[Federal Register Volume 72, Number 134 (Friday, July 13, 2007)]
[Rules and Regulations]
[Pages 38478-38484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-13492]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 9337]
RIN 1545-BE21
Withholding Exemptions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final 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.'' The regulations provide rules for income tax
withholding when the IRS notifies the employer and the employee of the
maximum number of withholding exemptions permitted. The regulations
also provide rules for the use of substitute forms and preserve the
IRS's ability to require the submission of certain copies of
withholding exemption certificates. The regulations primarily affect
taxpayers who are employers and employees.
DATES: Effective Date: These regulations are effective July 13, 2007.
Applicability Date: Except as provided in section 31.3402(f)(2)-
1(g)(5), section 31.3402(f)(2)-1(g) applies on April 14, 2005. Section
31.3402(f)(2)-1(g)(2)(iii)(A), (B), and (C) and section 31.3402(f)(2)-
1(g)(2)(ix) apply on October 11, 2007, except taxpayers may rely on
such paragraphs for notices issued prior to such date. Section
31.3402(f)(5)-1(a)(1) applies on April 14, 2005. Section 31.3402(f)(5)-
1(a)(2) applies October 11, 2007.
FOR FURTHER INFORMATION CONTACT: Ilya Enkishev, (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 regulations under section 6001 (Sec. 31.6001-5; OMB Control No.
1545-0798) and in the regulations 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) of the Internal Revenue Code, every
employee is required to furnish his or her employer with a signed
withholding exemption certificate on or before commencing employment.
The 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.
For many years, the regulations under section 3402(f) required
employers to submit to the IRS a copy of each Form W-4 on which an
employee claimed more than a certain number of withholding exemptions.
Employers had to also submit a copy of each Form W-4 on which the
employee claimed a complete exemption from withholding for the taxable
year if the employer reasonably expected, when the Form W-4 was
received, that the employee's wages from that employer would usually be
$200 or more per week. The regulations also provided that the IRS could
notify an employer that a named employee was not entitled to claim a
complete exemption from withholding and was not entitled to claim more
withholding exemptions than the number specified by the IRS in the
notice. The IRS issued this notice (often called a ``lock-in letter'')
if the IRS found that the withholding exemption certificate contained a
materially incorrect statement or if the IRS found, after written
request to the employee for verification of the statements on the
certificate, that the IRS lacked sufficient information to determine if
the certificate was correct. In these cases, the employer was required
to withhold tax based on the number of withholding exemptions specified
in the notice from the IRS unless otherwise notified by the IRS.
On April 14, 2005, the Department of Treasury published temporary
regulations (TD 9196) in the Federal Register (70 FR 19694) under
section 3402(f) modifying the rules relating to the submission of Forms
W-4 and relating to the IRS' notification of the number of withholding
exemptions permitted. The Department of Treasury also published a
notice of proposed rulemaking (REG-162813-04) cross-referencing the
temporary regulations in the Federal Register on the same day.
Effective when published, the temporary regulations changed the
procedures for submitting copies of Forms W-4 to the IRS. Specifically,
under the temporary regulations employers were no longer routinely
required to submit a copy of any Form W-4 on which an employee claimed
more than 10 withholding exemptions. In addition, employers were no
longer routinely required to submit a copy of any Form W-4 on which an
employee claimed complete exemption from withholding for the taxable
year if the employer reasonably expected, when the Form W-4 was
received, that the employee's wages from that employer would usually be
$200 or more per week. Rather, the temporary regulations provided that
employers must submit copies of Forms W-4 only if instructed to do so
in published guidance or in a written notice to the employer from the
IRS. At this time, the IRS has not issued any published guidance
requiring the submission of Forms W-4 to the IRS.
