Part I. Rulings — Internal Revenue Bulletin 1999-12

Section 472.—Last-in, First-out Inventories

26 CFR 1.472-1: Last-in, first-out inventories.

LIFO; price indexes; department stores. The January 1999 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, January 31, 1999.

Rev. Rul. 99–15

The following Department Store Inventory Price Indexes for January 1999 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended

on, or with reference to, January 31, 1999. The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups – soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Percent Change Jan. Jan. from Jan. 1998 Groups 1998 1999 to Jan. 1999 ¹

Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 536.7 507.3 –5.5
Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627.9 643.1 2.4
Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656.3 640.4 –2.4
Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890.5 894.0 0.4
Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619.0 628.6 1.6
Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558.3 560.7 0.4
Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304.6 316.2 3.8
Women’s and Girls’Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544.1 535.4 –1.6
Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . 395.6 376.9 –4.7
Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614.6 603.8 –1.8
Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584.2 585.2 0.2
Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504.4 482.1 –4.4
Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981.2 965.3 –1.6
Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 803.3 729.7 –9.2
Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 929.7 946.8 1.8
Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662.8 678.4 2.4
Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583.9 602.4 3.2
Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811.8 813.6 0.2
Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241.8 237.7 –1.7
Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.5 69.6 –5.3
Recreation and Education ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108.3 100.7 –7.0
Home Improvements ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134.0 130.3 –2.8
Auto Accessories ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.8 107.8 0.0

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593.1 586.4 –1.1

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461.9 459.0 –0.6

Groups 21 – 23: Misc. Goods ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.5 106.0 –4.9

Store Total ³ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547.5 539.4 –1.5

1 Absence of a minus sign before percentage change in this column signifies price increase. 2 Indexes on a January 1986=100 base. 3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

March 22, 1999 4 1999–12 I.R.B.

ble to payments made after December 31, 1998, and generally granted withholding agents until after December 31, 1999, to obtain the new withholding certificates and statements required under those regulations. This amendment serves to make the final regulations applicable to payments made after December 31, 1999, and to require mandatory use of the new withholding certificates and statements after December 31, 2000. In addition, this amendment serves to address typographical errors, and to withdraw the removal of §§1.6045–1T and 1.6045–2T since those sections were already removed on June 30, 1998, in T.D. 8772 (63 F.R. 35517).

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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Finally, it has been determined that the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations because the regulations do not impose a collection of information on small entities. Pursuant to 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations (61 F.R. 17614) was submitted to the Small Business Administration for comment on its impact on small business.

- - - -

Amendments to the Regulations

Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 1, 31, 35a, and 301 are amended by making the following correcting amendments:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.871–14, paragraph (h) is revised to read as follows:

§1.871–14 Rules relating to repeal of tax on interest of nonresident alien individuals and foreign corporations received from certain portfolio debt investments.

DRAFTING INFORMATION

The principal author of this revenue ruling is Richard C. Farley, Jr. of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Farley on (202) 622-4970 (not a toll-free call).

Section 1441.—Withholding of Tax on Nonresident Aliens

26 CFR 1.1441–1: Requirement for the deduction and withholding of tax on payments to foreign persons.

T.D. 8804

DEPARTMENT OF THE TREASURY Internal Revenue Services 26 CFR Parts 1, 31, 35a and 301

General Revision of Regulations Relating to Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Related Collection, Refunds, and Credits; Revision of Information Reporting and Backup Withholding Regulations; and Removal of Regulations Under Parts 1 and 35a and of Certain Regulations Under Income Tax Treaties

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule; delay of effective date, technical amendments, and partial withdrawal.

SUMMARY: This document contains changes delaying the effective date and making technical amendments to final regulations (T.D. 8734, 1997–2 C.B. 109), relating to the withholding of income tax on certain U.S. source income payments to foreign persons. The Department of the Treasury and the IRS believe it is in the best interest of tax administration to extend the effective date of the final withholding regulations to ensure that both taxpayers and the government can complete changes necessary to implement the new withholding regime. As ex

tended by this document, the final withholding regulations will apply to payments made after December 31, 1999. This document also withdraws two amendments which have already been dealt with in T.D. 8772, (1998–31 I.R.B. 8), which was published in the Federal Register for June 30, 1998.

DATES: Effective Dates: The amendments in this final rule are effective January 1, 2000. As of December 31, 1998, the effective date of the final regulations published at 62 F.R. 53387, October 14, 1997, is delayed from January 1, 1999, until January 1, 2000; however, the effective date of the addition of §31.9999–0 and §35a.9999–0 and the removal of §35a.9999–0T remains October 14, 1997.

Withdrawal: Effective December 31, 1998, the amendments removing §§1.6045–1T and 1.6045–2T published at 62 F.R. 53387, October 14, 1997, are withdrawn.

FOR FURTHER INFORMATION CONTACT: Lilo Hester, (202) 622-3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of this amendment provide guidance under sections 1441, 1442, and 1443 of the Internal Revenue Code (Code) on certain U.S. source income paid to foreign persons, the related tax deposit and reporting requirements under section 1461 of the Code, and the related changes under sections 163(f), 165(j), 871, 881, 1462, 1463, 3401, 3406, 6041, 6041A, 6042, 6045, 6049, 6050A, 6050N, 6109, 6114, 6402, 6413, and 6724 of the Code.

