[Federal Register Volume 70, Number 71 (Thursday, April 14, 2005)]
[Rules and Regulations]
[Pages 19694-19697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-6718]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[TD 9196]
RIN 1545-BE21


Withholding Exemptions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains regulations providing guidance under 
section 3402(f) of the Internal Revenue Code (Code) for employers and 
employees relating to the Form W-4, ``Employee's Withholding Allowance 
Certificate.'' These regulations provide rules for the submission of 
copies of certain withholding exemption certificates to the IRS, the 
notification provided to the employer and the employee of the maximum 
number of withholding exemptions permitted, and the use of substitute 
forms. The text of the 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 in this issue of the 
Federal Register. The amendments to the final regulations provide 
cross-references to the temporary regulations.

DATES: These regulations are effective April 14, 2005.

FOR FURTHER INFORMATION CONTACT: Margaret A. Owens, (202) 622-0047 (not 
a toll-free call).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations do not impose any new information collection. The
    Office of Management and Budget (OMB) previously approved the 
information collection requirements concerning Form W-4 contained in 
the regulation under section 6001 (Sec.  31.6001-5; OMB Control No. 
1545-0798) and in the regulation under section 3402 (Sec.  
31.3402(f)(2)-1; OMB Control No.1545-0010) under the provisions of the 
Paperwork Reduction Act, 44 U.S.C. 3501 et seq. Books or records 
relating to a 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

    Under section 3402(f)(2)(A), every employee is required to furnish 
his or her employer with a signed withholding exemption certificate on 
or before commencing employment. Regulations prescribe the form of the 
certificate as the Form W-4. The maximum number of withholding 
exemptions to which an employee is entitled depends upon the employee's 
marital status, the employee's filing status, the number of the 
employee's dependents, the number of exemptions claimed by the 
employee's spouse (if any) on a Form W-4, and the amount of the 
employee's estimated itemized deductions, tax credits, and certain 
other deductions from income. A Form W-4 may be in either paper or 
electronic form.
    Section 31.3402(f)(2)-1(g) of the existing regulations requires 
employers to submit copies of certain questionable Forms W-4 to the 
IRS. Employers must submit a copy of each Form W-4 on which an employee 
claims more than 10 withholding exemptions. Employers must also submit 
a copy of each Form W-4 on which the employee claims a complete 
exemption from withholding for the taxable year if the employer 
reasonably expects, when the Form W-4 is received, that the employee's 
wages from that employer will usually be $200 or more per week.
    In addition, the existing regulations provide that, upon written 
request from the IRS, employers are required to submit to the IRS 
copies of withholding exemption certificates which are received from 
employees or groups of employees identified by the IRS in the written 
request.
    The existing regulations provide that the IRS may notify an 
employer that a named employee is not entitled to claim a complete 
exemption from withholding and is not entitled to claim a total number 
of withholding exemptions more than the maximum number specified by the 
IRS in the notice. The IRS will issue such notice if the IRS finds that 
the withholding exemption certificate contains a materially incorrect 
statement or if the IRS finds, after written request to the employee 
for verification of the statements on the certificate, that the IRS 
lacks sufficient information to determine if the certificate is 
correct. In these cases, the employer must withhold tax based on the 
maximum number of withholding exemptions specified in the notice from 
the IRS unless otherwise notified by the IRS. However, if the employee 
furnishes

[[Page 19695]]

a new certificate that claims a number of withholding exemptions less 
than the number specified in the written notice to the employer, the 
employer must withhold tax based on that certificate.
    Under the existing regulations, if the employee furnishes a new 
withholding exemption certificate that claims complete exemption from 
withholding or claims a number of withholding exemptions more than the 
maximum number specified by the IRS in the notice, the employee must 
submit the new withholding exemption certificate and a written 
statement to support the claims made by the employee on the new 
certificate to the IRS or to the employer, who must then submit them to 
the IRS. The employer must disregard this new certificate until the IRS 
notifies the employer to withhold tax based on the new certificate.