[[Page 38479]]
The temporary regulations authorized the IRS to issue a notice to
an employer specifying the maximum withholding exemptions permitted to
be claimed by the employee without first obtaining a copy of the
withholding exemption certificate from the employer. Under the
temporary regulations, the IRS issued this notice to the employer with
a copy for the employee. The IRS also sent another copy to the employee
at the employee's last known address. The temporary regulations
provided that the employer must withhold tax in accordance with the
notice as of the date specified in the notice, which was required to be
at least 45 calendar days after the date of the notice. If the employee
wanted to claim complete exemption from withholding or claim more
withholding exemptions than the number specified by the IRS in the
notice, the employee must contact the IRS to provide information to
support the claim. The previous, and now obsolete, regulations
permitted the employee to send this information to the employer to
forward to the IRS. To reduce burdens on employers and to facilitate
efficient responses to the employee, the temporary regulations required
the employee to contact the IRS directly.
Finally, the temporary regulations also permitted employers to give
their employees a substitute withholding exemption certificate, if the
employers also gave them the worksheets contained in the Form W-4 in
effect at that time. The temporary regulations also authorized
employers to refuse to accept a substitute form developed by an
employee.
The proposed regulations were identical to the temporary
regulations described in the Preamble. The publication of the proposed
and temporary regulations followed a comprehensive review of
withholding compliance, which found that withholding noncompliance
remained a problem with some employees. In connection with the
publication of the proposed and temporary regulations, the IRS
developed a process to use information already reported on Forms W-2,
Wage and Tax Statements, to more effectively identify and address
employees with withholding compliance problems.
A public hearing on the proposed regulations was held on July 26,
2005. Written and electronic comments responding to the notice of
proposed rulemaking were received. After consideration of all the
comments, the Department of Treasury adopts the proposed regulations,
as modified herein, as final regulations, and removes the corresponding
temporary regulations.
Summary of Comments and Explanation of Provisions
The publication of this Treasury decision follows the
implementation of the IRS's new process for using information already
reported on Forms W-2 to more effectively identify employees with
withholding compliance problems. The modifications to the proposed
regulations that are included in these final regulations reflect both
consideration of the comments submitted by taxpayers and changes needed
following the implementation of the new process.
The comments received were generally favorable to the changes
proposed by the proposed regulations and implemented by the temporary
regulations. Commentators observed that the regulations reduced burdens
on employers by eliminating the requirement that employers submit
questionable Forms W-4 to the IRS and the requirement that employers
transmit communications from the employee to the IRS. One commentator
recommended that, as an alternative to the withholding compliance
program, the problem of underwithholding should be addressed by
increasing the employee's estimated tax penalty if insufficient taxes
are withheld and otherwise paid by the employee for the year. While tax
penalties do deter some employees from submitting Forms W-4 claiming
excessive withholding exemptions, the IRS has concluded that the
withholding compliance program implemented under the temporary
regulations is a more efficient and effective manner of deterring
serious underwithholding.
Submission of Withholding Exemption Certificates
Under the temporary regulations, employers were no longer routinely
required to submit copies of Forms W-4 that met the previously
established criteria, often referred to as ``Questionable W-4s''.
Rather, the temporary regulations provided that an employer must submit
a copy of any currently effective Form W-4 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.
Some commentators observed that requiring employers to submit
questionable Forms W-4 to the IRS may have deterred employees from
furnishing a Form W-4 claiming excessive withholding exemptions. Some
employers have expressed the concern that eliminating the submission
requirement will result in more employees submitting Forms W-4 claiming
excessive withholding allowances. While the Department of Treasury and
the IRS acknowledge the possible deterrent effect of a requirement to
submit certain Forms W-4 to the IRS, they have concluded that the final
regulations are a more efficient and effective manner of deterring
withholding compliance problems. Accordingly, the final regulations do
not require the routine submission of Forms W-4, but permit the IRS to
require submission of Forms W-4 under specific criteria either by
written notice or by future published guidance. The final regulations
do not change an employee's obligations to provide an accurate Form W-4
to an employer and to satisfy his or her tax obligations on a timely
basis. Thus, employees may be subject to penalties if they claim
excessive withholding exemptions on Forms W-4 or fail to file their tax
returns and pay their full tax liabilities on a timely basis.
