Burden Reduction Subgroup Report (2008 IRPAC Report)


Notice: Historical Content

This is an archival or historical document and may not reflect current law, policies or procedures.

Issues Covered in this Section:

A.  Form 944 Reporting (SB/SE)

B.  Form 941X (SB/SE)

C.  Form 2678 and Schedule R (SB/SE)

D.  Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s) (SB/SE)

E.  Form 1099-C, Cancellation of Debt (W&I) 

F.  Forms 5498, 5498-ESA and 5498-SA (W&I)

G.  IRS 63C Letter (W&I)

H.  W&I Issue: Proposed Form W-4 NR (Income Withholding for Non-Resident Aliens)

I.  Redesigned Form 990, Return of Organization Exempt From Income Tax (TEGE)

J.  LMSB; Form 8886, Reportable Transaction Disclosure Statement

The goal of this subgroup is to minimize the time and effort placed on taxpayers when filing tax returns without compromising IRS tax administration objectives. We selected projects based on input from the National Taxpayer Advocate (NTA), the IRS and various sponsorship organizations. For example, we address in Issue E the NTA’s concern about simplifying IRS forms, instructions and publications on cancellation of debt income since such use is expected to increase with the current  economic downturn.  Also, we met with representatives from the IRS Taxpayer Burden Reduction Office sponsored by the Small Business/Self-Employed (SB/SE) division which is working on new forms and instructions to streamline payroll reporting requirements. These forms include Forms 944, 941X and 2678 (Issues A, B and C). Further, we have responded to various taxpayer communities such as the nonprofit community that must file the redesigned Form 990 (Issue I).  

The issues are organized by the four operating divisions of the IRS: SB/SE, Wage and Investment (W&I), Tax Exempt and Government Entities (TEGE) and Large and Mid-Size Business (LMSB).

A.  Form 944 Reporting (SB/SE)


This subgroup asked to review Form 944 reporting with the Program Manager to gain clarity on the current status and direction of the IRS Program for small employers to file an Annual Form 944.  The W&I subgroup had made several suggestions in the 2007 public report and we wanted to understand the results of any that were adopted by the Service.  The 944 program started in 2006 with temporary regulations, which expire in December 2008. We,additionally wanted to give continued input to the Service on the unintended burdens caused by the program.

This subgroup met with the IRS Program Manager for Form 944, via teleconference on March 6, 2008.  The IRS shared data regarding the success of the program to reduce burden to, and impact on IRS.

  • The employers in the 944 program, as a whole, were generally compliant tax payers,
  • The percentages using EFTPS as a method of payment were high,
  • The number of taxpayers filing the required return was higher than among Form 941 filers,
  • IRS burden reduction statistics from first filing year show
    • 645,000 employers were included in initial identification extract, but 50% were found not to be active accounts,
    • 300,000 plus actual active filers were identified in final analysis, 
    • 1,300,000 returns were filed in 2005 for these identified taxpayers,
    • 305,000 Forms 944 were actually filed for tax year 2006,
    • IRS estimated that there was a combined total of 2 million hours of burden reduced by the 944 program.

Although there was a clear reduction in the burden to taxpayers and the Service with the inception of the Form 944 program, there were known issues with the program as well.  Most of the issues fell into three major categories: taxpayer confusion, increased IRS notice generation and IRS’s extract criteria used to determine form 944 filers. 

In September 2007, the IRS decided to extend the program for 1 more year to gain further data on the burden reduction efforts.  The IRS planned to further study the impact to the employment community by doing a survey to understand the confusion with the program.  IRS reported that 12% of taxpayers continued to file Form 941 repeatedly, even after receiving an IRS notice stating that they had been identified as a Form 944 filer.  The IRS changed the extract criteria when selecting which employers to include in the program.  Selection of Form 944 filers was reduced from 379,000 in 2007 to only 242,000 for 2008 by applying more conservative criteria parameters.  There were additional clarifications made of the requirements for Form 944 filing, including functionality for the IRS to code a permanent opt-out notation to a taxpayer account.

  • Make the 944 program voluntary instead of mandatory, which IRS is considering
  • Increase publication of the requirement clarifications made by IRS, including wording in Publication 15 and the instructions for Form 944
  • Allow new businesses to file Form 941 for the first two years of operation until a full look-back period is established
  • Clarify the instructions for Form SS-4, Application for Employer Identification Number, to address an online application process regarding the question in box 14 , “Do you expect your employment tax liability to be $1000 or less in a full calendar year?” (A Yes answer indicates that the taxpayer will be determined to be a Form 944 filer.)
  • Provide an alternative mechanism for bulk filing for Form 944 electronically (other than XML) that is similar to the way the Social Security Administration allows online preparation and submission of Forms W-2, Wage and Tax Statement.