Explanation of Provisions

    The temporary regulations change the procedures for submitting 
copies of Forms W-4 to the IRS and allow the IRS to issue a notice 
specifying the maximum number of withholding exemptions permitted 
without first obtaining a copy of the withholding exemption certificate 
from the employer.
    The temporary regulations also clarify that a substitute 
withholding exemption certificate developed by the employer may be used 
in lieu of the prescribed Form W-4, if the employer also provides the 
worksheets contained in the Form W-4 in effect at that time. The 
temporary regulations also provide that employers may refuse to accept 
a substitute form developed by an employee and that the employee 
submitting such form will be treated as failing to furnish a 
withholding exemption certificate.
    As noted in the Background portion of this preamble, Sec.  
31.3402(f)(2)-1(g) of the existing regulations sets forth rules for 
employers to submit copies of certain questionable Forms W-4 to the 
IRS. The Treasury Department and the IRS want to relieve employers of 
the burden of submitting copies of certain questionable Forms W-4 and 
want to more effectively address withholding noncompliance by using 
information already provided to the IRS. Under the temporary 
regulations, employers are no longer required to submit a copy of any 
Form W-4 on which an employee claims more than 10 withholding 
exemptions. In addition, under the temporary regulations, employers are 
no longer required to submit a copy of any Form W-4 on which an 
employee claims complete exemption from withholding for the taxable 
year if the employer reasonably expects, when the Form W-4 is received, 
that the employee's wages from that employer will usually be $200 or 
more per week. Instead, an employer must submit a copy of any currently 
effective withholding exemption certificate only if directed to do so 
in a written notice to the employer from the IRS or if directed to do 
so under any published guidance. As under existing regulations, the 
written notice may direct the employer to submit copies of Forms W-4 
for certain employees. The temporary regulations also authorize the IRS 
to provide specific criteria for those Forms W-4 that must be submitted 
either in a written notice to an employer or by published guidance.
    The temporary regulations provide that the IRS may issue a notice 
to an employer specifying the maximum number of withholding exemptions 
permitted for a specific employee. The IRS may issue such a notice 
after determining that a copy of a withholding exemption certificate 
submitted to the IRS contains a materially incorrect statement or after 
the employee fails to respond adequately to a request for verification 
of the statements on the certificate.
    The IRS may also issue such a notice after it determines an 
employee is not entitled to claim complete exemption from withholding 
or more than a specified number of withholding exemptions based on IRS 
records without first obtaining a copy of the withholding exemption 
certificate from the employer.
    After the IRS issues a notice of the maximum number of withholding 
exemptions permitted, if the employee wants to claim complete exemption 
from withholding or claim a number of withholding exemptions more than 
the maximum number specified by the IRS in the notice, the employee 
must submit a new withholding exemption certificate and a written 
statement to support the claims made by the employee on the new 
certificate to the IRS. To reduce burdens on employers and to more 
efficiently respond to the employee, the temporary regulations provide 
that the employee must send this new certificate and written statement 
directly to the IRS. The option under existing regulations to send this 
information to the employer for forwarding to the IRS has been removed. 
The employer must disregard this new certificate until the IRS notifies 
the employer to withhold tax based on the new certificate. However, if, 
at any time, the employee furnishes a certificate that claims a number 
of withholding exemptions less than the maximum number specified in the 
written notice to the employer, the employer must withhold tax based on 
that certificate.
    The temporary regulations provide a period during which the 
employee can address the pending withholding adjustment by providing a 
new certificate and written statement to the IRS. The temporary 
regulations provide that the earliest the notice of the maximum number 
of withholding exemptions permitted may be effective is 45 calendar 
days after the date of the notice. The notice may specify a later 
effective date.
    The Treasury Department and the IRS are considering additional 
amendments to the regulations under section 3402 to address other 
issues including, but not limited to, the criteria for identifying a 
valid withholding exemption certificate. The Treasury Department and 
the IRS specifically welcome comments on this issue in response to the 
related notice of proposed rulemaking in the Proposed Rules section in 
this issue of the Federal Register.

Effective Date

    These regulations are applicable on April 14, 2005.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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. For 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
refer to the Special Analyses of the preamble to the cross-reference 
notice of proposed rulemaking published in the Proposed Rules section 
in this issue of the Federal Register. Pursuant to section 7805(f) of 
the Code, these regulations will be 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 Margaret A. Owens, 
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities), IRS. However, other personnel from the IRS and 
the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping

[[Page 19696]]

requirements, Social Security, Unemployment compensation.