Need for Changes

On April 13, 1998, in Notice 98–16 (1998–15 I.R.B. 12), the IRS and Treasury announced their decision to extend the effective date of the final regulations, and to make correlative changes to the transition rules for obtaining new withholding certificates and statements containing the necessary information and representations required by the final regulations. As published in the Federal Register on October 14, 1997 (62 F.R. 53387 [T.D. 8734, 1997–2 C.B. 109]), the final regulations were generally applica

1999–12 I.R.B. 5 March 22, 1999

provisions in the same manner as the taxpayer would take action for payments made after December 31, 1999.

Par. 4. In §1.1441–4 as amended at 62 F.R. 53450, paragraph (g) is revised to read as follows:

§1.1441–4 Exemptions from withholding for certain effectively connected income and other amounts.

(g) Effective date —(1) General rule. This section applies to payments made after December 31, 1999.

(2) Transition rules. The validity of a Form 4224 or 8233 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form 4224 or 8233 that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a Form 4224 or 8223 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 5. In §1.1441–5 as revised at 62 F.R, 53452, paragraph (g) is revised to read as follows:

(h) Effective date —(1) In general. This section shall apply to payments of interest made after December 31, 1999.

(2) Transition rule. For purposes of this section, the validity of a Form W-8 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form W-8 that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (h)(2), however, does not apply to extend the validity period of a Form W-8 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (h)(2), a withholding agent or payor may choose to not take advantage of the transition rule in this paragraph (h)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, may choose to obtain withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441– 1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 3. In §1.1441–1 as revised at 62 F.R. 53424, paragraph (f) is revised to read as follows:

§1.1441–1 Requirement for the deduction and withholding of tax on payments to foreign persons.

(f) Effective date —(1) In general. This section applies to payments made after December 31, 1999.

(2) Transition rules —(i) Special rules for existing documentation. For purposes of paragraphs (d)(3) and (e)(2)(i) of this section, the validity of a withholding certificate (namely, Form W-8, 8233, 1001, 4224, or 1078, or a statement described in §1.1441–5 in effect prior to January 1, 2000 (see §1.1441–5 as contained in 26 CFR part 1, revised April 1, 1998)) that was valid on January 1, 1998 under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (f)(2)(i), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (f)(2)(i), a withholding agent may choose to not take advantage of the transition rule in this paragraph (f)(2)(i) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in paragraph (e)(4)(ii) of this section, regardless of when the certificate is obtained.

(ii) Lack of documentation for past years. A taxpayer may elect to apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of this section, dealing with liability for failure to obtain documentation timely, to all of its open tax years, including tax years that are currently under examination by the IRS. The election is made by simply taking action under those

March 22, 1999 6 1999–12 I.R.B.

(f) Effective date —(1) In general. This section applies to payments made after December 31, 1999.

(2) Transition rules. For purposes of this section, the validity of a Form 8709 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form 8709 that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (f)(2), however, does not apply to extend the validity period of a Form 8709 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (f)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (f)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 8. In §1.1441–9, paragraph (d) is revised to read as follows:

§1.1441–9 Exemption from withholding on exempt income of a foreign tax-exempt organization, including foreign private foundations.

(d) Effective date —(1) In general. This section applies to payments made after December 31, 1999.

§1.1441–5 Withholding on payments to partnerships, trusts, and estates.

(g) Effective date —(1) General rule. This section applies to payments made after December 31, 1999.

(2) Transition rules. The validity of a withholding certificate that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 6. In §1.1441–6 as revised at 62 F.R. 53458, paragraph (g) is revised to read as follows:

§1.1441–6 Claim of reduced withholding under an income tax treaty.

(g) Effective date —(1) General rule. This section applies to payments made after December 31, 1999.

(2) Transition rules. For purposes of this section, the validity of a Form 1001 or 8233 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form 1001 or 8233 is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a Form 1001 or 8233 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate or in interpretation of the law under the regulations under §1.894–1T(d). Notwithstanding the first three sentences of this paragraph (g)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 7. In §1.1441–8 as redesignated and amended at 62 F.R. 53464, paragraph (f) is revised to read as follows:

§1.1441–8 Exemption from withholding for payments to foreign governments, international organizations, foreign central banks of issue, and the Bank for International Settlements.

1999–12 I.R.B. 7 March 22, 1999

(2) Transition rules. For purposes of this section, the validity of a Form W-8, 1001, or 4224 or a statement that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form W-8, 1001, or 4224 or a statement that is valid on or after January 1, 1999 remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (d)(2), however, does not apply to extend the validity period of a Form W-8, 1001, or 4224 or a statement that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (d)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (d)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 9. In §1.1443–1 as revised at 62 F.R. 53466, paragraph (c) is revised to read as follows:

§1.1443–1 Foreign tax-exempt organizations.