B. Form 941X (SB/SE)


The IRS Burden Reduction Office has been working on a project to develop an alternative to Form 941-C, Supporting Statement to Correct Information. The IRS realized that the process of correcting employment taxes needed improvement because of the number of errors when preparing and processing which resulted in the generation of notices of discrepancy, all adding to burden for both taxpayers and the Service.  This subgroup wanted to review the final drafts for the form and instruction to analyze the ease of use and understanding of the new form, instructions and process.

The new Form 941X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is a stand-alone correction form similar to the Form 1040X with line by line correlation to the original return.  The IRS plans to develop additional specific amended returns for other employment returns such as Forms 944, 943, 945 and CT-1.  The Form 941 and other forms in the series, will also be revised to remove the previous prior period adjustment lines no longer needed.

The instructions for Form 941X have been greatly expanded with examples and plain language explanations.  The overall burden reduction impact of the new improved form and process will allow employers to make tax adjustments easily and quickly rather than waiting to report the adjustment on the next return filed.  The IRS expects to benefit from a reduction in processing time for corrections by receiving accurate and complete information initially, rather than through generating multiple correspondence or notices to taxpayers.  By mirroring the amendment process used for personal income tax reporting (Form 1040) the IRS should realize burden reduction because taxpayers and preparers will more easily understand the process.

We applaud the IRS efforts to reduce the burden to taxpayers with the new form and process.  Because of the release of various vision drafts and the involvement of many industry focus groups conducted by IRS in the development of the new Form 941X, we did not have any substantive comments or recommendations for changes to the form or instructions themselves.


  • We recommend that the final version of the 941X and all other adjustment forms be released at least 6 months prior to the tax year for which they must be used to allow for programming and process changes.
  • We recommend that the IRS release the new XML scheme as soon as possible.

C. Form 2678 and Schedule R (SB/SE)


This subgroup reviewed Form 2678 and a draft of proposed new schedule R (941) as a result of unanswered questions from the work done last year by the W&I subgroup.  We continue to have concerns as to how the IRS intends to capture the information needed to achieve compliance and to identify agents who act as the employer.  In 2005, the IRS Taxpayer Burden Reduction Office created a task force to study the use of Employer/Payer Appointment of Agent (Form 2678).  In the study, it was determined that this form was not being used to its full potential.

This subgroup was told that Chief Counsel would be working on regulations and outreach plans.  The main reasons given by the IRS for the new Schedule R and clarifications for Form 2678 were twofold: safety of client funds when there is a failure of a Designated Agent and a more formal identification of those groups acting as an appointed agent, but unknown to the Service (for example, agents in the Home Health Care field).  Taxpayer protection from third-party failures was one of the key points made in the National Taxpayer Advocate Report for 2007 under legislative recommendations.  TIGTA released a report (Reference Number 2007-30-169) on September 19, 2007 recommending that the IRS explore all options, including use of the revised Form 2678, requiring that this form list clients, and to ensure that outreach programs are available to inform taxpayers of potential risks.

Reporting Agents (RAs) use Form 8655 as the authorization form, and RAs are governed by Revenue Procedure 2007-38.  Reporting Agents pay and file employment taxes under the employer identification numbers of the client or employer.  Form 2678 is used for the appointment of an agent who uses his or her own employer identification number to file and pay aggregate Form 941 employment taxes.  Agents under the Form 2678 are governed by Revenue Procedure 70-6 and Notice 2003-70 (state and local government agents).  Agents appointed by use of Form 2678 are allowed to aggregate Forms 941, but not Forms 940 as described in IRS Code Section 3504.  Currently, Professional Employer Organizations (PEOs) are not required to use Form 2678; and as such, would not be subject to the additional reporting.

The IRS has decided to delay until tax year 2010 the original release of Schedule R (941) due to updated thinking on related filing of Form 940.  In 2008, 23,000 notices were sent to home health care employers erroneously asking for individual Forms 941 after the posting of their individual Form 940 filings.  The Service is now working on a change to the requirements for agents subject to Form 2678 to make both Forms 941 and 940 consistent.  They are developing Schedules R for Forms 941 and 940 to properly recognize and separately allocate the employment tax liabilities of the individual employers being reported by such Agents.