Amendments to the Regulations

0
Accordingly, 26 CFR part 31 is amended as follows:

PART 31--EMPLOYMENT TAXES

0
Paragraph 1. The authority citation for part 31 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 31.3402(f)(5)-1T also issued under 26 U.S.C. 3402(i) and 
(m). * * *

0
Par. 2. Section 31.3402(f)(2)-1 is amended by revising paragraph (g) to 
read as follows:


Sec.  31.3402(f)(2)-1  Withholding exemption certificates.

* * * * *
    (g) For further guidance, see Sec.  31.3402(f)(2)-1T(g).

0
Par. 3. Section 31.3402(f)(2)-1T is added to read as follows:


Sec.  31.3402(f)(2)-1T  Withholding exemption certificates (temporary).

    (a) through (f) [Reserved]. For further guidance, see Sec.  
31.3402(f)(2)-1(a) through (f).
    (g) Submission of certain withholding exemption certificates and 
notice of the maximum number of withholding exemptions permitted--(1) 
Submission of certain withholding exemption certificates. (i) An 
employer must submit to the Internal Revenue Service (IRS) a copy of 
any currently effective withholding exemption certificate as directed 
in a written notice to the employer from the IRS or as directed in 
published guidance. A notice to the employer may relate either to one 
or more named employees; to one or more reasonably segregable units of 
the employer; or to withholding exemption certificates under certain 
specified criteria. The notice will designate the IRS office where the 
copies of the withholding exemption certificates must be submitted. 
Employers may also be required to submit copies of withholding 
exemption certificates under certain specified criteria when directed 
to do so by the IRS in published guidance. For purposes of the 
preceding sentence, the term published guidance means a revenue 
procedure or notice published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2) of this chapter). Alternatively, upon notice from 
the IRS, the employer must make withholding exemption certificates 
received from one or more named employees; from one or more reasonably 
segregable units of the employer; or from employees who have furnished 
withholding exemption certificates under certain specified criteria, 
available for inspection by an IRS employee (e.g., a compliance check).
    (ii) After a copy of a withholding exemption certificate has been 
submitted to the IRS under this paragraph (g)(1), the employer must 
withhold tax on the basis of the withholding exemption certificate, if 
the withholding exemption certificate meets the requirements of Sec.  
31.3402(f)(5)-1, unless that certificate must be disregarded based on a 
notice of the maximum number of withholding exemptions permitted under 
the provisions of paragraph (g)(2) of this section.
    (2) Notice of maximum number of withholding exemptions permitted. 
(i) The IRS may notify the employer in writing that the employee is not 
entitled to claim a complete exemption from withholding and the 
employee is not entitled to claim a total number of withholding 
exemptions more than the maximum number of withholding exemptions 
specified by the IRS in the written notice. The notice will specify the 
IRS office to be contacted for further information. The notice of 
maximum number of withholding exemptions permitted may be issued if--
    (A) The IRS determines that a copy of a withholding exemption 
certificate submitted under paragraph (g)(1) of this section contains a 
materially incorrect statement or determines, after a request to the 
employee for verification of the statements on the certificate, that 
the IRS lacks sufficient information to determine if the certificate is 
correct; or
    (B) The IRS otherwise determines that the employee is not entitled 
to claim a complete exemption from withholding and is not entitled to 
claim more than a specified number of withholding exemptions.
    (ii) If the IRS provides a written notice to the employer under 
this paragraph (g)(2), the IRS will also provide the employer with a 
written notice for the employee (employee notice) that identifies the 
maximum number of withholding exemptions permitted and the process by 
which the employee can provide additional information to the IRS for 
purposes of determining the appropriate number of withholding 
exemptions. The IRS will also mail a similar written notice to the 
employee's last known address. For further guidance regarding the 
definition of last known address, see Sec.  301.6212-2 of this chapter.
    (iii) If the employee is still employed by the employer, the 
employer must furnish the employee notice to the employee within 10 
business days of receipt. If the employee is no longer employed by the 
employer, the employer is not required to furnish the employee notice 
to the employee but the employer must send a written response to the 
IRS office designated in the notice indicating that the employee is no 
longer employed by the employer.
    (iv) Except as provided in paragraph (g)(2)(v) and (vi) of this 
section, the employer must withhold tax on the basis of the maximum 
number of withholding exemptions specified in the written notice 
received from the IRS. The employer must withhold tax in accordance 
with the notice as of the date specified in the notice, which shall be 
no earlier than 45 calendar days after the date of the notice.
    (v) If a withholding exemption certificate is in effect with 
respect to the employee before the employer receives a notice from the 
IRS of the maximum number of withholding exemptions permitted under 
this paragraph (g)(2), the employer must continue to withhold tax in 
accordance with the existing withholding exemption certificate rather 
than on the basis of the notice if the existing withholding exemption 
certificate does not claim complete exemption from withholding and 
claims a number of withholding exemptions less than the maximum number 
specified by the IRS in the written notice to the employer.
    (vi) If the employee furnishes a new withholding exemption 
certificate after the employer receives a notice from the IRS of the 
maximum number of withholding exemptions permitted under this paragraph 
(g)(2), the employer must withhold tax on the basis of that new 
certificate as currently effective only if the new certificate does not 
claim complete exemption from withholding and claims a number of 
withholding exemptions less than the number specified by the IRS in the 
notice to the employer. If any new certificate claims complete 
exemption from withholding or claims a number of withholding exemptions 
more than the maximum number specified by the IRS in the notice, then 
the employer must disregard the new certificate and must continue to 
withhold tax on the basis of the maximum number specified in the notice 
received from the IRS unless the IRS by subsequent written notice 
advises the employer to withhold tax on the basis of that new 
certificate. If the employee wants to put a new certificate into effect 
to claim complete exemption from withholding or to claim a number of 
withholding exemptions more than the maximum number specified by the 
IRS in the notice to the employer, the employee must submit to the IRS 
office