(2) Transition rules. For purposes of this section, the validity of an affidavit or opinion of counsel described in §1.1443– 1(b)(4)(i) in effect prior to January 1,

2000 (see §1.1443–1(b)(4)(i) as contained in 26 CFR part 1, revised April 1, 1998) that is valid on December 31, 1998 is extended until December 31, 2000. However, a withholding agent may choose to not take advantage of the transition rule in this paragraph (c)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

§1.6041–3 [Amended]

Par. 10. Section 1.6041–3 as amended at 62 F.R. 53472 is further amended by removing the last sentence of the introductory text.

Par. 11. In §1.6042–3 as amended at 62 F.R. 53475, paragraph (b)(5) is revised to read as follows:

§1.6042–3 Dividends subject to reporting.

(b) * * * (5) Effective date —(i) General rule. The provisions of this paragraph (b) apply to payments made after December 31, 1999. (ii) Transition rules. The validity of a withholding certificate (namely, Form W8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or,

if earlier, until December 31, 2000. The rule in this paragraph (b)(5)(ii), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (b)(5)(ii), a payor may choose not to take advantage of the transition rule in this paragraph (b)(5)(ii) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par. 12. In §1.6045–1 as amended at 62 F.R. 53476, paragraph (g)(5) is revised to read as follows:

§1.6045–1 Returns of information of brokers and barter exchanges.

(g) * * * (5) Effective date —(i) General rule. The provisions of this paragraph (g) apply to payments made after December 31, 1999. (ii) Transition rules. The validity of a withholding certificate (namely, Form W8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(5)(ii), however,

March 22, 1999 8 1999–12 I.R.B.

does not apply to extend the validity period of a form that expires in 1998 solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(5)(ii), a payor may choose not to take advantage of the transition rule in this paragraph (g)(5)(ii) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

Par 13. Effective December 31, 1998, the amendments removing §§1.6045–1T and 1.6045–2T, published at 62 F.R. 53480, are withdrawn. Par. 14. In §1.6049–5 as amended at 62 F.R. 53483, paragraph (g) is revised to read as follows:

§1.6049–5 Interest and original issue discount subject to reporting after December 31, 1982.

(g) Effective date —(1) General rule. The provisions of paragraphs (b)(6) through (15), (c), (d), and (e) of this section apply to payments made after December 31, 1999.

(2) Transition rules. The validity of a withholding certificate (namely, Form W8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name

is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2), a payor may choose not to take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, may require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained.

PARTS 1, 31, 35a, and 301

[AMENDED]

Par. 15. In the list below, for each section indicated in the left column (which was added, revised, or amended at 62 F.R. 53387), remove the language in the middle column and add the language in the right column:

Section Remove Add

1.871–14(c)(2)(iii) 1.1441–1(c)(3)(ii) 1.1441–1(e)(3)(ii) 1.871–14(c)(3)(ii), October 12, 1999 October 12, 2000 Example, first and sixth sentences

1.871–14(c)(3)(ii), December 31, 1999 December 31, 2000 Example, sixth sentence

1.871–14(c)(3)(ii), June 15, 2003 June 15, 2004 Example, sixth and seventh sentences

1.1441–1(b)(2)(iii)(B), savings clause saving clause fifth sentence

1.1441–1(b)(2)(iv)(E), actually maintain actually maintains second sentence

1.1441–1(b)(3)(iii)(B), that cannot reliably cannot reliably first sentence

1.1441–1(b)(3)(iii)(C), 1.1441–4(e) 1.1441–4(d) last sentence

1.1441–1(b)(3)(x), W s W’s Example 1, seventh and ninth sentences

1999–12 I.R.B. 9 March 22, 1999

1.1441–1(b)(3)(x), W s W’s Example 2, sixth and seventh sentences

1.1441–1(b)(3)(x), X, nc. X, Inc. Example 3, third sentence

1.1441–1(b)(4)(i), 1.871–7(b)(2)(i) 1.871–7(b)(2) first sentence

1.1441–1(b)(4)(xix) January 1, 1999 January 1, 2000

1.1441–1(b)(4)(xix) April 1, 1997 April 1, 1998

1.1441–1(b)(5)(viii) I.R.B. 1996–49 1996–2 C.B. 227

1.1441–1(b)(7)(v), June 15, 1999 June 15, 2000 Example 1, first, fourth, and eighth sentences

1.1441–1(b)(7)(v), September 30, 2001 September 30, 2002 Example 1, third and ninth sentences

1.1441–1(b)(7)(v), March 15, 2000 March 15, 2001 Example 1, ninth sentence

1.1441-1(b)(7)(v), June 15, 1999 June 15, 2000 Example 2, first, fourth, and seventh sentences

1.1441–1(b)(7)(v), September 30, 2001 September 30, 2002 Example 2, third and seventh sentences

1.1441–1(b)(7)(v), March 15, 2000 March 15, 2001 Example 2, seventh and ninth sentences

1.1441–1(c)(6)(ii)(B) January 1, 1999 January 1, 2000

1.1441–1(c)(6)(ii)(B) April 1, 1997 April 1, 1998

1.1441–1(e)(4)(ii)(A) September 30, 1999 September 30, 2000

1.1441–1(e)(4)(ii)(A) December 31, 2002 December 31, 2003

1.1441–1(e)(4)(vi), provided the acceptable provided on the acceptable sixth sentence

1.1441–1(e)(4)(ix)(A)(2), §31.3406(c)1(c)(3)(ii) §31.3406(c)–(c)(3)(ii) second sentence

1.1441–1(e)(5)(i), reportable payments reportable amounts penultimate sentence

1.1441–1(e)(5)(v)(A), the intermediary the qualified intermediary third sentence

1.1441–1(e)(5)(v)(A), the intermediary to the qualified intermediary to fourth sentence

March 22, 1999 10 1999–12 I.R.B.

