetic tape return with a significant adjustment to preceding quarters must be supported by a statement submitted with the magnetic tape. The statement must identify the taxpayer and explain the adjustment. The Adjustment Indicator for Income Tax Withheld (position 156 of the Tax Data "B" Record) must be set to "1" if there is an adjustment or be set to zero if there is no adjustment.

.04 Adjustments to backup withholding must be reported in positions 365-374 of the Tax Data "B" Record. Any magnetic tape return with a significant adjustment to backup withholding must be supported by a statement submitted with the magnetic tape. The statement must identify the taxpayer and explain the adjustment. The Adjustment Indicator for Backup Withholding (position 157 of the Tax Data "B" Record) must be set to "1" if there is an adjustment or be set to zero if there is no adjustment.

.05 Include all statements and Forms 941c with the magnetic tape shipment for approval and subsequent adjustment action.

SEC. 10. FILING FORMS W-2 (COPY A) WITH THE SOCIAL SECURITY ADMINISTRATION

The reporting agents who file Forms 941 on magnetic tape for employers must file the wage information directly with the Social Security Administration on tape or paper documents. For directions for tape filing, you may call or write the appropriate Service Center Magnetic Tape Coordinator for Business Tax Returns, or any Social Security Administration office and ask for Technical Information Bulletin 4a (TIB-4a), or you may write to the following address:

     Social Security Administration

Requests for additional copies of this revenue procedure, applications for magnetic tape filing, requests for copies of appropriate input record element specifications, and requests for tape filing information should be addressed to the Director, Internal Revenue Service Center. Attention: Magnetic Tape Coordinator for Business Tax Returns, at one of the following addresses:

   1. North-Atlantic Region

.01 Conventions

(a) Reporting agents who submit Forms 940, 941 and 941E on magnetic tape must conform to Level 3 of the ANSI Standard X3.27-1978 (Magnetic Tape Labels and File Structure for Information Interchange). Specifically this calls for recognition of the following label types: VOL1, HDR1, HDR2, EOV1, EOV2, EOF1, and EOF2 (see exhibits 1 through 7 for specific label specifications). No user labels or non-labeled tapes will be accepted for processing.

(b) Record Mark

No restrictions apply to record marks.

(c) Tape Mark

The tape marks will be automatically generated for an interchange tape (as defined above in .01(a). An example as to their positioning is given in Section 8.02.

.02 Definitions

 Element                 Description

.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. A physical tape reel must have the following physical characteristics:

 Type of tape            1/2 inch Mylar base, oxide coated

VOL1

HDR1

HDR2

TAPEMARK

DATA RECORD A

DATA RECORDS B (Up to 100 occurrences)

DATA RECORD C

DATA RECORDS B (Up to 100 occurrences)

DATA RECORD C

the sequence of up to 100 B records followed by a C record is repeated as often as necessary.

DATA RECORD E

TAPEMARK

EOF1

EOF2

TAPEMARK

TAPEMARK

.03 All records including headers and trailers, if used, must be written at the same density.

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

1. Name of reporting agent,

2. Number of tax returns submitted on this reel of tape,

3. Payment period in YYMM (Year, Year, month, month) format, for example 8109,

4. Density (1600, 6250),

5. Channel (9),

6. Parity (odd),

7. Sequence number of reel and total number of reels in file (for example, 1 of 3).

.05 Record Blocking Factor

1. The tape records prescribed in the specifications must be blocked at one record per block.

.06 Data

1. Only character data may be used. This means numeric fields cannot use overpunched signs and must be right justified and zero filled. Special characters must be limited to -, &, %, /, #, period (.), comma (,), and apostrophe (') and may only be used in the name line fields and the street address fields of Agent "A" Record and Tax Data "B" Record. Otherwise, characters must be numeric or alphabetic. All numeric data must be in unsigned ASCII characters (no binary data). Where necessary, separate positions have been provided for signs, using "1" for plus and "0" (zero) for minus.

.07 Agent "A" Record

1. Identifies the reporting agent who prepares and transmits the tape file.

2. The Agent "A" Record will only appear once, at the beginning of the first reel of tape. The Agent "A" Record will no longer be the first record on the second or subsequent reels of tape.

3. Exhibit #8 provides details of "A" record format specifications.

.08 Form 941/941E Tax Data "B" Record

1. Contains tax information reported by the reporting agent. The number of Tax Data "B" Records appearing on one tape reel will depend on the number of taxpayers represented (only one tax return for each EIN).

2. All Tax Data "B" Records must be for the current tax period. All money amount fields must contain dollars and cents, must be right justified with zero filling on left and must be zero filled if non-significant. Fields identified as indicators or signs must always carry a value. Other non-money fields must be left justified and blank filled on right with blank filling of non-significant fields.

3. Exhibit #9 provides details of "B" record format specifications.

.09 Checkpoint Totals "C" Record

1. Write this record after each 100 or fewer (if less than 100 remain) Tax Data "B" Records. Each Checkpoint Totals "C" Record must contain a count of Tax Data "B" Records, the sum of Total Taxes, and the sum of the Total Amounts of FTDs for all Tax Data "B" Records which have not been summarized in preceding Checkpoint Totals "C" Records.

2. The Checkpoint Totals "C" Record must be followed by a Tax Data "B" Record except when the Checkpoint Totals "C" Record is at the end of the file, it will be followed by an End of File "E" Record.

3. All Checkpoint Totals "C" Records must be fixed length. All money amount fields will contain dollars and cents. The Checkpoint Totals "C" Records cannot be followed by a tape mark.

4. Exhibit #10 provides details of "C" record format specifications.

.10 End of File "E" Record

1. Write this record after the last Checkpoint Totals "C" Record in the file. All money amounts must contain dollars and cents. All End of File "E" Records must be fixed length. This record must be followed only by a tape mark and trailer label. (See Exhibit 11).

2. Exhibit #11 provides details of "E" record format specifications.

SEC. 14. EFFECT ON OTHER DOCUMENTS

.01 This revenue procedure supersede Rev. Proc. 86-27.

SEC. 15. EFFECTIVE DATE

.01 This revenue procedure is effective January 1, 1988.

                               EXHIBIT 1