  • Increase publication for acting as a Designated Agent under Form 2678, and specifically when Form 2678 must be executed.
  • Make Schedules R for Forms 941 and 940 mandatory for all Form 2678 Agents.
  • The IRS should develop a matching program with Forms 2678 and these Schedules R.
  • The IRS needs to study the effect of aggregate Form 940 filings and state unemployment tax certifications and matching programs.
  • Release draft forms and instructions by mid-2008 to allow time for programming requirements for forms and related processing if effective date will be January 1, 2010.
  • Work with industry groups to determine the impact of such changes and establish a voluntary program to include PEOs in a similar reporting requirement, but consistent with other variable conditions unique to that industry (i.e. insurance and benefit plans).

D.  Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s) (SB/SE)


Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), includes over thirty frequently asked questions.  It is the experience of many financial institutions that the IRS service centers reference Publication 1281 in their responses to penalty abatement requests related to Notice 972CG, Notice of Proposed Civil Penalty.  One FAQ answer does not accurately reflect the applicable Treasury regulations.  As a result financial institutions must spend additional time corresponding with IRS to receive penalty abatement under the reasonable cause regulations.  In addition, this subgroup has begun discussions with the IRS regarding a second FAQ related to closed accounts.

Publication 1281 FAQ number 6: ”Is a payee an exempt corporation if it uses the term ‘Company’ or ‘Co.’ in its name?” is answered as  ”A payer cannot treat a payee as an exempt organization merely because the business name contains the word ‘Company’ or ‘Co.’  A payer can only treat the payee as exempt if it certifies it is exempt on Form W-9, Request for Taxpayer Identification Number and Certification.”

IRS Regulations Section 1.6049-4(c)(1)(ii)(A) provides that a payer may treat a payee as a corporation (and therefore as an exempt recipient) if one of the requirements of paragraph (c)(1)(ii)(A)(1), (2), (3) or (4) of Section 1.6049-4 are met before a payment is made.

An entity whose name contains the word “Company” or “Co” will not meet the first requirement that the name of the payee contain an unambiguous expression of corporate status unless the name contains the term insurance company, indemnity company, reinsurance company or assurance company.  Requirement (1) is also met if the entities name indicates that it is an entity listed as a per se corporation under Section 301.7701-2(b)(8)(i).  In addition, such an entity could be treated as a corporation under requirement (2) if the payer has on file a corporate resolution or similar document clearly indicating corporate status; requirement (3) the payer receives a Form W-9 which includes an EIN and a statement from the payee that it is a domestic corporation, or requirement (4) the payer receives a withholding certificate described in Section 1.1441-1(e)(2)(i) that includes a certification that the person whose name is on the certificate is a foreign corporation. 

Publication 1281 FAQ number 25: “If I don’t do business anymore with a payee, or if it was only a one-time transaction, what should I do with the B Notice?” is answered as ”Send it and try to get the correct TIN.  Also, note your records to track the notice for the “two-in-three” rule.  You will need this information if you should renew business with the payee.  We require that you track these accounts for three years after the date of the first CP2100A or CP2100 Notice.”

If a customer’s account is closed and non-reportable in the year that a financial institution receives the CP2100, Listing of missing, incorrect, and/or not currently issued TIN(s), there is no benefit in soliciting the TIN.  The financial institution is not paying income on the account and therefore has no avenue to backup withhold when the former customer fails to respond.  In addition, because there is no current reporting to the IRS, this name/TIN mismatch will not be reflected on future CP2100s. 

The Burden Reduction Subgroup has begun discussions about this issue with SB/SE. 


Change the answer to Publication 1281 FAQ number 6 to include all of the requirements under which a payer may treat an entity, whose name contains the word “Company” or “Co”, as an exempt recipient corporation.  SBSE agrees with this recommendation and has taken steps to include the change in Publication 1281 set to be released September 30, 2008.

This subgroup will continue to discuss the solicitation of TINs for non-reportable closed accounts with the appropriate IRS personnel in 2009.

E. Form 1099-C, Cancellation of Debt (W&I)


The National Taxpayer Advocate’s 2007 Annual Report to Congress includes “Tax Consequences of Cancellation of Debt Income” as one of the most serious problems encountered by taxpayers.  It recommends several steps that the IRS should take related to cancellation of debt.  This subgroup provided feedback on several of the NTA’s recommendations.