Some commentators have suggested that if the IRS requires an
employer to submit certain Forms W-4 by a written notice or published
guidance, the employer should have the ability to provide the requested
Forms W-4 by electronic means. The final regulations do not address
this comment as the available and appropriate means for submission can
be determined by the IRS in specific cases or in the context of any
future published guidance requiring the submission of Forms W-4.
Valid and Invalid Withholding Exemption Certificates
In the Preamble to the proposed and temporary regulations, the
Department of Treasury and IRS requested comments specifically with
regard to the criteria for identifying a valid withholding exemption
certificate contained in Sec. 31.3402(f)(5)-1(a)(1) of the Employment
Tax Regulations. While a few comments were received, they were not
likely to provide significant assistance to employers or the IRS in
identifying potentially invalid withholding exemption certificates.
Accordingly, these final regulations do not change the existing rules
on when to treat a withholding exemption certificate as invalid.
Effect of Notice Specifying the Maximum Withholding Exemptions
Permitted
The final regulations, like the temporary regulations, authorize
the IRS to issue a notice to an employer specifying the maximum number
of
[[Page 38480]]
withholding exemptions permitted for a specific employee. The IRS may
issue such a notice after it determines an employee is not entitled to
claim 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.
Alternatively, the IRS may issue such notice after it reviews a
particular withholding exemption certificate and determines that the
withholding exemption certificate 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.
The IRS will send the notice both to the employer (with a copy for
the employee) and to the employee directly. The final regulations
provide a period during which the employee can address the pending
withholding adjustment by contacting the IRS. The final regulations
provide that the earliest the notice may be effective is 45 calendar
days after the date of the notice. The notice may specify a later
effective date.
One commentator expressed a concern held by some employers
regarding the need to ``warehouse'' the notice for the 45-day period
and suggested that instead the IRS either (1) send the notice first to
the employee before involving the employer or (2) not require the
employer to implement the notice until a subsequent ``final'' notice is
sent to the employer. The final regulations retain the approach of the
proposed and temporary regulations, including a delay period, to
balance the need to ensure that the employee receives the notice and to
provide time for the employee to discuss the appropriate withholding
with the IRS. Consistent with the intent to ensure that the employee
receives the notice, the final regulations also provide that if the IRS
is unable to determine a last known address for the employee, the IRS
will use other available information as appropriate to provide the
notice to the employee.
The final regulations also clarify that the notice to an employer
specifying the maximum withholding exemptions permitted for a specific
employee will also specify the marital status for purposes of
calculating the required withholding under the notice. Accordingly, the
employer must use the maximum number of withholding exemptions
permitted and marital status specified in the notice for calculating
income tax withholding, unless a new withholding exemption certificate
is submitted by the employee that must be honored under these final
regulations. Specifically, if, at any time, the employee furnishes a
withholding exemption certificate that claims a marital status, a
number of withholding exemptions, and any additional withholding that
results in more withholding than would result from applying the marital
status and number of withholding exemptions permitted in the notice,
the employer must withhold tax based on that certificate. The IRS may
also issue a modification notice to the employer that the employer must
implement as of the date in the notice. This notice may change the
marital status and/or the maximum number of withholding exemptions
permitted.
Although this issue was not raised in the comments, in the course
of conducting the withholding compliance program, the IRS has received
questions from taxpayers asking about the implications of receiving a
notice specifying the maximum number of withholding exemptions
permitted and marital status when possible exclusions from withholding
apply. Receipt of an IRS notice does not impose a requirement to
withhold income taxes where one does not already exist. For example,
under section 3401(a)(8)(A)(i) of the Code, employers do not have to
withhold income taxes from payments made to employees who are United
States citizens working in foreign countries if the employer reasonably
believes that the payments are excluded from taxation under section 911
of the Code. Issuance of an IRS notice to an employer properly relying
on this exclusion does not impose a withholding requirement on amounts
covered by the exclusion. However, if withholding is required, such as
on wages paid in excess of the amount excludable under section 911, or
if the exclusion ceases to apply to amounts paid by the employer to the
employee, the employer must withhold on the basis of the marital status
and maximum number of withholding exemptions set forth in the IRS
notice. An example has been added to the regulations to illustrate this
point.