1.1441–1(e)(5)(v)(B), paragraph (b)(3)(vi) paragraph (e)(3)(vi) introductory text, third sentence

1.1441–1(e)(5)(v)(B)(1), withholding agent qualified intermediary second sentence

1.1441–1(e)(5)(v)(C), The intermediary The qualified intermediary first sentence

1.1441–2(a), last 871(h)(5)(B) 871(h)(5)(B) or a member of a clearing sentence organization which member is the beneficial owner of the obligation

1.1441–2(b)(1)(ii), someone s someone’s fifth sentence

1.1441–2(b)(3)(iv) December 31, 1998 December 31, 1999

1.1441–2(f) December 31, 1998 December 31, 1999

1.1441–3(h) December 31, 1998 December 31, 1999

1.1441–4(a)(2)(i), second United States United States and is includable in the sentence beneficial owner’s gross income for the taxable year

1.1441–5(a)(6), withholding partnership withholding foreign partnership second sentence

1.1441–5(c)(2)(ii)(B), qualified intermediary withholding foreign partnership sixth sentence

1.1441–5(c)(2)(ii)(B), customers partners sixth sentence

1.1441–5(c)(3)(iii)(D) that the partners that the amounts allocable to the partners

1.1441–5(d)(4), Example 2, depending of depending on second sentence

1.1441–6(b)(1), first §1.1441–1(e)(1)(ii)(B) §1.1441–1(e)(1)(ii)(A)(2) sentence

1.1441–6(c)(2)(ii), first upon a certificate upon receipt of a certificate sentence

1.1441–6(d), second rate of tax rate of withholding sentence

1.1441–7(g) December 31, 1998 December 31, 1999

1.1461–1(b)(2)(v) foreign partnership shall foreign partnership (whether or not a withholding foreign partnership) shall

1.1461–1(b)(2)(vi), banks, securities dealers, banks, or insurance companies. paragraph heading or insurance companies.

1999–12 I.R.B. 11 March 22, 1999

1.1461–1(c)(4)(iv), first certificate attached to the intermediary’s certificate or documentary evidence atsentence or partnership withholding certificate attached to the intermediary’s or partnerthat is from a qualified intermediary or a ship withholding certificate withholding foreign partnership

1.1461–1(i) December 31, 1998 December 31, 1999

1.1461–2(a)(1), third an adjustment to a refund of sentence

1.1461–2(a)(3), beneficial owner beneficial owner or payee first sentence

1.1461–2(a)(4), December 1999 December 2000 Example 1 (i), second sentence

1.1461–2(a)(4), February 10, 2000 February 10, 2001 Example 1 (i), third sentence

1.1461–2(a)(4), 1999 2000 Example 1 (ii), first, second, and last sentences

1.1461–2(a)(4), March 15, 2000 March 15, 2001 Example 1(ii), first sentence

1.1461–2(a)(4), 2000 2001 Example 1(ii), third sentence

1.1461–2(a)(4), 2000 2001 Example 2, second and last sentences

1.1461–2(a)(4), June 2000 June 2001 Example 2, second sentence

1.1461–2(a)(4), July 15, 2000 July 15, 2001 Example 2, third sentence

1.1461–2(a)(4), 1999 2000 Example 2, third sentence

1.1461–2(a)(4), March 15, 2001 March 15, 2002 Example 2, last sentence

1.1461–2(a)(4), Example 3, February 15, 2000 February 15, 2001 last sentence

1.1461–2(a)(4), Example 3, March 15, 2000 March 15, 2001 last sentence

1.1461–2(d) December 31, 1998 December 31, 1999

1.1462–1(c) December 31, 1998 December 31, 1999

1.1463–1(a), last sentence §1.1441–7(b)(7) §1.1441–7(b)

1.1463–1(b) December 31, 1989 December 31, 1999

March 22, 1999 12 1999–12 I.R.B.

1.1464–1(b) §1.1461–4 §1.1461–2

1.6041–4(d) December 31, 1998 December 31, 1999

1.6041A–1(d)(3)(i)(B), if payments made if payments are made first sentence

1.6041A–1(d)(3)(iv), amount paid amounts paid paragraph heading

1.6041A–1(d)(3)(v) December 31, 1998 December 31, 1999

1.6043–2(a), first, second, 966 1099 and last sentences

1.6045–1(d)(6)(ii)(B) December 31, 1998 December 31, 1999

1.6045–1(g)(3)(iv), Example 7 Example 6 second sentence

1.6045–1(g)(4), Y s Y’s Example 7 (ii), last sentence

1.6049–4(c)(1)(ii)(A), certificate meeting the certification certificate stating that each member of the second sentence requirements of paragraphs (c)(2)(ii)(A) partnership meets the requirements of ( 1 ) through ( 5 ) of this section. paragraphs (c)(1)(ii)(A)( 1 ) through ( 4 ) of this section.