Accordingly, IRPAC addressed two recommendations specific to Form 1099-C, Cancellation of Debt, made to ease the burden of already distressed debtors who are attempting to understand the information reported and its affect on their taxable income.  These recommendations are that issuers provide contact information and an indication of recourse versus non-recourse debt on Form 1099-C.  Further, IRPAC held discussions on promulgating a comprehensive publication that specifically addresses the tax consequences of canceled debt.

Form 1099-C Changes

The IRS currently requires the telephone number of a contact person on numerous Forms 1099 and 1098.  This number must provide direct access to an individual who can answer questions about the statement.  This subgroup concurs that the reporting of a contact telephone number on Form 1099-C would be beneficial to the taxpayer.  However, inclusion of a specific individual’s phone number on Form 1099-C may be burdensome to financial entities.  Many financial institutions centralize Form 1099-C reporting but the responsibility for the loan relationship could be housed in many areas, e.g., consumer loans, commercial loans, credit cards or mortgages.

Further, the IRS should consider requiring issuers of Form 1099-C to indicate whether debt forgiveness relates to a recourse loan or non-recourse loan similar to Form 1099-A, Acquisition or Abandonment of Secured Property.  The Form 1099-A currently indicates recourse versus non-recourse debt in

box 5


with the question, “Was borrower personally liable for repayment of the debt?”  Providing this information on Form 1099-C would not be overly burdensome and avoids any confusion to the debtors regarding the use of the terms recourse and non-recourse.


Comprehensive Publication


The debtor instructions on Form 1099-C directs taxpayers to seven different forms and publications to obtain additional information on various canceled debt scenarios.  This burdens unnecessarily those taxpayers and practitioners who are attempting to properly calculate the amount of canceled debt includable in income.


This subgroup believes that taxpayers and practitioners would benefit greatly if the IRS developed a single comprehensive canceled debt publication. Ideally the publication would be enhanced to include numerous examples to assist taxpayers with the complex canceled debt concepts.  In addition, this publication should explain to the debtor the lender’s requirements related to the reporting of fair market value and canceled debt. This explanation would assist debtors in better understanding the amounts provided on Form 1099-C, which are an integral part of any reportable canceled debt calculation.


Form 1099-C directs a debtor to Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, if canceled debt is excluded from income during insolvency.  Form 982 provides a reference to Publication 908, Bankruptcy Tax Guide.  Both sources simply state that a taxpayer is insolvent to the extent that their liabilities exceed the fair market value of their assets immediately before the debt discharge without explanation of the most common types of assets and liabilities or insolvency calculation examples.


Form 1099-C Changes


This subgroup recommends that when a phone number requirement is added to Form 1099-C that the filer, financial institutions in many cases, be allowed the option to provide a central customer service phone number rather than a specific individual phone number.  This option would minimize the burden on large filers with centralized Form 1099-C reporting.  W&I agrees that a central customer service phone number is acceptable on Form 1099-C.  In addition, it encourages financial institutions that use a central number to establish procedures to assure that recipients of Form 1099-C are able to readily contact the applicable loan department.  W&I will change the 2009 Form 1099-C and instructions to require issuer phone numbers.  Issuers will have the option of providing either a specific individual phone number or a central customer service number.


Moreover, this subgroup discussed the option of including a recourse versus non-recourse debt checkbox on Form 1099-C and the need to provide an explanation of these terms in the Form 1099-A and 1099-C instructions and the instructions for borrowers on the back of Form 1099-C.  For example, if you are personally liable for a debt (recourse debt) or if you are not personally liable for a debt (non-recourse debt).  It was concluded that a box on Form 1099-C, “Was borrower personally liable for repayment of the debt?” would be the least confusing way to address the Taxpayer Advocate’s concerns related to recourse versus non-recourse debt.


With these changes to the forms we believe it is critical that the IRS provide sufficient lead time for financial institutions to make system and procedural changes.  In most cases, it is difficult for a bank to capture new reportable information retroactively.  It can also take a fair amount of lead time to implement system changes for prospective form changes.  We recommend that if these form changes are made for 2008 the payer community should be notified as soon as possible.  In addition, no penalties should be imposed for the 2008 filings if the institution makes a good faith effort to comply but is unable to.