[[Page 19697]]

designated in the employee notice earlier furnished to the employee 
under this paragraph (g)(2) that new certificate and a written 
statement to support the claims made by the employee on the new 
certificate.
    (3) Definition of employer. For purposes of this paragraph (g), the 
term employer includes any person authorized by the employer to receive 
withholding exemption certificates, to make withholding computations, 
or to make payroll distributions.
    (4) Effective date. This paragraph (g) applies on April 14, 2005. 
The applicability of this paragraph (g) expires on or before April 14, 
2008.

0
Par. 4. Section 31.3402(f)(5)-1 is amended by revising paragraph (a) to 
read as follows:


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

    (a) For further guidance, see Sec.  31.3402(f)(5)-1T(a).
* * * * *

0
Par. 5. Section 31.3402(f)(5)-1T is added to read as follows:


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

    (a)(1) Form W-4. Form W-4, ``Employee's Withholding Allowance 
Certificate,'' is the form prescribed for the withholding exemption 
certificate required to be furnished under section 3402(f)(2). A 
withholding exemption certificate must be prepared in accordance with 
the instructions and regulations applicable thereto, and must set forth 
fully and clearly the data therein called for. Blank copies of paper 
Forms W-4 will be supplied to employers upon request to the Internal 
Revenue Service (IRS). An employer may also download and print Form W-4 
from the IRS Internet site at http://www.irs.gov. In lieu of the 
prescribed form, employers may prepare and use a form the provisions of 
which are identical with those of the prescribed form, but only if 
employers also provide employees with all the tables, instructions, and 
worksheets contained in the Form W-4 in effect at that time and only if 
employers comply with all revenue procedures relating to substitute 
forms in effect at that time. Employers may refuse to accept a 
substitute form developed by an employee and the employee submitting 
such form will be treated as failing to furnish a withholding exemption 
certificate. For further guidance regarding the employer's obligations 
when an employee is treated as failing to furnish a withholding 
exemption certificate, see Sec.  31.3402(f)(2)-1.
    (2) Effective date. This paragraph (a) applies on April 14, 2005. 
The applicability of this paragraph (a) expires on or before April 14, 
2008.
    (b) through (c) [Reserved]. For further guidance, see Sec.  
31.3402(f)(5)-1(b) through (c).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: March 28, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-6718 Filed 4-13-05; 8:45 am]
BILLING CODE 4830-01-P