1.6049–4(d)(3)(ii)(B) December 31, 1998 December 31, 1999

1.6049–5(b)(12), first Returns of information are not required Payments that sentence for payments that

1.6049–5(c)(4)(i), first the payor may the bank or other financial institution may sentence

1.6049–5(c)(4)(ii), second sentence then the financial institution then the bank or other financial institution

1.6049–5(c)(4)(v) January 1, 1999 January 1, 2000

1.6049–5(d)(2)(ii), second publicly traded actively traded and last sentences

1.6049–5(d)(2)(ii), eighth is less than 31 is equal to or less than 31 sentence

1.6049–5(e)(1)(i), The amount An amount is described in this paragraph introductory text (e)(1)(i) if it

1.6049–5(e)(1)(ii) The amount An amount is described in this paragraph (e)(1)(ii) if it

1.6049–5(e)(4), second sentence specifically identifies specifically identify

1.6049–5(e)(5), of is section of this section Example 5, last sentence

1999–12 I.R.B. 13 March 22, 1999

1.6049–5(e)(5), a holds A holds Example 9, second sentence

1.6049–5(e)(5), paid to a paid to A Example 9, third sentence

1.6049–5(e)(5), a’s A’s Example 9, third sentence

1.6049–5(e)(5), to a by DB to A by DB Example 9, last sentence

1.6050N–1(e), first sentence is applies to applies to

1.6050N–1(e), last sentence December 31, 1998 December 31, 1999

31.3401(a)(6)–1(e), January 1, 1999 January 1, 2000 paragraph heading

31.3401(a)(6)–1(e), January 1, 1999 January 1, 2000 first sentence

31.3401(a)(6)–1(f), December 31, 1998 December 31, 1999 paragraph heading

31.3401(a)(6)–1(f), December 31, 1998 December 31, 1999 first sentence

31.3406(g)–1(e), December 31, 1998 December 31, 1999 first sentence

31.3406(h)–2(d), December 31, 1998 December 31, 1999 penultimate sentence

31.9999–0 January 1, 1999 January 1, 2000

301.6114–1(b)(4)(ii)(C), December 31, 1998 December 31, 1999 introductory text

301.6114–1(b)(4)(ii)(D) December 31, 1998 December 31, 1999

301.6724–1(g)(2) Q-11 January 1, 1999 January 1, 2000

301.6724–1(g)(2) Q-11 April 1, 1997 April 1, 1998

301.6724–1(g)(2) A-11 January 1, 1999 January 1, 2000

301.6724–1(g)(2) A-11 April 1, 1997 April 1, 1998

301.6724–1(g)(3), first December 31, 1998 December 31, 1999 sentence

301.6724–1(g)(3), last January 1, 1999 January 1, 2000 sentence in both places

301.6724–1(g)(3), last April 1, 1997 April 1, 1998 sentence

March 22, 1999 14 1999–12 I.R.B.

of a partnership which is a preparer), must retain the manually signed copy of the return or claim.

Explanation of Provisions

The regulations provide that, if an income tax return preparer presents for a taxpayer’s signature a return or claim for refund that has a copy of the preparer’s manual signature, the preparer may either retain a photocopy of the manually signed copy of the return or claim for refund or use an electronic storage system meeting the requirements of section 4 of Rev. Proc. 97–22, (1997–1 C.B. 652) or procedures subsequently prescribed by the Commissioner, to store and produce a copy of the return of claim manually signed by the preparer.

Special Analyses

Drafting Information

The principal author of these regulations is Marc C. Porter, Office of Assistant Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entity in

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

FOR FURTHER INFORMATION CONTACT: Marc C. Porter (202) 622-4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26 CFR part

relating to the penalty for failure to sign an income tax return under section 6695(b) of the Internal Revenue Code. Section 6695(b) provides that any person who is an income tax return preparer with respect to a return or claim for refund, who is required by regulations prescribed by the Secretary to sign the return or claim, and who fails to comply with those regulations, must pay a penalty of $50 for such failure, unless it is shown that the failure is due to reasonable cause and not willful neglect. The maximum penalty imposed with respect to documents filed during a calendar year will not exceed $25,000.

Section 7701(a)(36)(A) provides that, in general, the term “income tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax or claim for refund imposed by subtitle A. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim is treated as if it were the preparation of such return or claim.

Section 1.6695–1(b)(1) and (c) generally provides that an income tax return preparer, with respect to a return or claim for refund, must manually sign the return or claim (which may be a photocopy) in the appropriate space provided on the return or claim after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature.

Section 1.6695–1(b)(4)(i) provides that the manual signature requirement may be satisfied by a photocopy of a copy of the return or claim for refund if the copy is manually signed by the income tax return preparer after completion of its preparation. The taxpayer may file a photocopy of this manually signed return with the IRS, see Rev. Proc. 78–370, (1978–2 C.B. 335). The employer of the preparer or the partnership in which the preparer is a partner, or the preparer (if not employed or engaged by a preparer and not a partner

Approved January 7, 1998.