Comprehensive Publication


This subgroup supports the Taxpayer Advocate’s view that a comprehensive canceled debt publication, and additional guidance and examples related to insolvency would be beneficial to taxpayers and practitioners.  The IRS, working with the Taxpayer Advocate Office, has released Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments for use in preparing 2007 returns.  Updates to Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, have not been released but remain an IRS priority.  IRPAC will review the canceled debt publication and related updates to forms and provide feedback to the IRS if needed enhancements are identified.
F. Forms 5498, 5498-ESA and 5498-SA (W&I)




Information reporting on Forms 5498, IRA Contribution; 5498-ESA, Coverdell Education Savings Account Contribution and 5498-SA, Health Savings Account, Archer MSA, or Medicare Advantage MSA Information is inconsistent in two areas.


Filing Dates


Participants in IRAs, ESAs and HSA/MSAs are permitted to make prior year contributions from January 1st to April 15th of the subsequent year (e.g., contributions in 2008 for the 2007 tax year).  Forms 5498 and 5498-SA are due to the participant by May 31st of the subsequent year.  This due date allows trustees ample time to process contributions received through April 15th and to prepare information returns by the May 31st deadline.  Form 5498-ESA, however, is due to the participant by April 30th.  The accelerated due date burdens the trustee by requiring processing of the Form 5498- ESA contributions and preparation of the information returns in a very short timeframe.  A due date change for Form 5498-ESA to May 31st would provide trustees additional processing time and allow them to consolidate the processing of all Form 5498 participant statements.


Filing Requirements


The instructions for Forms 5498 and 5498-SA are inconsistent on reporting of the FMV and subsequent information return filings.  Form 5498 instructions state that trustees must provide participants with a statement of the December 31st value of their account by January 31st of the subsequent year.  If there are no reportable contributions for the year, another statement (or Form 5498) is not required to report zero contributions as long as the January statement contains a legend designating which information is being furnished to the Service.


Form 5498-SA instructions state that trustees may, but are not required to, provide participants with a statement of the December 31st value of their account by January 31st of the subsequent year.  However, there is no option to eliminate the Form 5498-SA filing if there are no reportable contributions for the year.




Filing Dates 


This subgroup and IRS W&I representatives discussed the recommended due date change for participant Form 5498-ESA.  The IRS explained that a change to the participant Form 5498-ESA due date would burden the taxpayer responsible for the minor’s ESA account.  Coverdell ESAs have an annual contribution limit of $2,000 for each designated beneficiary, however, there is no limit to the number of persons who can make contributions to the ESA.  Excess contributions and related earnings that are not distributed by June 1st of the subsequent year are subject to a 6% excise tax.  A due date of May 31st for participant regarding Forms 5498-ESA does not allow sufficient time to determine and withdraw excess contributions and earnings.  This subgroup agrees that the due date for the participant of Form 5498-ESA can not be extended as long as the excess contributions and related earnings are required to be distributed by June 1st.


Filing Requirements


This subgroup recommends that the January statement of account value for Form 5498-SA remain optional.  However, if a trustee chooses to file the January statement and there are no reportable contributions for the year, the trustee should be given the option to eliminate the Form 5498-SA filing.  If the trustee chooses to follow this procedure, the January statement must include a legend designating which information is being furnished to the IRS.  W&I agrees that the inconsistency between Forms 5498 and 5498-SA should be corrected and will include this change with the release of the 2009 forms and instructions.


G. IRS 63C Letter (W&I)




The purpose of the IRS 63C Letter is to inform an employer or payer that a taxpayer contacted the IRS stating that they received income from the employer or payer but either did not receive Form W-2 or Form 1099-R or received an incorrect form.  The 63C letter instructs the employer or payer to determine the correct Form W-2 or Form 1099-R and forward it to the taxpayer within 10 days.  An increasing number of financial institutions have received the 63C letter citing other Forms (1098 or 1099) or referencing Form W-2 or 1099-Rs for entities that do not issue them; for example, a mortgage company that only files Form 1098s receives notice about Form 1099-R. This subgroup asked the IRS the following questions related to the 63C letter:  


  1. Many times a financial institution receives the IRS 63C letter without having received any direct contact from the customer.  When the customer calls the IRS are they asked if they have contacted the payer?  Direct communication between the customer and the financial institution would result in a faster response than the issuance of the IRS 63C letter.
  2. If the customer address on the IRS 63C letter is not the same address the bank has on file, then the bank is being asked to send confidential information (i. e., Form 1099) to an address they do not know is correct.  Typically, the financial institution would send a letter to the customer requesting address confirmation before mailing the information requested in the 63C letter.  This process may take more than 10 days.  If the bank mails the address confirmation request within 10 days does this avoid the $50 penalty referenced in the 63C letter?
  3. Can the IRS share the guidelines for issuing the 63C letter so that Financial Institutions have a better understanding of the process?




