Temporary Regs Authorize Electronic Changes to W-4

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to Form W-4, Employee's Withholding Allowance Certificate. The temporary regulations authorize employers to establish systems that permit employees to make certain changes to their Forms W-4 electronically. The regulations provide employers and employees with guidance necessary to comply with the law and affect employers who choose to establish electronic systems and employees who use them. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: These temporary regulations are effective December 21, 1994.

 FOR FURTHER INFORMATION CONTACT: Russ Weinheimer, (202) 622-6060 (not a toll-free number).

 SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-1435.

 For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross- referencing notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

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). The proposed regulations would authorize employers to establish electronic systems for employees to use in filing changes to their Forms W-4. These electronic systems could not be used for Forms W-4 required upon commencement of employment, on which more than 10 withholding exemptions are claimed, or, if the employee is expected to earn more than $200 per week, on which exemption from withholding is claimed. In addition, under the proposed regulations an employer would have to retain a paper option for those employees who are eligible to use the electronic system but do not wish to do so.

 Written comments responding to the notice have been received, and a public hearing was held on July 15, 1994. The commentators generally approved of the proposed regulations, but also urged that the IRS go farther. Specifically, they recommended that electronic systems be allowed for all Forms W-4 without exception, and that employers be allowed to mandate the use of an electronic system rather than be required to maintain a paper option for their employees. One commentator, however, was concerned about employees being overwhelmed by the transition to electronic systems and requested confirmation that a paper option would continue to be available.

EXPLANATION OF PROVISIONS

 While the IRS has not concluded its evaluation of the merits of these recommendations, it has been decided that the final regulations on this subject will not further restrict situations where electronic Forms W-4 can be used. In order to allow the use of electronic systems for filing Forms W-4 as quickly as possible, these temporary regulations authorize employers to establish electronic systems as contemplated in the proposed regulations, effective immediately.

 The IRS invites further comments on the electronic filing of Forms W-4 and the practical implementation of systems that make such filing possible. To this end, a notice of proposed rulemaking appears in the Proposed Rules section of this issue of the Federal Register. While the text of these temporary regulations also serves as the text for those proposed regulations, comments are specifically requested on whether electronic systems should be allowed for additional categories of Forms W-4 and the extent to which employers should be allowed to mandate the use of an electronic system. Those further comments will be considered in determining the appropriate balance between the advantages to employers of fully electronic systems, ensuring adequate employee access, and the IRS's concerns relating to enforcement. This expanded comment process and, in particular, comments and insights arising from the experience of employers and the IRS during this interim period, is expected to provide information that is very helpful in developing final regulations.

 In response to requests for clarification, these temporary regulations differ from the previously proposed regulations in two ways. First, the previously proposed regulations would have required the electronic system established by the employer to document occasions of employee access. The temporary regulations provide that the system need not document all such occasions; the system need only document those occasions of employee access that result in a change to the Form W-4. Second, the previously proposed regulations would have required the employer to supply the IRS with a hard copy of the electronic Form W-4 upon request. The temporary regulations clarify that, while the hard copy must contain exactly the same information as the paper Form W-4, it need not be a facsimile of the paper form.

 One commentator expressed concern about the requirement that the electronic filing contain exactly the same information as the paper Form W-4. This commentator stated that such a requirement would be unduly burdensome if it encompassed the worksheets accompanying the form as well as the Form W-4 certificate itself. That result is not contemplated. The worksheets are intended merely as a convenience to the employee, to assist the employee in completing the form. The IRS therefore does not anticipate that the worksheets would be included as part of the information in the electronic filing.

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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Russ Weinheimer, 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.

Treasury Decision 8577

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 31.3402(f)(5)-2T is added to read as follows:

Section 31.3402(f)(5)-2T Electronic filing of withholding exemption certificates (temporary).

(a) IN GENERAL. An employer may provide its employees with the option of electronic filing of those withholding exemption certificates to which this section applies. The employer must, nevertheless, provide its employees with the option of filing paper withholding exemption certificates.

(b) CERTIFICATES TO WHICH THIS SECTION APPLIES -- (1) IN GENERAL. This section applies to any withholding exemption certificate permitted or required by section 31.3402(f)(2)-1(b) (change in status affecting calendar year) or section 31.3402(f)(2)- 1(c) (change in status affecting next calendar year). This section does not apply to the withholding exemption certificate required by section 31.3402(f)(2)-1(a) (commencement of employment).

(2) EXCEPTION FOR CERTIFICATES THAT MUST BE SUBMITTED. Notwithstanding paragraph (b)(1) of this section, this section does not apply to any withholding exemption certificate for which submission to the Internal Revenue Service is required under section 31.3402(f)(2)-1(g)(1) (regarding certificates that claim more than 10 withholding exemptions and certain claims of exemption from withholding).

(c) REQUIREMENTS. (1) The electronic system must reliably identify the user, ensure that the information received is the information sent, and document all occasions of employee access that result in a change to the Form W-4.

(2) The electronic filing must contain exactly the same information as the paper Form W-4.

(3) Upon request by the Service, the employer must supply a hard copy 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 hard copy of the electronic Form W-4 must contain exactly the same information as, but need not be a facsimile of, the paper Form W-4.

(d) EFFECTIVE DATE. This section applies to withholding exemption certificates that are required to be filed after December 21, 1994.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

SECTION 602.101 [Amended]

Par. 4. Section 602.101, the table in paragraph (c) is amended by adding the entry "31.3402(f)(5)-2T . . . . 1545-1435" in numerical order.