Donald C. Lubick, Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on December 30, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 31, 1998, 63 F.R. 72183)

Section 6695.—Other Assessable Penalties With Respect to the Preparation of Income Tax Returns for Other Persons

26 CFR 1.6695–1: Other assessable penalties with respect to the preparation of income tax returns for other persons.

T.D. 8803

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Retention of Income Tax Return Preparers’ Signatures

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations that provide income tax return preparers with two alternative means of meeting the requirement that a preparer retain the manually signed (by the preparer) copy of the return or claim. The regulations are necessary to inform preparers of the two alternatives and provide preparers with the guidance needed to comply with the alternatives. 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 REG– 106386–98, page 31.

DATES: Effective date. These regulations are effective December 31, 1998.

Applicability date: For dates of applicability, see §1.6695–1T(g) of these regulations.

1999–12 I.R.B. 15 March 22, 1999

SUMMARY: This document contains temporary regulations relating to the due diligence requirements for paid preparers of federal income tax returns or claims for refund involving the earned income credit. The temporary regulations reflect changes to the law made by the Taxpayer Relief Act of 1997. The temporary regulations provide guidance to paid preparers who prepare federal income tax returns or claims for refund claiming the earned income credit. 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 REG–120168–97, page 21.

DATES: These regulations are effective December 21, 1998.

FOR FURTHER INFORMATION CONTACT: Marc C. Porter (202) 622-4940 (not a toll free call).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, 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 1545–1570. Responses to this collection of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

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 REG–120168–97.

Books and 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

numerical order to read as follows:

Authority: 26 U.S.C. 7805 *** Section 1.6695–1T also issued under U.S.C. 6695(b) ***

Par 2. Section 1.6695–1 is amended by revising paragraph (b)(4)(i) to read as follows:

§1.6695–1 Other assessable penalties with respect to the preparation of income tax returns for other persons.

- - - -

(b) *** (4) (i) [ Reserved ]. For further guidance on acceptable methods of meeting the manual signature requirement of paragraph (b)(1) and (2), see §1.6695–1T(b)(4)(i).

- - - -

Par. 3. Section 1.6695–1T is added to read as follows:

§1.6695–1T Other assessable penalties with respect to the preparation of income tax returns for other persons (temporary).

(a) through (b)(3) [ Reserved ]. For further guidance, see §1.6695–1(a) through (b)(3).

(4) (i) The manual signature requirement of paragraph 1.6695–1(b)(1) and (2) of this section may be satisfied by a photocopy of a copy of the return or claim for refund which copy is manually signed by the preparer after completion of its preparation. After a copy of the return or claim for refund is signed by the preparer and before it is photocopied, no person other than the preparer may alter any entries on the copy other than to correct arithmetical errors discernible on the return or claim for refund. The employer of the preparer or the partnership in which the preparer is a partner, or the preparer (if not employed or engaged by a preparer and not a partner of a partnership which is a preparer), must retain the manually signed copy of the return or claim for refund. In the alternative, for a return or claim for refund presented to a taxpayer for signature after December 31, 1998 and for returns or claims for refund retained on or before that date, the person required to retain the manually signed copy of the return or claim for refund may choose to retain a photocopy of the manually signed copy of the return or

claim for refund, or use an electronic storage system to store and produce a copy of the manually signed return or claim for refund. For purposes of paragraph (b)(4)(i) of this section, an electronic storage system must meet the electronic storage system requirements prescribed in section 4 of Rev. Proc. 97–22 (1997–1 C.B. 652) or procedures subsequently prescribed by the Commissioner. A record of any arithmetical errors corrected must be retained and made available upon request by the person required to retain the manually signed copy of the return or claim for refund.

(b)(4)(ii) through (f) [ Reserved ]. For further guidance, see §1.6695–1(b)(4)(ii) through (f).

(g) Effective date. This section applies to income tax returns and claims for refund presented to a taxpayer for signature after December 31, 1998 and for returns or claims for refund retained on or before that date. This section expires on December 31, 2001.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

Approved December 17, 1998.

Donald C. Lubick, Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on December 30, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 31, 1998, 63 F.R. 72182)

26 CFR 1.6695–2T: Preparer due diligence requirements for determining earned income credit eligibility (temporary).

T.D. 8798

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602

Preparer Due Diligence Requirements for Determining Earned Income Credit Eligibility

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

March 22, 1999 16 1999–12 I.R.B.

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains amendments to the Income Tax Regulations (26 CFR parts 1 and 602) under section 6695(g) relating to the penalty for failure of a preparer to be diligent in determining a taxpayer’s eligibility for the earned income credit (EIC). Section 6695(g) was added by section 1085(a)(2) of the Taxpayer Relief Act of 1997, Public Law 105-34 (11 Stat. 788, 955 (1997)) (the Act), effective for taxable years beginning after December 31, 1996.

Section 6695(g) imposes a $100 penalty for each failure by an income tax return preparer to meet the due diligence requirements set forth in this regulation. The IRS may impose the section 6695(g) penalty in addition to any other applicable penalty provided by law.