W&I provided the following responses to these questions: 


  1. IRS representatives are instructed to refer callers back to their financial institution to obtain missing or corrected Forms 1099.  Representatives advise the taxpayer if they are unable to obtain the information they should file their returns estimating payments received and federal income tax withheld.
  2. According to the IRS, the taxpayer’s address information is systemically inserted into the 63C letter from the taxpayer’s IRS address of record. Customer Service Representatives (CSRs) are required to perform disclosure and validate that the taxpayer is authorized to receive information which includes asking the taxpayer for their current address.  If the taxpayer’s address is incorrect, the CSR is required to take action to correct the address.
  3. The 63C letter states “FAILURE TO PROVIDE THIS INFORMATION COULD RESULT IN A $50 PENALTY.”  The 10-day timeframe is not included in this statement.  The information should be supplied in the 10-day timeframe, if possible.
  4. IRM procedures are very clear that employees should not reference any forms other than Forms W-2 or 1099-R in the 63C letter.  IRS states that the problem occurs because there are open paragraphs on the 63C letter (paragraphs D & E) where employees could insert any form reference.  However, the IRM states that the 63C letter is to be used for Forms W-2 and 1099-R only.  The IRS recently revised the 63C letter to remove any references to Form 1098 and changed all Form 1099 references to Form 1099-R.  In addition, the IRS is investigating whether they can restrict paragraph D and E open form fields to Forms W-2 and 1099-R and whether they can change the name of the letter to only show Forms W-2 and 1099-R. 


These changes to the 63C letter would facilitate a more efficient process for payers and taxpayers.


H. W&I Issue: Proposed Form W-4 NR (Income Withholding for Non-Resident Aliens)




The IRS asked us to review reporting requirements for Non-Resident (NR) employees, specifically working immigrants. In reviewing the issue it became obvious that employees classified as non-resident aliens (NR), have a wide and confusing range of instructions, forms and publications to follow to correctly complete Form W-4.  Traditional manual and electronic on-boarding processes do not accommodate for these exceptions by supplying the various withholding instructions referenced at the top of the Form W-4.  Without proper instruction and documentation, NR employees are likely to incorrectly complete Form W-4.  This burdensome documentation can unintentionally lead to noncompliance through underwithholding.   The challenge then is:


  1. Providing adequate information and documentation to educate employers on determining which employees qualify as NR.
  2. Providing non-burdensome instructions to employees to ensure proper Form W-4 completion.


Publication 15 provides employers with the details needed to properly process NRs.  However, documentation for employees needs to be concise, convenient and easy to follow.  At present, an NR employee is instructed to go from the Form W-4 to the instructions for the Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Non-resident Alien Individual).  The instructions for this form are completely unrelated to the completion of Form W-4.  Further, guidance for completion of Form W-4 is not provided until page 2 of the instructions.  This placement increases the likelihood of noncompliance.


From Form 8233: Instructions on the top section describe when you must use the Form W-4 instead of Form 8233.


From Instructions for Form 8233: Page 2 of the instructions details the way non-resident aliens should complete the Form W-4 on lines 2 through 6.


To make this process the least burdensome, the instructions for these two forms could be consolidated onto one form entitled the Form W-4 NR.  The reference on the top of the standard Form W-4 should direct non-resident aliens to the Form W-4 NR instead of the 8233.  The decision tree in the instructions for Form 8233 could also be included on the Form W-4 NR directing ineligible users to Form 8233 instead.  The non-resident alien instructions referenced by the Form W-4 included in the Form 8233 instruction booklet could be removed and placed with the Form W-4 NR. 


The form itself would look exactly like the Form W-4 in lines 1 and 2.  Line 3 would include only a single filing status with a short description of the reason.  Line 4 stays the same.  Line 5 would have a check box certifying that the individual is a non-resident alien as defined in the attached instructions to the form.  Line 6 is still valid, but line 7 would be deleted.  The same jurat statement can be included.


The new form designed specifically for this type of taxpayer will ensure that the proper filing status is reported to the employer for payroll purposes.  It also consolidates instructions to reduce confusion and burden to the employee.  The employer will then be more likely to withhold properly at the time of the paycheck.  Without this change, too many employees in this filing status will complete the standard Form W-4 incorrectly causing an underwithheld situation.  Because NRs can be in the


United States only temporarily, correct withholding at the source will reduce the need for overseas collection.  This can also lead to a potential reduction to the tax gap through increased compliance at the source.