Employer Furnishing IRS Notice to Employee
The final regulations provide that, if the employee is still
employed by the employer, the employer must furnish the notice of
maximum number of withholding exemptions permitted to the employee
within 10 business days of receipt. Commentators questioned whether
they may furnish the employee's copy electronically. The final
regulations clarify that the employer may furnish the copy of the IRS
notice to the employee within the 10 required business days using any
reasonable business practice. For example, an employer might provide
the employee with a paper copy of the notice or might transmit a copy
using a secure and reliable electronic means of communication.
Terminated, Rehired, and Seasonal Employees
The proposed and temporary regulations provided that the employer
is not required to furnish the IRS employee notice to the employee if
the employee is no longer employed by the employer. In such a case, 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. Some commentators have expressed concerns over application of
the regulations to employees who are not currently performing services,
but may resume employment in the future, such as seasonal employees or
rehired employees. Specifically, the comments requested assistance in
determining when an employee is ``no longer employed,'' and asked
whether an employer is required to retain an IRS notice for future
implementation should an employee be rehired or resume performance of
services. One commentator recommended that the employer be required to
retain the notice no later than the end of the calendar year in which
the employee terminates, or one year after termination.
After consideration of these comments, the final regulations modify
the proposed regulations to clarify that the determination of whether
the employee is employed is made as of the date of the notice, and is
based on all the facts and circumstances, including whether the
employer has treated the employment relationship as terminated for
other purposes. The final regulations also specifically state that an
employee who is not currently performing services is nevertheless
employed for purposes of this rule if on the date of the notice (a) The
employer pays wages subject to income tax withholding to the employee
with respect to prior employment on or after the date specified in the
notice, (b) the employer reasonably expects the employee to resume the
performance of services for the employer within twelve months of the
date of the notice, or (c) the employee is on a bona fide leave of
absence if the period of such leave does not exceed twelve months or if
the individual retains a right to reemployment with the employer by
[[Page 38481]]
contract or under an applicable statute, such as the Family Medical
Leave Act.
If the employer must furnish the notice under these final
regulations, the employer must withhold based on the notice as of the
date specified in the notice unless one of the regulatory exceptions
applies. Specifically, the employer must withhold based on the notice
unless (a) the employer receives a modification notice, (b) the
employee has provided or provides a new Form W-4 that results in more
withholding than would result based on the notice, (c) the employer is
required to furnish the notice only because the employer reasonably
expects the employee to resume the performance of services within
twelve months of the date of the notice but the employee does not
resume the performance of services until after such time, or (d) the
employment relationship is terminated for more than twelve months. The
regulations include examples to illustrate these requirements.
Notices to Other Employers
One commentator questioned whether an employer has any obligation
with respect to an IRS notice issued to another employer, such as a
related entity or an employer using the same entity as its ``payroll
agent,'' with respect to the same employee. The commentator also
proposed that an employer be able to rely on any subsequent notices
provided by the IRS with regard to an employee (for example, modifying
the maximum number of withholding exemptions permitted) while the
employee was employed by another employer.
The final regulations do not adopt these proposals. Other than when
an employer qualifies as a ``successor employer'' within the meaning of
section 3121(a)(1) of the Code and Sec. 31.3121(a)(1)-1(b) of the
Employment Tax Regulations and uses the alternate procedure described
in Rev. Proc. 2004-53, 2004-34 I.R.B. 320, an employer's liability for
withholding under section 3402 is determined separately with regard to
that employer. Rev. Proc. 2004-53 provides that, under the alternative
procedure, the predecessor employer must transfer to the successor
employer all current Forms W-4 that were provided to the predecessor by
the acquired employees and any written notices received from the IRS
under Sec. 31.3402(f)(2)-1(g). The revenue procedure also provides
that the successor employer must withhold amounts from the employees on
the basis of the maximum number of withholding exemptions specified in
any written notices from the IRS under Sec. 31.3402(f)(2)-1(g).