In Notice 97–65 (1997–51 I.R.B. 14 (December 22, 1997)), the IRS set forth the preparer due diligence requirements for 1997 returns and claims for refund involving the EIC. To avoid the imposition of the section 6695(g) penalty for 1997 returns and claims for refund, Notice 9765 requires preparers to meet four requirements: (1) complete the Earned Income Credit Eligibility Checklist attached to Notice 97-65 (Eligibility Checklist), or otherwise record the information necessary to complete the Eligibility Checklist; (2) complete the Earned Income Credit Worksheet (Computation Worksheet), as contained in the 1997 Form 1040 instructions, or otherwise record the computation and information necessary to complete the Computation Worksheet; (3) have no knowledge that any information used by the preparer in determining eligibility for, and amount of, the EIC is incorrect; and (4) retain for three years the Eligibility Checklist and Computation Worksheet (or alternative records), and a record of how and when the information used to determine eligibility for, and amount of, the EIC was obtained by the preparer. This information may be retained either as a paper record or in magnetic media format consistent with Rev. Proc. 81–46 (1981–2 C.B. 621).

Notice 97–65 also requested comments on preparer due diligence requirements

for tax years after 1997. Two comments were received. The commentators did not suggest alternative due diligence requirements. One commentator suggested, however, increased education for the public. The IRS and Treasury Department adhere to the principle that education is an integral part of good tax administration. Therefore, as part of its overall EIC strategy, the IRS has established various educational tools and outreach programs for taxpayers and preparers. These efforts are intended to provide the public with the tools necessary to receive the full amount of the EIC allowed by law.

The second commentator suggested that preparers should be able to meet the due diligence requirements by using software reviewed and approved by the IRS. The IRS does not approve commercial software. The IRS is currently exploring, however, new opportunities for partnership with outside stakeholders to reduce burden, enhance customer service, and increase compliance. As part of this effort, the IRS will continue to review this comment and evaluate options.

Explanation of Provisions

The temporary and proposed regulations impose due diligence standards on persons who are income tax return preparers with respect to determining eligibility for, or the amount of, the EIC. Consistent with existing regulations under section 6695, these temporary regulations apply a modified definition of income tax return preparer. Section 7701(a)(36) provides that, in general, the term income tax re- turn preparer means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return or claim for refund of tax imposed by subtitle A. The preparation of a substantial portion of a return or claim for refund is treated as if it were the preparation of such return or claim for refund. Persons are considered preparers if they give legal advice concerning a return or claim for refund or if they prepare another return which affects the return or claim for refund (§301.7701–15(a)(2) and (b) and §301.7701–15(b)(3), respectively). The regulations retain this definition of an income tax return preparer, except that preparers who merely give advice or prepare another return that af

fects the EIC return or claim for refund are not preparers for purposes of the section 6695(g) penalty. Rather, the due diligence standards are imposed only on paid preparers who prepare the return claiming the EIC.

The temporary regulations essentially adopt the four due diligence requirements in Notice 97-65. Thus, to avoid the penalty under section 6695(g), a preparer must: (1) complete the Eligibility Checklist (Form 8867, Paid Preparer’s Earned Income Credit Checklist, or such other form as may be prescribed by the IRS), or otherwise record in the preparer’s files the information necessary to complete the Eligibility Checklist; (2) complete the Computation Worksheet ( Earned Income Credit Worksheet contained in the Form 1040 instructions), or otherwise record in the preparer’s files the computation and information necessary to complete the Computation Worksheet; (3) have no knowledge, and have no reason to know, that any information used by the preparer in determining eligibility for, and amount of, the EIC is incorrect; and (4) retain for three years the Eligibility Checklist and the Computation Worksheet (or alternative records), and a record of how and when the information used to determine eligibility for, and the amount of, the EIC was obtained by the preparer.

The temporary regulations also provide that the income tax return preparer may avoid the section 6695(g) penalty with respect to a particular income tax return or claim for refund if the preparer can demonstrate to the satisfaction of the IRS that, considering all the facts and circumstances, the preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of the regulations, and that the particular failure was isolated and inadvertent.

The temporary regulations will be effective for taxable years beginning after December 31, 1996. However, the Eligibility Checklist contained in Notice 97-65 has been expanded in Form 8867. Therefore, for taxable year 1997, the applicable Eligibility Checklist is the Eligibility Checklist contained in Notice 97-65. For taxable year 1998, a preparer may choose as the applicable Eligibility Checklist either the Eligibility Checklist published in Notice 97-65 modified however, by re

1999–12 I.R.B. 17 March 22, 1999

structions or such other form as may be prescribed by the IRS (Computation Worksheet); or

(B) Otherwise record in the preparer’s paper or electronic files the preparer’s EIC computation, including the method and information used to make the computation (Alternative Computation Record). The Alternative Computation Record may consist of one or more documents containing the required information.

(ii) The preparer’s completion of the Computation Worksheet or Alternative Computation Record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer.

(3) Knowledge. The preparer must not know, or have reason to know, that any information used by the preparer in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect. The preparer may not ignore the implications of information furnished to, or known by, the preparer, and must make reasonable inquiries if the information furnished to, or known by, the preparer appears to be incorrect, inconsistent, or incomplete.