An alternate suggestion that does not involve creation of a new form would be to create a specific separate instruction document for those in the non-resident alien status that would be referenced in the Form W-4 instructions.  This document could have a decision tree very similar to what exists on Form 8233.  Then, if the NR needs to complete the Form 8233, the document would instruct the reader to go there and its instructions would contain only information relating to that form.  If the individual truly needed to complete the Form W-4, all relevant instructions would be included in that document in one location.  This would increase the level of compliance with employees who would no longer need to reference irrelevant documents for assistance.




Create a new Form W-4 NR that is specifically designed for the Non-Resident alien status.  Reference to the new form can be placed on the existing Form W-4 where the instructions are currently located for NRs.  The new form will contain all instructions that currently are housed in multiple locations that are not related to this form.
An alternative would be to enhance current Form W-4 to more easily accommodate the NR status. This could be done through development of a specific instruction document for the NR employee or through better placement of the existing instructions through the use of an index in the existing Form 8233 instructions.


IRPAC will carry over this issue for resolution in 2009.  The American Payroll Association (APA) will continue to survey its members to solicit comments on this proposed form.  APA will also seek statistical evidence of the total numbers of this type of employee in the


U. S. workplace.


I. Redesigned Form 990, Return of Organization Exempt From Income Tax (TEGE)




In reaction to statements from Congress  and as part of an internal initiative to revise the Form 990 , the IRS redesigned this form last year by requiring significantly more information than previously.  The purpose was threefold: to enhance transparency, to promote tax compliance and to minimize the burden on the filing organization. This form is to be filed for the 2008 tax year (returns filed in 2009).


On April 7, 2008, the IRS released for public comment a draft of the instructions to accompany the Form 990 and in response, this subgroup held a conference call with a representative from the TEGE division in late May to discuss our concerns. Accordingly, after considering approximately 120 comments received during this comment period, the IRS released on August 19th the final instructions to accompany this form.


The Form 990 is a document that is open to public disclosure which impacts many interested parties such as financial institutions, credit rating companies, various media, state regulators and other members of the community. Accordingly, the information reported on the form must provide an accurate understanding of an organization’s operations to avoid any confusion or misinterpretation. Also, the information must be meaningful to the IRS with a balance that minimizes the burden to the filer. It is estimated that the completion of this new form will cost certain exempt organizations, on average, an additional full-time administrative position simply to coordinate data collection and track the IRS reporting preparation throughout the year.


In our discussion, we raised concerns with respect to the following points:


  1. We asked the IRS to provide guidance on defining the standard or expectations in obtaining information from third parties. For example, what is the degree of due diligence that the exempt organization must use to determine whether the board member or trustee is independent, i. e., having received material financial benefits from the organization during the year. 
  2. We asked the IRS for clarity when reporting compensation and when completing the schedules for hospitals (Schedule H) and tax-exempt bonds (Schedule K). For instance, the definition of the term key employee is broad and may include employees not intended to be reported. Also, that part of the Schedule H that reports charity care and certain other community benefits needs certain terms clearly defined such as subsidized health services and research for the purposes of accurate and consistent reporting. Further, administrative burdens to the filer can be minimized by excluding from reporting those refunding bonds issued post-2002 for bonds issued pre-2003 with respect to expenditure and investment of proceeds, and private business use.
  3. We asked the IRS to conduct outreach programs and other continuing educational efforts to assist the nonprofit filers on preparing this form, in particular the Schedules H and K, large portions of which are not required to be completed until the 2009 year (returns filed in year 2010).




The IRS responded accordingly:


  1. A standard of reasonable efforts was established when gathering information from third parties. For example, the organization need not engage in more than a reasonable effort to obtain the necessary information to determine the independence of members of the governing body and may rely on information provided by such members. 
  2. A more narrow definition of key employee was given with a cap on the number of employees to report. The percentage for the responsibility test to report such individuals was increased from 5% to 10% and no more than 20 key employees are to be reported. Also, terms specific to the Schedule H were defined clearly. For example, the term research includes, in addition to that research funded by tax-exempt organizations or government entities, those costs of any internally funded research that the organization conducts. Further, the exempt organization on Schedule K may forego the reporting of refunding bonds issued post-2002 for bonds issued pre-2003 when completing Part III, Private Business Use.