Accordingly, the provision of an IRS notice or a subsequent IRS notice
to another employer is not relevant in determining the employer's
obligation to withhold income taxes under these final regulations.
Substitute Forms W-4
Some commentators have suggested that employers must refuse to
accept substitute Forms W-4 developed by employees. After consideration
of this comment, the final regulations provide that employers may not
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.
Effective Date
The final regulations are generally effective on April 14, 2005,
the date the temporary regulations were published in the Federal
Register. However, the new provisions in the final regulations that (a)
specify when an employee who is not currently performing services is
employed for purposes of the requirements to furnish the employee
notice and withhold based on the notice, (b) require the employer to
withhold based on the notice if a terminated employment relationship is
resumed within 12 months, and (c) require employers to refuse to accept
substitute withholding exemption certificates developed by employees
apply on October 11, 2007. However, taxpayers may rely on such
provisions for notices issued prior to such date.
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, and because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking that preceded 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 Ilya Enkishev, Office
of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and the
Department of Treasury participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 31 is amended as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE
SOURCE
0
Paragraph 1. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
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) Submission of certain withholding exemption certificates and
notice of the maximum number of withholding exemptions permitted--(1)
Submission of certain withholding exemption certificates--(i) In
general. 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 submit withholding exemption certificates. A notice
to the employer to submit withholding exemption certificates 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. Alternatively, upon notice from the
IRS, the employer must make available for inspection by an IRS employee
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.
(B) Published guidance. Employers may also be required to submit
copies of withholding exemption certificates
[[Page 38482]]
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).
(ii) Withholding after submission of withholding exemption
certificate. 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. However, the employer may not
withhold on the basis of the withholding exemption certificate if the
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 the maximum number of withholding exemptions
permitted--(i) Notice to employer. The IRS may notify the employer in
writing that the employee is not entitled to claim a complete exemption
from withholding or more than the maximum number of withholding
exemptions specified by the IRS in the written notice. The notice will
also specify the applicable marital status for purposes of calculating
the required amount of withholding. 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 or
otherwise provided to the IRS 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.
(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) Notice to employee. If the IRS provides a notice to the
employer under this paragraph (g)(2), the IRS will also provide the
employer with a similar notice for the employee (employee notice) that
identifies the maximum number of withholding exemptions permitted and
specifies the marital status to be used for calculating the required
amount of withholding. The employee notice will also indicate the
process by which the employee can provide additional information to the
IRS for purposes of determining the appropriate number of withholding
exemptions and/or modifying the specified marital status. The IRS will
also mail a similar 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. If the IRS is unable to determine a
last known address for the employee, the IRS will use other available
information as appropriate to mail the notice to the employee.
(iii) Requirement to furnish. If the employee is employed by the
employer as of the date of the notice, the employer must furnish the
employee notice to the employee within 10 business days of receipt. The
employer may follow any reasonable business practice to furnish the
copy of the notice to the employee. For purposes of this paragraph
(g)(2)(iii), the determination of whether an employee is employed as of
the date of the notice is based on all the facts and circumstances,
including whether the employer has treated the employment relationship
as terminated for other purposes. An employee that is not performing
services for the employer as of the date of the notice is employed by
the employer as of the date of the notice for purposes of this
paragraph (g)(2)(iii) if--
(A) The employer pays wages with respect to prior employment to the
employee subject to income tax withholding on or after the date
specified in the notice;
(B) The employer reasonably expects the employee to resume the
performance of services for the employer within twelve months of the
date of the notice; or
(C) The employee is on a bona fide leave of absence if the period
of such leave does not exceed twelve months or the employee retains a
right to reemployment with the employer under an applicable statute or
by contract.
(iv) Requirement to notify the IRS. If the employer is not required
to furnish the notice to the employee under paragraph (g)(2)(iii) of
this section, the employer must send a written response to the IRS
office designated in the notice indicating that the employee is not
employed by the employer.