(4) Retention of records. (i) The preparer must retain —

(A) A copy of the completed Eligibility Checklist or Alternative Eligibility Record;

(B) A copy of the Computation Worksheet or Alternative Computation Record; and

(C) A record of how and when the information used to complete the Eligibility Checklist or Alternative Eligibility Record and the Computation Worksheet or Alternative Computation Record was obtained by the preparer, including the identity of any person furnishing the information.

(ii) These items must be retained for three years after the June 30th following the date the return or claim for refund was presented to the taxpayer for signature, and may be retained on paper or electronically in the manner prescribed in applicable regulations, revenue rulings, revenue procedures, or other appropriate guidance.

(c) Exception to penalty. The section 6695(g) penalty will not be applied with respect to a particular income tax return or claim for refund if the preparer can demonstrate to the satisfaction of the IRS that, considering all the facts and circum

placing, $9,770, $25,760, $29,290, and $2,250 each time these figures appear on the 1997 Eligibility Checklist with $10,030, $26,473, $30,095, and $2,300, respectively, or Form 8867. For taxable years beginning after December 31, 1998, the applicable Eligibility Checklist will be the Form 8867.

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) does not apply to these regulations. Further, it is hereby certified, pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility Act, that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the amount of time necessary to record and retain the required information will be nominal for those income tax return preparers that choose to use the Alternative Eligibility Record and Alternative Computation Record. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) 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.

Drafting Information

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1 — INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.6695–2T also issued under 26 U.S.C. 6695(g). * * *

Par. 2. Section 1.6695–2T is added to read as follows:

§1.6695–2T Preparer due diligence requirements for determining earned income credit eligibility (temporary).

(a) Penalty for failure to meet due dili- gence requirements. A person who is an income tax return preparer (preparer) of an income tax return or claim for refund under subtitle A of the Internal Revenue Code (Code) with respect to determining the eligibility for, or the amount of, the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty of $100 for each such failure. However, no penalty will be imposed under section 6695(g) on a person who is an income tax return preparer solely by reason of —

(1) Section 301.7701–15(a)(2) and (b) of this chapter, on account of having given advice on specific issues of law; or

(2) Section 301.7701–15(b)(3) of this chapter, on account of having prepared the return solely because of having prepared another return that affects amounts reported on the return.

(b) Due diligence requirements. A preparer must satisfy the following due diligence requirements:

(1) Completion of eligibility checklist. (i) The preparer must either —

(A) Complete Form 8867, Paid Pre- parer’s Earned Income Credit Checklist, or such other form as may be prescribed by the IRS (Eligibility Checklist); or

(B) Otherwise record in the preparer’s paper or electronic files the information necessary to complete the Eligibility Checklist (Alternative Eligibility Record). The Alternative Eligibility Record may consist of one or more documents containing the required information.

(ii) The preparer’s completion of the Eligibility Checklist or Alternative Eligibility Record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer.

(2) Computation of credit. (i) The preparer must either —

(A) Complete the Earned Income Credit Worksheet in the Form 1040 in

March 22, 1999 18 1999–12 I.R.B.

stances, the preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of paragraph (b) of this section, and the failure to meet the due diligence requirements of paragraph (b) of this section with respect to the particular return or claim for refund was isolated and inadvertent.

(d) Effective date. (1) In general. This section applies to income tax returns and claims for refund for taxable years beginning after December 31, 1996. This section expires on, December 21, 2001. For the applicable Eligibility Checklist see paragraph (d)(2) of this section.

(2) Eligibility Checklist —(i) For the 1997 taxable year. For taxable year 1997, the applicable Eligibility Checklist is the Eligibility Checklist published in Notice 97-65 (1997–51 I.R.B.14) December 22, 1997. (See §601.601(d)(2)(ii)(b) of this chapter.)

(ii) For the 1998 taxable year. For taxable year 1998 the applicable Checklist is either—

(A) The Checklist published in Notice 97-65 (1997-51 I.R.B.14) December 22,

1997, modified however, by applying the figures $10,030, $26,473, $30,095, and $2,300 in place of $9,770, $25,760, $29,290, and $2,250, respectively, each time these figures appear on the 1997 Checklist; or

(B) Form 8867, Paid Preparer’s Earned Income Credit Checklist.

(iii) For taxable years after 1998. For taxable years beginning after December 31, 1998, the applicable Eligibility Checklist is the Eligibility Checklist contained in Form 8867, Paid Preparer’s Earned Income Credit Checklist, or such other form as may be prescribed by the IRS.

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. Par. 4. In §602.101, paragraph (c) is amended by adding the following entry in numerical order to the table to read as follows:

§602.101 OMB Control numbers.

CFR part or section Current OMB where identified control No. and described

1.6695–2T . . . . . . . . . . . . . . . 1545–1570

David S. Mader, Acting Deputy Commissioner

of Internal Revenue.

Approved December 9, 1998.

Donald C. Lubick, Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on December 18, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 21, 1998, 63 F.R. 70339)

1999–12 I.R.B. 19 March 22, 1999