We recommend that in addition to the traditional means of promulgating a new form, that the IRS continue its outreach and educational efforts through Frequently Asked Questions, (FAQs) posted on the website, a phone forum to address specific concerns, and a task force that focuses on providing continual quality improvement with opportunities to give feedback and further suggestions.  
J.  LMSB; Form 8886, Reportable Transaction Disclosure Statement




The taxpayer is required to file this form when engaged in a reportable transaction. This form is relatively recent, as of January 1, 2003 , and, in essence, replaces the Form 8271, Investor Reporting of a Tax Shelter Registration Number.  Historically, the IRS required the taxpayer to report information regarding tax shelters, but in the last few years has substantially broadened this scope to require the taxpayers to report information on transactions that are considered legitimate but may have little or no purpose other than to generate tax or financial statement benefits.


The current version of Form 8886 includes six categories of transactions that must be reported as an attachment to the taxpayer’s return for each tax year the transaction occurs and a separate filing for the initial year with the Office of Tax Shelter Analysis (OTSA). The six categories of transactions include listed transactions, confidential transactions, transactions with contractual protection, loss transactions, transactions with a brief asset holding period (only for such transactions entered into prior to August 3, 2007) and transactions of interest.  The term ‘listed transaction’ is broadly defined to include a transaction that is the same or substantially similar to one of the types of transactions the IRS has determined to be a tax avoidance transaction.  


The American Jobs Creation Act of 2004 added significant penalties in an effort to ensure compliance. The penalties for failure to disclose the information properly for listed transactions is $100,000 for natural persons and $200,000 for other entities, and for other reportable transactions, the penalties are $10,000 and $50,000 respectively.  Per the instructions to the form, these penalties apply if the taxpayer fails to attach the form to the tax return, fails to file with the OTSA, or fails to include all the information required.  Further, an article reported that approximately 70,000 taxpayers submitted Form 8886 in the 2005 tax season. 


In light of these recent developments, this subcommittee asked to meet with a representative with the LMSB division to discuss the following: (1) consider minimizing the forms filed with the OTSA, and (2) add an example to the instructions on ‘loss’ transactions which should help to minimize the tax burden to the taxpayer while improving compliance efforts.   


These forms are sent initially to the OTSA to analyze these transactions in a timely manner or, in other words, to allow OTSA to learn as much as it can about these reportable transactions as soon as it can. However, to require every taxpayer to file this form can result in excessive and unnecessary filings that are burdensome to the taxpayer and can clutter compliance efforts carried out by the OTSA. For instance, the regulations require that both flow-through entities, such as, partnerships, S corporations and trusts, and their partners, members and beneficiaries, file this form with the OTSA.  Thus, given a limited partnership with 99 limited partners and one general partner, the OTSA will receive 101 forms (100 from the owners and 1 from the partnership) for the same transaction, arguably a case of ‘overkill’ which can overwhelm the review and analysis process. Although the regulations require these additional filings, the preamble mentions that the IRS recognizes this concern and added a provision that the Commissioner in his discretion may issue in published guidance other provisions for disclosure requirements.  


Also, specific guidance in the instructions regarding reporting ‘loss’ transactions may prevent unnecessary filings. The final regulations specifically provide that if a taxpayer is a partner in a partnership, member in an S corporation, or beneficiary of a trust and a loss flows through from the entity to these owners, then that owner has participated in a loss transaction if the amount of the loss that flows through to it equals or exceeds the threshold amounts applicable to that taxpayer.  The regulations provide an example that clearly illustrates that a loss that requires disclosure as a reportable transaction at the entity level may not result in a reportable transaction for certain owners once this loss is allocated among them.  However, flow-through entities inadvertently report to their partners, members or beneficiaries the amount of the entities’ losses rather than the amount of owners’ losses. The result is that these owners (who are oftentimes less familiar with the reporting requirements but are experiencing ‘angst’ regarding the penalties) file this form when it may be unnecessary.




This subgroup proposes the following recommendations:


  1. We recommend that the IRS consider providing a functional threshold that excludes certain owners from filing this form with the OTSA. For instance, limited partners in a partnership with 25 or more limited partners are excluded from this filing requirement. Alternatively, the form may include a de minimis standard that excludes certain owners from filing, such as owners with interests of 5% or less. 
  2. We recommend that the instructions include the example discussed above or a similar example to illustrate to the flow-through entities how best to report the disclosure of ‘loss’ transactions to their owners.