(v) Requirement to withhold based on the notice. If the employer is
required to furnish the employee notice to the employee under paragraph
(g)(2)(iii), then the employer must withhold tax on the basis of the
maximum number of withholding exemptions and the marital status
specified in the notice for any wages paid after the date specified in
the notice, except as provided in paragraphs (g)(2)(vi), (vii), (viii),
(ix), and (x) of this section. 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.
(vi) Employment resumes after twelve months. If the employer is
required to furnish the employee notice to the employee only pursuant
to paragraph (g)(2)(iii)(B) of this section and the employee resumes
the performance of services for the employer more than 12 months after
the date of the notice, then the employer is not required to withhold
based on the notice.
(vii) Requirement to withhold based on an existing Form W-4. If a
withholding exemption certificate is in effect with respect to the
employee before the employer receives a notice 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 marital status,
a number of withholding exemptions, and any additional withholding that
results in more withholding than would result from applying the marital
status and number of withholding exemptions specified in the notice.
(viii) Modification notice. After issuing the notice specifying the
maximum number of withholding exemptions permitted and the marital
status, the IRS may issue a subsequent notice that modifies the
original notice (modification notice). The modification notice may
change the marital status and/or the number of withholding exemptions
permitted. The employer must withhold based on the modification notice
as of the date specified in the modification notice.
(ix) Requirement to withhold after termination of employment. If
the employee is employed as of the date of the notice under paragraph
(g)(2)(iii) of this section but the employer or employee terminates the
employment relationship after the date of the notice, the employer must
continue to withhold based on the maximum number of withholding
exemptions and the marital status specified in the notice or a
modification notice if any wages subject to income tax withholding are
paid with respect to the prior employment after such date. Furthermore,
the employer must withhold based on the notice or
[[Page 38483]]
modification notice if the employee resumes an employment relationship
with the employer within 12 months after the termination of the
employment relationship. Whether the employment relationship is
terminated is based on all the facts and circumstances.
(x) Requirement to withhold based on new Form W-4. The employee may
furnish a new withholding exemption certificate after the employer
receives a notice or modification notice from the IRS of the maximum
number of withholding exemptions permitted under this paragraph (g)(2).
(A) Employee requests more withholding. If the employee furnishes a
new withholding exemption certificate after the employer receives the
notice or modification notice, the employer must withhold tax on the
basis of that new certificate only if the new certificate does not
claim complete exemption from withholding and claims a marital status,
a number of withholding exemptions, and any additional withholding that
results in more withholding than would result under the notice or
modification notice.
(B) Employee requests less withholding. If the employee furnishes a
new withholding exemption certificate after the employer receives the
notice or modification notice, the employer must disregard the new
certificate and withhold on the basis of the notice or modification
notice if the employee claims complete exemption from withholding or
claims a marital status, a number of withholding exemptions, and any
additional withholding that results in less withholding than would
result under the notice or modification notice. If the employee wants
to put a new certificate into effect that results in less withholding
than that required under the notice or modification notice, the
employee must contact the IRS. The employer must withhold on the basis
of the notice or modification notice unless the IRS subsequently
notifies the employer to withhold based 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) Examples. The following examples illustrate the rules of this
section.
Example 1. Employer U receives a notice from the IRS that
identifies the maximum number of withholding exemptions permitted
and specifies the marital status for Employee A. Employee A is not
currently performing any services for Employer U. However, Employer
U is continuing to make certain wage payments to Employee A.
Employer U must furnish the employee notice to Employee A within 10
business days of receipt and must withhold based on the notice on
any wages paid to Employee A on or after the date specified in the
notice.
Example 2. Employer V receives a notice in October of Year 1
from the IRS that identifies the maximum number of withholding
exemptions permitted and specifies the marital status for Employee
B. Employee B has not performed services for Employer V since August
of Year 1. However, since Employee B has performed services for
Employer V for several years on a seasonal basis, Employer V
reasonably expects Employee B to resume the performance of services
for Employer V in June of Year 2, a date that is within 12 months of
the date of the notice. Employer V is required to furnish the notice
to Employee B within 10 business days of receipt. Employee B does
not resume the performance of services until June of Year 3.
Employer V is not required to withhold based on the notice.
Example 3. Employer W receives a notice from the IRS that
identifies the maximum number of withholding exemptions permitted
and specifies the marital status for Employee C. Employee C began a
4-month unpaid maternity leave of absence three weeks before
Employer W received the notice. Employer W must furnish the employee
notice to Employee C within 10 business days of receipt. When
Employee C resumes performing services when her maternity leave
ends, Employer W must withhold based on the notice.
Example 4. Employer X receives a notice from the IRS in Year 1
that identifies the maximum number of withholding exemptions
permitted and specifies the marital status for Employee D. Employer
X must furnish the employee notice to Employee D within 10 business
days of receipt and withhold based on the notice. In Year 2,
Employee D terminates the employment relationship. Employee D
applies for a different position with Employer X and resumes
employment 10 months after having left her previous position with
Employer X. Since Employer X rehired Employee D within 12 months
after the termination of employment, Employer X must withhold based
on the notice.
Example 5. Employer Y receives a notice from the IRS that
identifies the maximum number of withholding exemptions permitted
and specifies the marital status for Employee E. Employer Y must
furnish the employee notice to Employee E within 10 business days of
receipt. After receipt of this notice, Employee E contacts the IRS
and establishes that he is entitled to claim a higher number of
withholding exemptions. Employer Y receives a modification notice
from the IRS that changes the maximum number of withholding
exemptions permitted for Employee E. Employer Y must withhold tax
based on the modification notice as of the date specified in such
notice.
Example 6. Employer Z pays remuneration to Employee F, a United
States citizen, for services performed in Country M. Employer Z
receives a notice from the IRS in Year 1 that identifies the maximum
number of withholding exemptions permitted and specifies the marital
status for Employee F. Employer Z must furnish the employee notice
to Employee F within 10 business days of receipt. Employer Z
reasonably believes all the remuneration paid to Employee F in Year
1 is excluded from Employee F's gross income under section 911 of
the Internal Revenue Code. Since section 3401(a)(8)(B) excludes such
remuneration from wages for income tax withholding purposes,
Employer X does not have to withhold on such remuneration,
notwithstanding the maximum number of exemptions permitted and
marital status specified in the notice. In Year 2, Employee F
returns to the United States to perform services. Employer Z does
not reasonably believe any part of Employee F's remuneration paid in
Year 2 is excluded from Employee F's gross income under section 911.
Rather, Employer Z reasonably believes that remuneration paid to
Employee F in Year 2 is subject to income tax withholding. Employer
Z must withhold on the remuneration paid to Employee F based on the
notice.
(5) Effective/applicability date. Except as provided in this
paragraph (g)(5), paragraph (g) applies on April 14, 2005. Paragraphs
(g)(2)(iii)(A), (B), and (C) and paragraph (g)(2)(ix) apply on October
11, 2007, except taxpayers may rely on such paragraphs for notices
issued prior to such date.
Sec. 31.3402(f)(2)-1T [Removed]
0
Par. 3. Section 31.3402(f)(2)-1T is removed.
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)(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 that is called for therein. 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 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.
[[Page 38484]]
(2) Employers are prohibited from accepting 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.
(3) Effective/applicability date. Paragraph (a)(1) applies on April
14, 2005. Paragraph (a)(2) applies to any substitute withholding
exemption certificate furnished to an employer on or after October 11,
2007.
* * * * *
Sec. 31.3402(f)(5)-1T [Removed]
0
Par. 5. Section 31.3402(f)(5)-1T is removed.
Kevin Brown,
Deputy Commissioner for Services and Enforcement.
Approved: July 2, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-13492 Filed 7-12-07; 8:45 am]
BILLING CODE 4830-01-P